Proposals Under Attack by SEC

Proposals & shareholders are under attack by the SEC. Review finds no necessity for SEC proposed rules and a likely market cost of billions of dollars in American wealth.

Proposals and voting proxies are the primary mechanisms shareholders have for holding directors and corporations accountable. The right of non-billionaires to file shareholder proposals is currently under attack by the SEC, which has proposed two sets of rules jeopardizing our rights and promises to create a more democratic-free zone around public companies. Comments are due February 3. I have previously filed letters on December 28 and 29 on File No. S7-23-19. I also posted SEC Rulemaking Comment Tips to help readers file their own comments.

In the rulemaking, the SEC asks a set of at least 69 questions on shareholder proposals. In preparation for filing another comment letter, I have begun to jot down a few initial thoughts on those questions. Here I begin to contemplate only the first 16, with a long way to go. I am looking for feedback from readers. Are you attempting to answer these questions? What are your draft or final answers? Your feedback is solicited. Please use  the comment box below or email me.

Yes, the post below is messy. It is pasted from a draft letter I am beginning to write. I have no time to make it look pretty.

Proposals by SEC Lack Necessity

In a section titled Need for Proposed Amendments, the Commission argues “Rule 14a-8 facilitates engagement between shareholders and the companies they own.” Amendments are proposed because Rule 14a-8 is “susceptible to overuse,” allowing individual shareholders to shift the cost of soliciting their proposals to the company and other shareholders.

The Commission seeks to guard against overuse. “We are concerned that the $2,000/one-year threshold established in 1998 does not strike the appropriate balance today. We believe that holding $2,000 worth of stock for a single year does not demonstrate enough of a meaningful economic stake or investment interest in a company to warrant the inclusion of a shareholder’s proposal in the company’s proxy statement.

The Commission, therefore, implies shareholders have taken advantage to Rule 14a-8’s susceptibility to overuse. They must have dramatically increased the number of proposals filed and increased the cost to companies and other shareholders. Yet, according the Commission’s own data, “Our analysis shows no discernible trend in the number of submitted shareholder proposals in the 1997 to 2018 period.” (p. 70) “The percentage of voted, omitted, and withdrawn proposals has largely remained stable during our sample period.” (p. 72)

In fact, while the overall number of proposals has not trended up or down, the average number submitted to each individual company has fallen. “The average number of proposals submitted to S&P 500 companies has decreased from 1.85 in 2004 to 1.24 in 2018, representing a 33 percent decrease during our sample period, and the average number of proposals submitted to Russell 3000 companies has decreased from 0.38 in 2004 to 0.28 in 2018, representing a 26 percent decrease during our sample period.” (p. 74)

Given that the overall number of shareholder proposals has been relatively flat and the average number per company is trending down, we must conclude shareholders have not taken advantage of Rule 14a-8 susceptibility for overuse.

“Overuse” could also be claimed if there were a substantial drop in overall support for shareholder proposals. However, the SEC finds “our analysis shows that the average voting support of all proposals has remained stable during our sample period, but there is an increase in the average voting support for environmental and social proposals over the sample period.” (p. 85) Therefore, overuse on the basis of lack of support cannot be claimed.

Need for the proposed amendments has not been demonstrated. Therefore, they should be rejected.

Proposed amendment is to Rule 14a-8(b) re submission thresholds

1. We are proposing to amend Rule 14a-8(b) to establish new ownership requirements for establishing an investor’s eligibility to submit a shareholder proposal to be included in a company’s proxy statement. Should we amend Rule 14a-8(b) as proposed?

The SEC could reasonably change the eligibility requirements to adjust for inflation. The original increase from $1000 to $2000 included a future inflationary adjustment as noted on page 15, footnote 36, of the proposal. As such, an actual current inflation adjustment, removing the future adjustment of the previous change, would result in a $2521.60 threshold, rounded to $2500.

2. The proposed amendments seek to strike a balance between maintaining an avenue of communication for shareholders, including long-term shareholders, while also recognizing the costs incurred by companies and their shareholders in addressing shareholder proposals. Are there other considerations we should take into account?

The SEC should consider the desirability of wide participation of shareholders in corporate governance. Alienation of shareholders from meaningful input is likely to lead to calls for socialism and government control. See Millennial Socialists Bolstered by SEC at  https://www.corpgov.net/2019/12/millennial-socialists-bolstered-by-sec/. Already 57% of millennials reject the capitalist mode of production. Those who do are just beginning to realize how their investment are voted in corporate elections to concentrate power in corporate elites, obfuscate environmental issues and influence civil elections with dark money.

Additionally, the proposed amendments recognized wildly exaggerated costs incurred by companies and shareholders in addressing shareholder proposals, but none of the benefits. For example, the five individual proponents, who Chairman Clayton (https://www.sec.gov/news/public-statement/statement-clayton-2019-11-05-open-meeting#_ftn19, 11/5/2019) criticized for submitting 78% of all proposals by individual shareholders submit almost exclusively good governance proposals.

The Never-Ending Quest for Shareholder Rights: Special Meetings and Written Consent (Emiliano Catan and Marcel Kahan https://corpgov.law.harvard.edu/2019/05/31/the-never-ending-quest-for-shareholder-rights-special-meetings-and-written-consent/)  found:

Out of the 114 firms in our sample that granted that power over 2005-2017, 80% had received a precatory proposal. Relatedly, 84% of the unique firms that received at least one shareholder proposal asking for the right to call special meetings had granted their shareholders that right by the end of 2017…

The proposals were almost exclusively filed by individuals (as opposed to pension funds or other institutional investors). Remarkably, close to 90% of the proposals were filed by members of four families (the Chevedden family, the Steiner family, the Young-McRitchie family, and the Rossi family).

Our actions not only improved the long-term value of our companies, they also helped move the entire market by driving what is considered best practice. Driving beta (the whole market) is much more impactful and sustainable than seeking a slight alpha edge, which tends to fluctuate more.

A recent Diligent Institute report finds that equity returns for 2017 and 2018 of the top 20% of S&P 500 companies exhibiting strong corporate governance outperformed the bottom 20% by 17% over that period. Good governance included shareholder rights, such as annual election of directors and simple majority vote standards. (The High Cost of Governance Deficits: A Case for Modern Governance, Diligent Institute, https://www.diligentinstitute.com/modern-governance-report/)

The High Cost of Governance Deficits: A Case for Modern Governance, 2019, Diligent Institute, https://www.diligentinstitute.com/modern-governance-report/

Since the market cap of S&P 500 companies rose $1,843,463,000,000 in just those two years (http://siblisresearch.com/data/total-market-cap-sp-500/), the report provides supporting evidence that the proposed rule would result in decreased gains to shareholders of billions of dollars each year by delaying passage and enactment of shareholder proposals promoting good corporate governance. That enormous cost is not considered in the Commission’s economic analysis for File No. S7-23-19.

3. Should we adopt a tiered approach, providing multiple eligibility options, as proposed? Are there other approaches that would be preferable instead?

See response to #1 above.

4. How is a sufficient economic stake or investment interest best demonstrated? Is it by a combination of amount invested and length of time held, as proposed, or should another approach to eligibility be used?

The SEC’s two and three year holding periods are arbitrary and capricious, with no factual backing as to rationale. Tax law in the US already declares a year of holding as long-term investing; it makes no sense for the SEC to be three times as conservative in the current widely accepted legal standard.

5. Are the proposed dollar amounts and holding periods that we propose for each of the three tiers appropriate? Are there other dollar amounts and/or holding periods that would better balance shareholders’ ability to submit proposals and the related costs? Should any dollar amounts be indexed for inflation or stock-market performance?

The proposed dollar amounts, holding periods and three tiers are arbitrary and capricious. The SEC offers basis in facts to support its scheme other than bold assertions.

6. We are proposing to maintain the $2,000 ownership level, but increase the corresponding holding period to three years. Should we also increase the $2,000 threshold? If so, what would be an appropriate increase? For example, should we adjust for inflation (e.g., $3,000) or otherwise establish a higher amount?

As indicated in response to #1 above, I would not oppose an inflation adjusted threshold of a $2500.

7. Are there potential drawbacks with the tiered approach? If so, what are they?

See response to #4.

8. Instead of adopting a tiered approach, should we simply increase the $2,000/one-year requirement? If so, what would be an appropriate threshold?

See response to #1.

9. Should the current 1 percent test be eliminated, as proposed? Should the 1 percent threshold instead be replaced with a different percentage threshold? Are there ways in which retaining a percentage-based test would be useful in conjunction with the proposed tiered thresholds?

Yes, eliminate the 1 percent test. It serves to useful purpose as long at the $2,000 or $2,500 threshold remains since I know of no listed company with a value of $250,000 or less.

10. Should we instead use only a percentage-based test? If so, at what percentage level? Are there practical difficulties associated with a percentage-based test such as calculation difficulties that we should take into consideration?

No, any percentage-based test is likely to disenfranchise all but a few of the largest funds, funds that have never filed any shareholder proposals.

11. Should we prohibit the aggregation of holdings to meet the thresholds, as proposed? Would allowing aggregation of holdings be consistent with a shareholder having a sufficient economic stake or investment interest in the company to justify the costs associated with shareholder proposals?

Aggregation should be allowed for holdings held by the same person, family or organization. For example, my wife and I have five accounts. Unless clarified, the SEC rule may allow companies to argue that two or more broker/bank letters evidencing threshold ownership constitutes “aggregation,” even though held by the same person, family or organization.

12. If we were to allow shareholders to aggregate their holdings to meet the thresholds, should there be a limit on the number of shareholders that could aggregate their shares for purposes of satisfying the proposed ownership requirements? If so, what should the limit be? For example, should the number of shareholders that are permitted to aggregate be limited to five so as to reduce the administrative burden on companies associated with processing co-filed submissions?

See response to #11.

13. Should we require shareholder-proponents to designate a lead filer when co-filing or co-sponsoring a proposal? Would doing so facilitate engagement and reduce administrative burdens on companies and co-filers? If we required shareholder- proponents to designate a lead filer, should we require that the lead filer be authorized to negotiate the withdrawal of the proposal on behalf of the other co-filers? Would such a requirement encourage shareholders to file their own proposals rather than co-file? Would the number of shareholder proposal submissions increase as a result?

Requiring co-filers to designate a lead filer is common practice and serves a clearer path to negotiations for all parties.

14. What other avenues can or do shareholders use to communicate with companies besides the Rule 14a-8 process? Has the availability and effectiveness of these other channels changed over time?

There are some helpful tools coming online. Today, social media drives public opinion, and changes it daily. Companies that fail to engage often regret it, just as many regret not engaging with activist investors. Most are familiar with Facebook, YouTube, WhatsApp, Messenger, WeChat, Instagram, Tumblr, Google, Twitter and other general-purpose social media sites. Many are not limited to shareholders, do not monitor content, and some are better known for spreading propaganda than facilitating reasoned discussion.

For example, see YouTube video from Chris & Holly Turner of  Stampede Consulting, which attempts to drum up comments on SEC File No. S7-22-19 (discussed at https://www.corpgov.net/2020/01/sock-puppets-for-proxy-advisory-rule/). The Turner’s claim proxy advisors are “submitting shareholder proposals” on things like “abortion, climate change, sanctuary cities, gun control…” “You’re getting almost half your money stolen and given to things like abortion and open borders, sanctuary cities…” “Some of these shareholder proposals are giving money to organizations that oppose the second amendment, oppose the first amendment, that oppose the right to life…” Of course, proxy advisors are not submitting shareholder proposals or stealing money. Shareholder proposals are not giving money away or opposing the Constitution.

The SEC’s higher threshold would encourage such outright lies and propaganda wars. The current thresholds allow small shareholders to engage with companies through shareholder proposals, a much more regulated and civil activity than posting propaganda on social media.  There is no substitute for shareholder proposals in communicating effectively with companies, especially around corporate governance issues, since it is the only way to get an issue in front of all shareholders for a vote.

Newer social media sites and applications are being developed to generate public pressure around specific corporate accountability issues. Disclosure of proxy votes in real-time would help ground those developing opinions around factual information. A few examples posted at https://www.corpgov.net/shareowner-action-handbook/#Networking are as follows:

YourStake.org facilitates the ability of individual shareholders to have their voices heard. Users create an “Ask” on any issue for public companies and funds. Once an Ask receives substantial support, a “Champion,” with a proven track record on social and environmental issues, is appointed to negotiate the Ask. Champions include Walden Asset Management and Zevin Asset Management. 

Say.com provides a framework for communications between companies and shareholders for many uses. Unlike SEC Rule 14a-8 shareholder proposals, Say is not limited as to what questions shareholders can pose to companies.

Just Capital surveys thousands of Americans to identify issues most important in defining a “more just economy.” Employees are gaining on shareholders as the top priority for Main Street at companies. An increased number also believe CEOs should take a stand on important social issues and that acting together can change corporate behavior. About 76% said they would take a job at a more just company, even if it paid 20% less.

Change.org claims nearly 200 million users in 18 countries. Petition led campaigns targeted and changed Massage Envy (sexual assault issues), Walmart (banning dangerous paint strippers), and Starbucks (recycling), among others.

SumOfUs, claims “15,096,345 people stopping big corporations from behaving badly.” Accomplishments include getting the European Union to ban ”Bayer’s bee-killing pesticides” and McDonalds to reduce plastic waste.

The Center for Political Accountability (CPA) leads efforts for corporate political disclosure and accountability and publishes the annual CPA-Zicklin Index, benchmarking companies. CPA’s Track Your Company database includes undisclosed company election-related spending and profiles. Collision Course examines the heightened risks companies face.

The Gender Diversity Exchange exposes “whether companies’ intentions match their outcomes to reward those that do well, encourage other companies to do better, and share their results.” The database includes information on each company’s directors, diversity policy, quantitative targets, policy implementation, women in the C-suite, percent of women in management and trends.

As You Sow works directly “with corporate executives to collaboratively develop business policies and practices that reduce risk, benefit brand reputation, and increase the bottom line, while bringing positive environmental and social change.” They file proxy proposals, provide free online tools to screen mutual funds on specific ESG issues, and issue reports (CEO Pay, Proxy Preview, Proxy Voting Guidelines).

The Proposal argues shareholders now have alternative ways to engage companies, such as social media. However, participation on social media is not limited to shareholders, is often not fact checked, and provides for even less true dialogue.

15. Unlike other issuers, open-end investment companies generally do not hold shareholder meetings each year. As a result, several years may pass between the submission of a shareholder proposal and the next shareholder meeting. In these cases, the submission may no longer reflect the interest of the proponent or may be in need of updating, or the shareholder may no longer own shares or may otherwise be unable to present the proposal at the meeting. Should any special provisions be considered, after some passage of time (e.g., two years, three years, five years, etc.), to require shareholders to reaffirm submission of shareholder proposals for open-end investment companies or, absent reaffirmation, for the proposals to expire?

Shareholder proponents should have an opportunity to update proposals.

16. Does the Rule 14a-8 process work well? Should the Commission staff continue to review proposals companies wish to exclude? Should the Commission instead review these proposals? Is there a different structure that might serve the interests of companies and shareholders better? Are states better suited to establish a framework governing the submission and consideration of shareholder proposals?

The current process works well. It serves both issuers and shareholders at comparatively low cost.