Investor Response to Chamber: Don’t Gut Rights

Investor Response to Chamber: Letter

Representatives of hundreds of investors with trillions of dollars in assets delivered a letter to the SEC on November 9, 2017, An Investor response to U.S. Chamber’s Proposal to Revise SEC Rule 14a-8 (report).

We noted with interest the November 1, 2017, guidance contained in Staff Legal Bulletin No. 14I. While we are reserving judgment about how the guidance may apply in practice, we are particularly pleased by Director Hinman’s accompanying statement that the guidance is not intended to “make things easier or harder for one side or the other, . . . [but] to improve the process.” We strongly support that goal and plan to actively monitor the SEC staff no-action process during the upcoming proxy season to determine whether the goal was achieved.

The object was to “ensure that Rule 14a-8 continues to provide investors with a cost effective and efficient means to communicate with their fellow shareholders, boards of directors, and corporate management.” The letter was signed by CII, US SIF, Ceres and ICCR with input from many of their members.

Investor Response to Chamber: Report

During the summer of 2017, The U.S. Chamber of Commerce’s Center for Capital Market Competitiveness (CCMC, or the Chamber) proposed seven changes to the rules governing shareholder proposals in the United States in the midst of a public policy debate around the Financial Choice Act. The report by investor groups represents the most thorough response I have seen.

Investor Response: Chamber’s Claims

The report address each of  six claims made by the Chamber to address their misconceptions. For example, the Chamber complains the SEC allows shareholders to deal with social and political issues, which should not be proper subjects for shareholders who should only be concerned with efficiency and profitability. Investors point out the $65 trillion in assets are managed by members of the UN-backed Principles for Responsible Investment, which commits signatories to incorporating ESG issues into investment analysis and decision-making processes. Climate change and other ESG issues are not immaterial, as the Chamber claims.

The Chamber claims “a very small subset of investors have come to dominate the shareholder proposal system.” Investors rebut includes the following:

Individual investors who file the most resolutions are Chevedden, Steiner and McRitchie. Between 2004 and 2017 these filers accounted for 14.5% of proposals. The average vote on their resolutions is 40%. These investors provide an important service for the capital markets because they have a very strong track record of filing proposals on corporate governance issues that have resulted in hundreds of companies adopting policies that are now considered best practice in governance. These filers provide a good example of a point made by Adam Kanzer of Domini Impact Investments: “The quality of one’s ideas is not correlated with the size of one’s investment.”

Chamber: “The broken Rule 14a-8 system is yet another burden on companies and their shareholders that only serves to make the public company model less attractive.”

Investors: “…only 9% of public companies that have IPO’d since 2004 have ever received a shareholder proposal.

These are the briefest summaries of just a few, but you get the picture. The Chamber’s claims are based on alternative facts.

Investor Response: Chamber’s Proposals

Investors address seven suggestions by the Chamber for modifying the shareholder proposal process. Again, I’m going to be very brief.

1. Raise resubmission thresholds. Investor Response: Among many considerations pointed out that the Chamber ignored is the fact that about 40% of all proposals are withdrawn because agreements are reached with management.
2. Withdraw SLB 14H. Investor Response: Allowing companies to exclude shareholder proposals by proposing more restrictive proposals on the same issue is just gamesmanship, not thoughtful governing. (backgound before guidance)
3. Require proponents to disclose economic interests and objectives. Investor Response: A first step would be to require the company to name the proponent(s) in the proxy statement but many companies exclude this information from proxy statements. In contrast to the Chamber’s vague requirements, Investors offer a reasonable checklist that could be included, in addition to the existing 500 word statement.
4. Exclude proposal is the subject matter “impacts less than 5% of a company’s total assets and 5% of net earnings” by removing the provision in Rule 14a-8(i)(5) “and is not otherwise significantly related to the company’s business.” Investor Response: “Material risks are not necessarily correlated to revenues or significant ownership.” The Chamber may have gotten half a loaf toward their goal with recently issued SLB 14I.
5. Prohibit the use of images, photos, or graphs as part of proposals. Investor Response: Clarification best done through bulletin, such as SLB 14I.
6. SEC should offer more certainty regarding 14a-8(i)(4), which deals with proposals that relate to a redress of a personal claim or grievance. Investor Response: Staff can already even issue “forward-looking relief,” which would apply to future proposals.
7. SEC must allow for the exclusion of proposals that include materially false or misleading statements.” Investor Response: Already clarified in 2004 via SLB 14B.

I hope the SEC listens to the investors it is supposed to be serving. As the investor response notes:

The shareholder proposal is among the most important tools used by investors in these groups, and others, to act as watchdogs and advocates for long-term value creation and risk management within the U.S. capital markets. In this sense, they are strong allies of the SEC in achieving its mission; and they do this work voluntarily, through the existing, fine-tuned form of shareholder democracy facilitated by rule 14a-8.

Related Post: SLB 14I (CF) – SRI Conference: 1st Impression