By Soyoung Ho
Despite investor opposition, the SEC has scheduled a public meeting for November 5, 2019, to consider proposing changes to the thresholds for submitting and resubmitting shareholder proposals for vote during a public company’s annual meeting. The commission is expected to propose a rule that would make it harder for shareholders to bring resolutions up for vote in response to long-running business complaints.
Business groups, especially the U.S. Chamber of Commerce and the Business Roundtable, have been criticizing Rule 14a-8 of the Securities Exchange Act of 1934, which lets investors put forth proposals if they own at least $2,000, or 1 percent, of a public company’s voting shares for at least one year. The groups believe that as currently set, the rule allows a handful of activist investors to easily put forward “idiosyncratic” proposals that relate to environmental, social, and governance (ESG) matters at the expense of the rest of the shareholders. The business organizations think ESG issues have nothing to do with a company’s financial performance. But it is an extra expense that companies have to address resolutions, for example, on disclosure of the amount spent on political activities or greenhouse gas emissions. They believe one way to address the problem is to raise the resubmission threshold.
The SEC under Chairman Jay Clayton’s leadership has been sympathetic to business complaints and has made it a priority to make commission rules less burdensome so more companies will be encouraged to go public.
Rule 14a-8(i)(12) allows a company to exclude a proposal from its proxy statement for a vote at the annual meeting if it failed to receive the support of 3 percent of shareholders if voted on once in the last five years, 6 percent if voted on twice in the last five years, and 10 percent if voted on three or more times in the last five years.
But investor advocates want the thresholds left intact. Among other things, they believe ESG matters are increasingly material today. They also believe small retail investors will be disenfranchised if the thresholds were raised. Even 18,617 individual investors also signed form comment letters urging Chairman Jay Clayton not to revise Rule 14a-8, as of October 30.
In an October 25 letter to Clayton, the Shareholder Rights Group also noted that his focus has been on protecting retail investors. He has talked up the importance of protecting Ms. 401(k).
“This leads us to believe that you may have been misled by the advocates for amendments to the shareholder proposal rule,” said the Shareholder Rights Group, which represents several investment firms.
A few individuals filing a significant portion of proposals is nothing new. “In fact, the 14a-8 proposal process, since its inception, has always had the effect of empowering a few shareholders who have made it part of their investing strategy and mission to improve the governance of the companies in which they invest,” the group wrote. “Over time, many of the changes they sought were implemented and even adopted as SEC rules. Compared with historical numbers, the proportion of proposals currently filed by so-called gadflies, the active corporate governance proponents, has fallen from 100% when the shareholder proposal rule was first instituted, down to 50% some years ago, and to 30% today.”
What has changed over the years is that gadflies are winning much more support for their proposals, the group explained.
“Large numbers of mainstream, institutional, and values or faith based investors are voting in favor of those proposals, very often leading to majority support or higher,” the group wrote. “Disrupting such productive corporate governance engagements is not in the best interest of the investing community or the capital markets.”
The planned vote on Rule 14a-8 is part of a wider effort to reform the proxy voting system.
In August, a divided SEC decided to tighten the commission’s interpretation of rules that apply to proxy advisory firms and asset managers who use their services. The action, which was opposed by investor advocates, responded to another long-running business complaint that proxy advisory firms—who provide voting recommendations on issues ranging from executive compensation to director elections during shareholder meetings—have too much unchecked power.
Another item the SEC will consider on November 5 will be on exemptions from the proxy rules for proxy voting advice.
“The Commission will consider whether to propose amendments to the proxy solicitation rules that would provide for disclosure of material conflicts of interest and set forth procedures to facilitate issuer and shareholder engagement, to provide clarity to market participants, and to improve the information provided to investors,” the SEC said.
The SEC will also consider proposing changes to the rules that prohibit certain investment adviser advertisements and payments to solicitors.
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