Investor Statements on SEC Proposed Changes to Shareholder Proposal Rule

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Statements from Investors

Investor Voice:: SEC’s Proposed Rule Changes Muzzle Shareholders and Shield CEOs From Accountability

SEATTLE – The U.S. Securities and Exchange Commission voted today to consider sweeping changes to the regulations governing the shareholder proposal process which negatively impact small investors as well as proxy advisory services. The proposed changes to Rule 14a-8 include substantially more strict and complicated thresholds for filing, significantly higher resubmission requirements, serious free speech infringements on independent third-party proxy advisory services, and onerous restrictions on an investor’s essential agency right to seek assistance. 

“The shareholder proposal rule is the bedrock of effective corporate engagement in the United States,” said Bruce Herbert, chief executive of Investor Voice.  “For over 70 years, the shareholder engagement process has been a vital tool for stockowners to propose good ideas involving sustainability, profitability, and governance; to hold CEOs accountable for mismanagement; and to mitigate risk by addressing issues like climate change and human rights.” 

“These proposed changes were not asked for by investors,” Herbert continued, “they are the result of a concerted influence campaign backed by large industry associations. Key players were the Business Roundtable, National Association of Manufacturers, and the U.S. Chamber of Commerce – each of whom believes that responding to small investors creates an undue burden on the corporation.”

The proposed changes, Herbert said, are a solution in search of a problem.  Trump appointees to the SEC, including Chair Jay Clayton and Commissioner Elad Roisman, argue that change is needed to ‘modernize’ the shareholder engagement process, asserting that the rules have not been “revised” in decades.  

“However,” Herbert observed, “that argument is highly misleading because ‘revision’ is very different from ‘review’ – the fact is that the shareholder engagement rule has been reviewed many times over the decades and always found to be fresh and beneficial as it stood.  Focusing on ‘revisions’ while ignoring ‘reviews’, as Clayton and Roisman purposefully do, is like asserting that someone who goes in for annual check-ups has received no medical attention whatsoever unless and until they undergo surgery.”

The two Democrats on the commission, Allison Lee and Robert Jackson, blasted the proposed changes as a power-grab by corporate CEOs.  “The bottom line is that today’s proposals would shift power away from shareholders and towards management,” said Commissioner Lee.

Commissioner Jackson, meanwhile, argued that, while some minor reforms may be needed, today’s proposals “amount to swatting a gadfly with a sledgehammer.”

The Commission passed the motion to consider the proposed changes on a party-line vote of 3-2.  The public will have only 60 days to submit comments to the SEC once the proposals are published in the Federal Register.

Contact:  Bruce Herbert  
206-522-3055  team@investorvoice.net

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US SIF opposes SEC’s proposed changes to Rule 14a-8 and proxy advisors 

Washington, DC, November 5, 2019 - US SIF: The Forum for Sustainable and Responsible Investment today shared the following statement about two proposals the Securities and Exchange Commission (SEC) issued today.  One proposal would change rule 14a-8, the regulation that spells out the rights shareholders have to raise substantive issues of concern at the annual meetings of the companies in which they invest.  The second proposal would impose additional requirements on independent proxy advisory firms that provide recommendations to investors on the voting items at the meetings of publicly traded companies.

The proposed changes to the 14a-8 rule would limit shareholders’ ability to file resolutions at the annual meetings of publicly traded companies.  Under the existing rule, the minimum stock ownership necessary to file a resolution at a corporation’s annual meeting is $2,000, which must be held for at least one year.  The SEC is proposing instead that shareholders would have to own $25,000 of the target company’s stock for at least one year (a 1,200% increase), or $15,000 for at least two years.  Smaller shareholders who own at least $2,000 but less than $15,000 worth of the company’s stock would have to wait three years to file a resolution.

The SEC also proposes to change how much support a resolution must win—measured by the percentage of the shares voted—in order to be resubmitted in subsequent years. The proposal changes these thresholds from 3 percent (first  year), 6 percent (second year) and 10 percent (third and subsequent years) to 5 percent, 15 percent and 25 percent  Moreover, proposals that win more than 25 percent (but less than 50 percent) support may be excluded in a subsequent year if the support drops by 10 percent from the previous year’s level.     

The SEC’s second proposed rule would require proxy advisory firms to give the issuers they cover the opportunity to review and comment on the proxy advice before it is issued. It would also allow issuers to include a link to the issuers’ views when proxy advice is sent to recipients.

In response to these two proposals, Lisa Woll, CEO of US SIF, issued the following statement.

“The founding purpose of the Securities and Exchange Commission is to protect investors, but you would not know that by the two proposals the SEC approved today on a 3-2 vote.  One proposal severely limits the ability of individual and smaller institutional investors to file shareholder resolutions at the companies in which they invest.  The second would muffle the voices of independent proxy advisory firms.

Shareholder proposals are an important, cost-effective and market-based mechanism for retail and institutional shareholders to communicate with management teams, directors and other shareholders.  Today’s proposal transfers power to CEOs and company management at the expense of their shareholders.  Investors have not sought these changes; corporate trade associations have.  This is despite the fact that on average, only 13 percent of Russell 3000 companies received a shareholder proposal in any one year between 2004 and 2017. In other words, the average Russell 3000 company can expect to receive a proposal once every 7.7 years.

The new thresholds will make it significantly more difficult for investors to get critical issues on the meeting agendas of publicly traded companies. Time and again, individual investors, asset managers and institutional owners have raised an array of concerns at American companies to improve these companies and make them better investments over the longer term.  They have encouraged companies to diversify their boards of directors, to align executive compensation incentives with the long-term good of the company, and to reduce their greenhouse gas emissions.

Additionally, proxy advisory firms help investors meet their fiduciary responsibilities by providing efficient and cost-effective research services to them to inform their proxy voting decisions. We do not support giving companies the automatic right to preview proxy advisory firm reports and to lobby the authors to change recommendations.  These provisions will give corporate management substantial editorial influence over reports on their companies.   

The SEC should protect the tools and resources available to shareholders to help hold publicly traded companies accountable.” 

Additional resources

  • US SIF, the Interfaith Center on Corporate Responsibility (ICCR) and The Shareholder Rights Group launched the Investor Rights Forum (www.InvestorRightsForum.com), a website to share data and research supporting the shareholder process.

  • US SIF delivered a letter to the SEC signed by 129 investors with total assets under management of $525 billion to oppose changes to rule 14a-8. To read the full letter, click here.

  • Investor organizations sent a letter to the SEC opposing new proxy advisor regulations. To read the full letter, click here.

NY State Comptroller DiNapoli Statement on Proposed SEC Rule Changes

"The SEC's proposals are two of the most significant actions to restrict shareholder rights in the SEC’s history. There is no credible evidence to support the need for these proposals, and if adopted, they would undermine corporate accountability, entrench managements’ opposition to shareholder proposals and increase costs for investors. These proposals are contrary to the SEC's mission to protect investors and our financial markets. Along with other investors, I will continue to voice my opposition to these actions and my support for greater corporate accountability."

ICCR: PROPOSED SEC RULES TO RESTRICT PROXY ACCESS BREAK FAITH WITH INVESTORS

Agency caves to pressure from trade associations like the Business Roundtable, U.S. Chamber, and National Association of Manufacturers to the detriment of shareholders and the public interest.

NEW YORK, NY, Tuesday, November 5, 2019 – Today’s 3-2, party-line vote by the Securities and Exchange Commission (SEC) regarding proposed changes to its shareholder proposal rule that would severely restrict investors’ access to the corporate proxy prompted a fierce rebuke from the investment community, the very constituency the SEC is designed to protect.

Members of the Interfaith Center on Corporate Responsibility say the new rules would stifle the voice of shareholders by substantially increasing the number of shares required to file proposals that appear on company proxies; doubling the thresholds necessary for the re-submission of those proposals in subsequent years; and restricting access to independent proxy advice.  As Commissioner Allison Herren Lee said in voting against these rule changes: “The odds are stacked against shareholders.”

 Presently, the SEC’s 14a-8 rule requires shareholders to hold $2,000 worth of stock for at least one year before they can file a resolution, an amount which ensures that small investors have the ability to place issues significant to the company before fellow shareholders.  The SEC is proposing to revise the rule so that shareholders must own this stake for a minimum of three years before they can submit a resolution. If they are shareowners for under three years, they must own up to a $25,000 stake in the company in order to file a resolution.  Moreover, the current thresholds for shareholder support required for the resubmission of proposals are currently 3% for the first year, 6% in the second year and 10% in the third year.  The new re-filing thresholds being proposed by the SEC would more than double those thresholds to 5%, 15% and 25% respectively.

Taken together, the rule changes would significantly weaken corporate accountability structures. Raising the ownership threshold threatens to exclude smaller investors, raising serious concerns about the equity of the process. Shareholders big and small can make and have made valuable contributions to the companies that they own.  Increasing re-submission thresholds could prevent critically important issues from being considered. There are many examples throughout the history of shareholder engagement of issues that initially received little support, but went on to receive majority support as shareholders came to appreciate the serious risks they presented to companies.

“For over 75 years, the shareholder proposal process has served as a cost effective way for corporate management and boards to gain a better understanding of shareholder priorities and concerns, particularly those of longer-term shareholders concerned about the impact of environmental, social, and governance issues on the long-term value of the companies that they own,” said Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility. “We see this unjustified action by the SEC as part of a broader move across this Administration to realign the regulatory landscape in favor of corporate interests at the expense of the public interest.”

Timothy Smith, Director of Shareowner Engagement at Boston Trust Walden, who has been involved in the shareholder resolution process since the early 1970s stated, “The U.S. Chamber and Business Roundtable have led a steady drumbeat of attacks on shareholder advocates who engage with companies on key issues like climate change, claiming their work is politically motivated and they don’t care about the financial bottom line when these investors who represent literally tens of trillions of dollars in assets are simply seeking to protect their investments. Unfortunately, restricting investors’ use of the shareholder resolution process will only encourage the use of blunter tools like legal action and withholds on directors and say on pay votes to gain the attention of companies on key governance and environmental issues.” 

“While shareholders typically engage companies through direct dialogue with management, the shareholder resolution has been an important tool for investors to bring material issues to the attention of company boards and fellow shareholders,” said Susan Makos of Mercy Investment Services.  “Resolutions have contributed to companies addressing some of the most critical challenges of our time including climate change, where shareholders encouraged improvements to company disclosures of their environmental impacts and, as a result, more and more companies are adopting science-based targets to meaningfully reduce their GHG emissions. Other resolutions raise human rights risks and community health concerns, including oversight of opioids and the affordability of drugs, which have led pharma companies to improve their practices.”

The SEC has further proposed a regulatory structure that would undercut the relationship between investor clients and proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis, with a goal to dramatically undermine the voices of shareholders and produce more management-friendly votes, particularly on matters such as executive compensation, and proposals on environmental, social, and governance issues. These provisions would tilt the scales of the process further in favor of corporate management, and have also long been advocated by pro-business trade groups like the Business Roundtable, the National Association of Manufacturers and the U.S. Chamber of Commerce.

About the Interfaith Center on Corporate Responsibility (ICCR)
Celebrating its 49th year, ICCR is the pioneer coalition of shareholder advocates who view the management of their investments as a catalyst for social change. Its 300 member organizations comprise faith communities, socially responsible asset managers, unions, pensions, NGOs and other socially responsible investors with combined assets of over $500 billion. ICCR members engage hundreds of corporations annually in an effort to foster greater corporate accountability. www.iccr.org

CONTACT: Susana McDermott Director of Communications Interfaith Center on Corporate Responsibility

212-870-2938 smcdermott@iccr.org

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New York City Comptroller Scott M. Stringer on Proposed SEC Rule Changes

"As Comptroller for the City of New York, I am the chief investment advisor and custodian of assets of the five New York City Retirement Systems (NYCRS) and a trustee of four of them. These Funds represent the retirement security of the City’s teachers, school employees, police and firefighters, and other employees. Many of our more than 700,000 members likely only participate in the capital markets through their role as pension fund beneficiaries, and are the true main street investors whose interests the SEC should protect.

"The NYCRS are long-term shareowners of more than 3,000 U.S. public companies and are the fourth largest public pension system in the United States, with more than $200 billion in assets under management. Our funds have filed more than 1,000 shareowner proposals, almost certainly more than any other institutional investor in the world, with a record dating back 30 years.

"The proposed U.S. Securities and Exchange Commission changes will compromise the independence of our contracted proxy advisers, impose limits on shareowner proposals and therefore further insulate corporate management from accountability to shareowners. If implemented, these actions would be a shameful gift to corporate executives at the expense of shareowners.

"The proposed rules seek to remedy problems that do not exist but are merely false narratives put forward by corporate executives who want to limit the ability of investors to push for change and to hold them accountable for runaway CEO pay, excessive risk taking and irresponsible and harmful business practices.

"These are mechanisms through which we and other shareowners have pushed for anti-discrimination policies, greater diversity in the C-suite, better climate policies and improved transparency and accountability in our interests as long-term investors. We should be demanding more of this, not less."

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Sanford Lewis, Director, Shareholder Rights Group

 The proposed rule change  shifts power  to corporate managers and boards, and away from shareholders, especially smaller shareholders who arguably have the most need to file shareholder proposals. We have not yet seen the actual text of the proposed rule, but what we are able to discern from the discussion today, we have the following comments.

The filing threshold requirements skew the process to disempower small shareholders. Now holding shares for just a year would require, instead of $2000, over $25,000 in a company.  This is is obviously not a ”retail investor level”  of shareholding –  shifting the filing level to larger investors who are less likely to file proposals and to innovate.  Moreover, without explanation, the filing threshold requirements creates a draconian provision – preventing shareholders from joining  their shares together (aggregating)  to file a proposal.

The resubmission threshold requirements stifle the introduction of new ideas by creating a  much steeper voting on-ramp for proposals to garner support. The prior rule was 3%  support the first year, 6% the second year and 10% the third year. The new rule is 5% the first year, 15% the second year and 25% the third year.  We know from historical records that this would bar out proposals addressing emerging ideas. It takes institutional investors in particular  time to study and set guidelines to support new proposals and ideas. An example is Netflix where a proposal  for proxy access got 4.4% the first time it was voted on and then a majority vote the second year. This would have been excluded under the new thresholds.

Contact: Sanford Lewis 413 549-7333Sanford Lewis, Director, Shareholder Rights Group

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Public Citizen: Trump’s SEC Chief Cements Anti-Investor Legacy

Note: Today, the U.S. Securities and Exchange Commission (SEC) proposed new restrictions on shareholders who submit resolutions to companies where they’ve invested, raising the ownership and resubmission thresholds. Commissioners Robert Jackson and Allison Lee opposed the proposal. Chair Jay Clayton and Commissioners Hester Peirce and Elad Roisman supported it.

“It’s no secret that many corporate captains loathe shareholders who raise questions at annual meetings. But Congress created the SEC to protect shareholders, not coddle thin-skinned C-suiters who dislike being questioned. No shareholder asked for these new limits. Instead the pressure on the SEC comes from giant corporations and trade associations like the U.S. Chamber of Commerce and the Business Roundtable.”

·         Lisa Gilbert, vice president of legislative affairs

“Clayton has cemented his legacy as an antagonist to investors by tightening the rules on shareholder activism. Shareholder resolution rules should be reformed, but in a way that provides greater latitude, not less, for engagement by the investors who own the company. We commend Commissioners Jackson and Lee for standing on the right side of fairness.”

·         Bartlett Naylor, financial policy advocate

Contact: David Rosen, drosen@citizen.org, (202) 588-7742
Angela Bradbery, abradbery@citizen.org, (202) 588-7741

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AFL-CIO: Trump’s SEC Chairman Proposes to Disenfranchise Investors and Reduce Shareholder Democracy by Curtailing the Shareholder Proposal Rule - Brandon Rees

In a partisan 3-2 vote, the Trump administration’s Securities and Exchange Commission (SEC) proposed to curtail the rights of investors to file proposals for a vote at company annual meetings. If adopted, these changes will hinder shareholder proposals by union members and their pension plans to hold corporate management accountable.

"We strongly oppose the SEC's shareholder proposal rule changes that will limit the ability of working people and their pension plans to have a voice in the companies that we invest in," said AFL-CIO President Richard Trumka (UMWA). The proposed changes include dramatic increases in stock ownership requirements and vote resubmission requirements.


Corporate CEOs of the Business Roundtable and the Chamber of Commerce have long wished for these changes to the shareholder proposal rule. In a 2017 letter to the SEC, the AFL-CIO showed how these proposed rule changes will undermine efforts to increase corporate responsibility for environmental, social and governance issues.

"The right to petition corporate management by filing shareholder proposals is an integral part of shareholder democracy in the United States,” Trumka explained. “The SEC should protect the rights of working people as the real main street investors, not the interests of overpaid and unaccountable corporate CEOs."

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Council of Institutional Investors: Fact Sheet on Proxy Advisory Firms and Shareholder Proposals Nov. 5, 2019

1. The Business Roundtable, National Association of Manufacturers and other

management groups’ claim that proxy advice is rife with errors is based on anecdote not evidence.

·      The SEC comment file for the SEC’s Nov. 15, 2018, proxy roundtable includes a number of letters that assert that errors in proxy reports are endemic. But the letters offer very few examples and most of those do not identify the company and cannot be checked. CII believes most claims of errors actually are methodological differences.

·      The only study that CII is aware of that purports to tote up proxy advisor errors alleges just 39 factual errors over nearly three years (or 0.1% of more than 30,000 reports by leading proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis during that period). And the study inflates the claimed error rate. CII’s own analysis of the study found that no more than 17 of the claims of factual error had merit.

·      CEO and board member dislike of proxy advisors appears driven by discomfort with the role of proxy research to be critical and raise questions. The charge of systemic factual error appears to be fabricated as a means to quash critical analysis and commentary.

2. Claims that proxy advisory firms wield excessive influence over how institutional investors vote confuse correlation with causation.

·      Many pension funds and other institutional investors buy proxy and review advisors’ research and recommendations but vote according to their own guidelines and policies. According to ISS, 85% of its top 100 clients use a custom voting policy.

·      It is wrong and insulting to suggest that institutional investors “robo vote”—vote in lockstep with proxy advisor recommendations. While ISS recommended voting against say-on-pay proposals at 12.3% of Russell 3000 companies in 2018, just 2.4% of those companies received less than majority shareholder support on their say-on-pay proposals. In 2019, Glass Lewis recommended in favor of 89% of directors and 84% of say-on-pay proposals, while directors received average support of 96% and say-on-pay proposals garnered average support of 93%.

·      Academic research has found that while both ISS and Glass Lewis appear to have some impact on shareholder voting, media reports often substantially overstate the extent of that influence.

3. The proposed mandate that proxy advisory firms let companies review the firms’ reports before investor clients see them amounts to unprecedented interference in the free market and is the opposite of what is required by regulation of stock analyst reports.

·      Current rules prohibit analysts from sharing draft research reports with target companies, other than to check facts after approval from the firm’s legal or compliance department.

·      FINRA Rule 2241, which the SEC approved, establishes this safeguard to, as the SEC has explained, “help protect research analysts from influences that could impair their objectivity and independence.”

·      If the SEC adopts its proxy advisor regulation, an analyst and a proxy advisor could write a report on the same company and the analyst would violate securities laws by showing it to the company in advance, while the proxy adviser would violate the law if it did not show it to the company in advance.

·      This is the very definition of arbitrary and capricious government action.

4. Three SEC commissioners are attempting to jam through fundamental changes without appropriate analysis and public comment.

·       The predicate for the SEC’s new, heavy-handed regulatory structure for proxy advisory firms is a significant change made by the SEC on Aug. 15, 2019, on a 3-2 vote, without any public comment, zero cost-benefit analysis and limited and flawed legal justification.

5. Shareholder proposals have proven to be a key channel for effective shareholder engagement with public companies for more than half a century.

·      Shareholder proposals permit investors to express their voice collectively on issues of concern to them, without the cost and disruption of waging proxy fights.

·      Shareholder proposals have encouraged many companies to adopt governance policies that today are viewed widely as best practice.

o   Electing directors by majority vote, rather than by plurality, a radical idea a decade ago when shareholders pressed for it in proposals, is now the norm at 90% of large-cap U.S. companies.

o   Similarly, norms such as independent directors constituting a majority of the board, independent board leadership, board diversity, sustainability reporting, non-discrimination policies and annual elections for all directors all were advocated early through shareholder proposals.

·      Shareholder proposals are a critical tool for expression of the collective views of holders, permitting them to communicate with each other as well as the company on whether an issue or approach has support. Another tool is voting against directors, but the message from negative voting on directors when the concern is a specific policy or disclosure is much less focused or clear.

6. Shareholder proposals are not a significant burden to U.S. public companies.

·      Shareholder proposals are almost always non-binding. The board actually does not have to do anything in response to a proposal.

·      Most public companies do not receive any shareholder proposals. On average, 13% of Russell 3000 companies received a shareholder proposal in a particular year between 2004 and 2017. In other words, the average Russell 3000 company can expect to receive a proposal once every 7.7 years. For companies that receive a proposal, the median number of proposals is one per year.

·      Companies exaggerate the cost of shareholder proposals. Most of the cost involves attempts by management to exclude proposals from their proxy statements, which is a choice made by management. The cost to put a proposal on the proxy ballot is de minimis.

·      CEO advocacy organizations say that shareholder proposals keep private companies from doing an IPO, an unsupportable and fact-free assertion. It is ludicrous to argue that a board would forgo access to public capital markets because in the next eight years the company may face a nonbinding shareholder proposal requesting better disclosure on its carbon footprint or the annual election of all directors.

7. Additional curbs on shareholder proposals are not needed.

·      Raising resubmission thresholds will stifle new ideas and issues, which typically take time to gain traction with investors.

·      The raised resubmission thresholds will keep topics off corporate ballots for years, even though circumstances may change at a company (e.g., independent board leadership tends to be seen as much more urgent when a company is in crisis, and the proposed new thresholds are likely to bar a proposal to separate the roles of CEO and chair at companies with the worst governance records).

·      The increased ownership thresholds will especially hamper small investors, the very market participants that SEC Chairman Jay Clayton has made it a priority to protect.

·      Until 1983, ownership of a single share of stock carried the right to propose a shareholder resolution. Now we are on a slippery slope that strips that right from more and more small shareholders, whose ideas can be as important and valuable to consider as those of larger holders.

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AS YOU SOW: As Shareholder Support for Climate Change and other Environmental, Social, and Governance Issues Grows, SEC Votes to Restrict Shareholder Voice

BERKELEY, CA—NOV. 5, 2019—The U.S. Securities and Exchange Commission (SEC), led by Chairman Clayton, voted today to severely limit the rights of shareholders, especially small shareholders to file proposals at companies. The SEC 14a8 process was created to ensure that shareholders have the right to seek transparency and disclosure from companies or raise significant policy issues that can create risk or harm company value over time. Such proposals, which are advisory and not mandatory even with 100% of the vote, have the goal of raising critical issues in front of management, boards, and company shareholders. Today’s draconian vote, split along party lines, would limit investor rights in ways that are incompatible with the basic premise that shareholders are owners of companies and should have a voice in the companies they own. 

“With this vote, the SEC has apparently inverted its mandate of protecting shareholders to that of protecting companies from shareholder input — even where company action creates increasing risk to shareholders, people, or the environment,” said Andrew Behar, CEO of As You Sow. “This proposal flies in the face of the SEC’s mandate of ensuring transparency, open discussion, and company responsiveness to shareholder concerns.”  

Shareholder proposals have served an important role in bringing cutting edge issues to the attention of management and boards, informing shareholders of growing risk, and increasing productive discussion of significant policy issues — in short, increasing transparency and shedding light on company actions. “Shareholders and companies have been well served by this process over the years; allowing company actions to fall back into the shadows is a giant step backward for all,” said Behar.  

Climate proposals are an important example of how shareholders have successfully used the process to flag the growing risk to companies and investors of inaction on climate change. Shareholder proposals have shined a light on the importance of climate change; highlighted the risks of inaction; underscored opportunities for responsive companies; flagged lead actors and lagging companies; and ensured that the market is appropriately addressing growing systemic climate risk. 

“The SEC has been unable to point to any demonstrable problem with the current shareholder system or make a case for how its proposal to limit shareholder rights will improve company value,” said Danielle Fugere, president of As You Sow. “To the contrary, this proposed rulemaking has the potential to increase shareholder and company risk, particularly regarding growing climate concerns. We don’t believe that it will withstand public or legal scrutiny.” 

# # #

As You Sow is a nonprofit organization that promotes environmental and social corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies. See our resolutions here.

MEDIA CONTACT: Stefanie Spear, sspear@asyousow.org, 216-387-1609

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James McRitchie: A Gadfly on SEC “Modernization” of Shareholder Proposal Rule

The changes would significantly reduce the spread of best practices generated by proposals submitted by “gadflies” like myself. Chairman Clayton seems to believe we file unpopular costly proposals. Untrue. My proposals averaged more than 50% support this year. See https://www.corpgov.net/2019/08/mcritchie-2019-proxy-season-win-for-market-beta/ 

Due to the increased thresholds for submission or increased waiting period, my wife and I would have to wait an extra year or two before filing most of our proposals. We have held about half of the 150 company investments in our portfolio for less than 3 years. Since we have a diversified portfolio, we have less than $15,000 in each of our newer investments. As a result, adoption of best practices would take longer… unless CalPERS and others file at hundreds of additional companies each year. 

The Never-Ending Quest for Shareholder Rights: Special Meetings and Written Consent https://corpgov.law.harvard.edu/2019/05/31/the-never-ending-quest-for-shareholder-rights-special-meetings-and-written-consent/ by Emiliano Catan and Marcel Kahan found:

Out of the 114 firms in our sample that granted that power over 2005-2017, 80% had received a precatory proposal. Relatedly, 84% of the unique firms that received at least one shareholder proposal asking for the right to call special meetings had granted their shareholders that right by the end of 2017…

The proposals were almost exclusively filed by individuals (as opposed to pension funds or other institutional investors). Remarkably, close to 90% of the proposals were filed by members of four families (the Chevedden family, the Steiner family, the Young-McRitchie family, and the Rossi family).

Higher resubmission thresholds are often recognized as problematic for environmental and social proposals, but they will also be problematic for governance proposals, such as the ones we usually file. For example, it took years of submissions and many low threshold votes to reach “consensus” around the terms of poxy access proposals. Many resubmissions would have been prohibited under the proposed rule. The spread of proxy access provisions, now in place at more than 70% of S&P 500 companies and a near majority of the Russell 1000, would have been delayed if the proposed rule had been in place.

 

The proposed rule would also hit us hard with procedural nightmares limiting our ability to coordinate submissions and by requiring that we keep our calendars open for the convenience of companies, rather than making normal appointments for negotiations.  

Companies are allowed to use the same outside counsel for filing more than one no-action request. I do not see why shareholders should be prohibited from using an agent who has also filed a proposal or has filed a proposal on another’s behalf. The “one proposal” rule should be called the “Chevedden Amendment,” because it is specifically targeted at one individual and those who work with him. Shareholders may have to seek a “Gibson Dunn Amendment” aimed at cutting down the number of companies any single law firm can represent.

With regard to negotiations, I am always happy to negotiate with companies. For example, I have filed a proxy access proposal at Apple for several years to bring them into best practices with regard to the standard “20% or two, whichever is higher” provision regarding the number of nominees. Apple has never been willing to negotiate. I have no problem being available via teleconference 10-30 days after submission of a proposal but it would be unduly burdensome to commit in advance to keep specific days and times open in advance, especially when I have no commitment from a company they are even willing to engage in discussion.

Investors to SEC: "Rescind New No-Action Policy"

We recommend that the Division rescind the policy and retain the process that has worked reasonably well for decades. The number of no action requests processed by the Staff has not increased, and thus this change does not seem merited. In the event that the SEC does not rescind the new policy, we offer the following suggestions to reduce the level of uncertainty and conflict resulting from the new approaches….

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SEC: Nominal Thresholds Empower the Small Shareholder

The Securities and Exchange Commission last revised the requirement as to how many shares must be held by a proponent in 1998. At that time the Commission made it clear that increasing the threshold above $2000 held for a year would be detrimental to key participants in the process - the smaller shareholders empowered by the rule:

[W]e are increasing the dollar value of a company‘s voting shares that a shareholder must own in order to be eligible to submit a shareholder proposal ­­ from $1,000 to $2,000 ­­ to adjust for the effects of inflation since the rule was last revised. There was little opposition to the proposed increase among commenters, although several do not believe the increase is great enough to be meaningful, especially in light of the overall increase in stock prices over the last few years. Nonetheless, we have decided to limit the increase to $2,000 for now, in light of rule 14a­8’s goal of providing an avenue of communication for small investors. There was no significant support for any modifications to the rule’s other eligibility criteria, such as the one ­year continuous ownership requirement.

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