The Securities and Exchange Commission voted today to modernize its shareholder proposal rules, raising the amount of money one needs to initially invest in a company to propose changes to it in proxy statements, a move critics say would restrain the ability of shareholders to hold corporations and CEOs accountable on a variety of issues—namely on climate change, human rights and corporate board diversity.
SEC Commissioner Jay Clayton argued today's amendments to the shareholder proposal rules ensured that there'd be an “appropriate alignment” between the interests of shareholder proponents and all shareholders, while Commissioner Elad Roisman said the rule changes make sure anyone bringing a proposal to be included in a company's proxy statement has a sufficient economic stake or investment interest in the corporation.
"The only constant in our markets is the fact that they will change. It is our job as regulators to make sure our rules keep pace," Roisman said in support of the changes.
But others excoriated the decision as a giveaway to CEOs by limiting shareholders’ ability to push for changes in corporate governance. Lev Bagramian, a senior securities policy advisor at Better Markets, said the SEC's actions disenfranchised shareholders’ corporate rights and inhibited them from speaking up on hot-button issues.
“This action will harm Main Street investors and is a radical, ideologically driven policy that deliberately ignores the documented value of shareholder proposals,” he said. “The SEC’s action specifically targets proposals that have been gaining support from shareholders, such as those related to environmental, social and governance-related policies of a company (ESG proposals). This action comes even as shareholders—who co-own the companies they invest in—are learning how to more effectively engage companies and exercise their corporate suffrage.”
Under the new rules, a shareholder can submit an initial proposal to be included in a company’s proxy statement for consideration by all shareholders after holding $2,000 in company stock for at least three years, or $25,000 for one year (previously, a shareholder with $2,000 in stock for one year was eligible to submit a proposal). The amendments to Rule 14a-8 also increase the amount of support a proposal would need from other shareholders to be resubmitted for consideration at future shareholder meetings. Previously, a proposal would need 3% support from other shareholders in its first year of submission to be able to be resubmitted in the next five years, as well as 6% for its second time and 10% for the third time. The amendments boost the necessary support for resubmission to 5%, 15% and 25% for the first, second and third submissions.
Roisman said the changes were necessary to “modernize” the rule, noting that some portions had not been changed since the 1950s. Additionally, he stated that only five people had been responsible for most shareholder proposals between 2003 and 2014, often submitting identical proposals to different companies, while arguing that the previous shareholder support levels meant that a shareholder could resubmit their proposal each year even if an overwhelming majority of the shareholders voted against it.
“I do believe that the ability of a shareholder to communicate with a company and the other shareholders fosters good corporate governance. Each shareholder, as the owner of a company, is certainly entitled to his or her opinions about how that company should be managed,” he said. “However, the ability for a single shareholder—and even, as some advocate for, a non-shareholder—to require a company to include his or her own proposal in the company’s proxy statement is not a fundamental right.”
Commissioner Caroline Crenshaw opposed the rule changes, saying they implied that the wealthy were more likely to have ideas that should be considered by corporations. She noted that while the SEC's statement claimed the changes would save $70 million across companies in the Russell 3000 Index, that would be about $23,000 per company, which is less than an individual has to invest to be able to submit their own proposal. Additionally, boosting the investment a first-year shareholder must have to submit a proposal to $25,000 would create a situation where the average investor would need to have an outsized investment in a single company to have a voice.
“Today’s rules, of course, contemplate this and allow smaller investors to submit proposals if they hold $2,000 worth of securities for at least three years,” she said. “But it is unreasonable to expect an investor who identifies an existing problem, but cannot afford to invest $25,000, to wait three years to suggest a solution.”
The amendments were first proposed last November, and earlier this year, advocates like As You Sow, Green America and Americans for Financial Reform said the heightened support levels among shareholders would make it difficult to resubmit proposals, arguing that submitted proposals rarely garnered widespread support in their first submission.
Fran Teplitz, an executive co-director for business, investing & policy at Green America, said shareholder resolutions were often used to address a variety of corporate conduct questions, including on human rights, worker rights, climate change and corporate board diversity.
“This effort to ‘modernize’ the shareholder process actually is a sign of its effectiveness as it currently works,” Teplitz said. “The SEC wants to let companies off the hook so they can ignore issues they’d prefer not to address, even to the detriment of companies’ long-term value.”