“It’s not broken, don’t ‘fix’ it.” 

The Investor Rights Forum contains extensive evidence that the existing shareholder proposal rule is not broken, and does not merit consideration of changes to the rule’s thresholds:

SHAREHOLDER SUPPORT. Shareholders at numerous companies are increasingly voting in favor of the proposals, demonstrating that the shareholders want the opportunity to weigh in on the issues raised in proposals by both small and large investors.

NUMBER OF PROPOSALS IS NOT GROWING. The number of proposals being filed has generally held steady from year to year. It is not increasing.

THE RULES WORK. The rules already screen out proposals that are not significant to the company or that reflect a personal grievance.  It is rare that an “idiosyncratic” proposal that is of no interest to other investors makes it to the proxy. In those cases, shareholders reject the proposal and prevent its resubmission.

VALUE TO COMPANIES AND SHAREHOLDERS. The proposal process provides significant input to the governance of companies. It encourages investors to put their resources — both time and money — to promote foresight and accountability. Shareholder proposals fulfill multiple, valuable services: risk assessment, communication channels, investor polling and honing of governance mechanisms.

LOW COST. The cost of printing a shareholder proposal on the company’s proxy statement is minimal. Even the costs associated with legally challenging a proposal can be minimal. 

RIGHTS, CONTRACTS AND RELATIONSHIPS. The right to file proposals is part of the bundle of rights and expectations associated with share ownership. Investing strategies, contracts, fiduciary duties and contractual commitments have been constructed around the right of investors, especially smaller retail investors, to be able to file proposals as part of an active investing strategy. Rulemaking by the SEC must not dilute these rights or disrupt these relationships.   

Investor Rights are at Risk

The Securities and Exchange Commission  has issued a proposed rulemaking to alter the thresholds for filing and resubmission of shareholder proposals and make other changes in the process.

For over half a century,  the shareholder proposal process has aided investors of all sizes to convey key concerns to company directors and managers as well as fellow shareholders.  The shareholder proposal process often sheds light on issues neglected by boards, leading to better-considered strategic decisions and more transparency.

A few companies and their lobby groups are seeking to curtail these shareholder rights, and are calling on the SEC to make substantial changes to the rule. 

POTENTIAL SEC RULEMAKING

PROPOSAL FILING THRESHOLDS

Current rules require an investor, as a precondition to filing a proposal, to hold at least $2,000 in shares of a company for at least a year.  The nominal amount and holding period has been maintained by the Securities and Exchange Commission to ensure that small investors would have access to the important right to place issues significant to the company before fellow shareholders. The new SEC proposal raises the threshold for a shareholder holding shares for one year from $2,000 to $25,000! Smaller shareholders holding $2000 in stock would only be able to file proposals if they held the shares for three years.

Restricting the liquidity of smaller engaged shareholders in inconsistent with Commission advice regarding maintaining diversified portfolios, and extending the holding period is inconsistent with market realities. When the rule was originally enacted in the 1950s, the average time an investor held a share of  stock was eight years; today the average is between four and eight months.[1] Extending the holding time is out of step with today’s  high-frequency trading and index funds in which fewer shareholders are exercising “buy-and-hold” investment strategies.

RESUBMISSION THRESHOLDS

Once a proposal is voted upon at a company, SEC rules limit the circumstances in which the proposal can be resubmitted. In order to resubmit a particular proposal at a company in a subsequent year, the proposal must have obtained at least 3% shareholder support in the first year,  6% in the second and 10% in the third year at the company’s annual shareholder meeting. These thresholds allow time for the introduction of a proposal on an emerging concern to prompt ongoing consideration, education, research and dialogue among the shareholders and companies. Support levels for proposals also increase over time in the face of emerging information on risks, technical innovation, and shifts in investing strategies. The potential for resubmission sometimes is sufficient to stimulate a company to address the underlying concern. Vote levels for novel proposal topics grow over time. Many of the largest shareholders only support a proposal after establishing a voting policy relevant to the newly emerging issue.

Despite these functional realities, corporate trade associations have been asserting since the late 1990’s that these thresholds should be increased. The SEC has proposed changing the thresholds to 5-15-25.

The data do not support this change. The record shows that proposals are seldom resubmitted by proponents if they achieve votes that only narrowly exceed the existing thresholds. Thus, the concern about too many resubmitted proposals is misplaced.  An examination of  proposal resubmissions and voting records during 2018 and 2019 demonstrates that the 3% threshold for a first-time proposal remains relevant — a number of proposals were rejected by shareholders,   receiving votes less than 3% and preventing them from being resubmitted in a subsequent year. The existing resubmission thresholds thus effectively screen out proposals considered irrelevant or ill-advised by most shareholders.      Changing the resubmission threshold in a way that would make it harder for such proposals to persist would ultimately disadvantage all investors, large and small, by depriving them of the opportunity for ongoing deliberation on issues believed by many to be consequential for portfolio companies.

INVESTOR STATEMENTS IN RESPONSE TO THE RULEMAKING

ADDITIONAL THREATS TO SHAREHOLDER RIGHTS

In addition to the rulemaking, other current developments at the SEC are also threatening shareholder rights. 

ADVISORY PROPOSALS DO NOT MICROMANAGE

 A further controversy relates to whether proposals may be excluded as “micromanaging” company decision-making. In 2018 and 2019,  the SEC Staff found[2] that proposals requesting companies to disclose greenhouse gas targets would “require” the company to substitute “specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors.”[3]  As such, the staff allowed exclusion.

In fact, there was no such requirement  in any of the excluded proposals, because they are advisory in nature. Because most proposals “request” rather than “require” action, by their nature they respect and ultimately defer to the discretion of the board and management to operate the company. Most shareholder proposals provide suggestions and offer input from company shareholders, while also  providing an opportunity for management to  determine how widely a view is shared among the investors. The Staff’s broadened definition of micromanagement is depriving shareholders the opportunity to vote on clear, effective proposals on urgent risks such as climate change.

Read More: Council of Institutional Investors letter on micromanagement. 

SELECTIVE ISSUANCE OF NO ACTION LETTERS COULD HURT BOTH COMPANIES AND SHAREHOLDERS

The SEC has indicated that it may halt the practice of issuing written replies to all company no action requests, and in some instances to give their reply orally instead of in writing, or even decline to reply at all. This new process lacks the safeguards of transparency and accountability provided by a written no action process, and deny all parties the benefits of the staff's deliberative process and thinking. Denial of a no action request without a written justification will certainly be problematic to issuers, and similarly deny proponents the benefits of the Staff’s thinking.

Read more

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[1] https://www.politifact.com/virginia/statements/2016/jul/06/mark-warner/mark-warner-says-average-holding-time-stocks-has-f/ see also Jake Zamansky, The Death of the "Buy and Hold" Investor, Forbes, Jul 5, 2012, http://forbes.com/sites/jakezamansky/2012/07/05/the-death-of-the-buy-and-hold-investor/#45702d5a30b9

[2] Examples:  Exxon Mobil, JB Hunt Transportation  and  Devon Energy.

 [3] The decision stated: “In our view, the Proposal would require the Company to adopt targets aligned with the goals established by the Paris Climate Agreement. By imposing this requirement, the Proposal would micromanage the Company by seeking to impose specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors.” [emphasis added]