Introduction to the Investor’s Right to File a Shareholder Proposal

A shareholder  at a U.S. publicly traded company has a right, under Securities and Exchange Commission (SEC) Rule 14a-8, to submit a proposal of up to 500 words to appear on the company’s proxy and be voted on at the next annual shareholder meeting. The investor must have owned a minimum of $2,000 in stock in the company for at least a year. In addition to these qualifications, the SEC has established a series of requirements that limit what kinds of proposals can be filed. For instance, the SEC rules  prevent filing based on a personal grievance, filing of a proposal on an issue that is “insignificant” to a company, and other topics that screen out inappropriate proposals.[1]  

In situations where the company seeks to omit a proposal from the proxy, companies engage the SEC by requesting informal advice, called a no action letter, to advise shareholders and companies on whether a proposal must appear on the proxy or can be excluded. In this “no action letter process” the SEC staff  determines whether they would recommend enforcement action (or recommend no action) if the company chooses not to include the proposal on the proxy.

Shareholder Proposals Offer Companies Fresh Perspectives

The proposal process is grounded in that most American of values — the marketplace of ideas. Typical shareholder proposals include governance proposals (such as asking the company to separate the positions of board chairman and CEO), and proposals on environmental or human rights risks (such as requesting the company to issue an annual report describing the company’s impact  on climate change and the risks that the changing climate poses to the company).

Shareholder Proposals are an Investor Right

The right to file a proposal is part of the “bundle of rights” that one acquires with share ownership. For many investors, these rights are integral to active investing strategies and a valued part of being a shareholder.

Shareholder Proposals Protect Investors

The SEC’s stated mission is “to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC strives to promote a market environment that is worthy of the public's trust.”

As it stands now, Rule 14a-8 serves this core mission as a well-functioning mechanism for ensuring that smaller institutional and individual investors can raise issues with their companies. The shareholder proposal process allows investors of all sizes to pursue investors and fund beneficiaries’ long-term investment goals by encouraging foresight, inspiring innovation, and demanding accountability.

Most proposals are non-binding. They advise the company on shareholder concerns but leave it to board and management to take implementing actions. Indeed, many proposals are withdrawn after companies dialogue with the proponents on the issue and agree to take steps to address the issues raised.

Shareholder Proposals Are Good for the US Economy

The process has resulted in numerous important changes to corporate governance in the U.S.  Even small shareholders can catalyze significant company moves that benefit all shareholders. Large mutual fund families, proxy advisors, mutual funds and pension funds often find common cause with smaller investors and vote in favor of their  proposals to improve a company's governance or risk disclosures. This is because the proposals advance trustworthiness, foresight and investment-readiness in the capital markets.