SEC to Protect Shareholder Rights in 2021
Shareholder rights in 2021 will strengthen if recent speculation is realized. U.S. Senate Democrats aim to undo Trump-era shareholder voting rights rule.
Shareholder Rights in 2021: History
As discussed elsewhere on CorpGov.net (Review: Carl Gershenson).
After its founding, the SEC was largely a champion of shareholder rights, requiring companies to include proposals on any ‘proper subject’ in the proxy. The idea was to “approximate the conditions of the old-fashioned meeting.” The SEC even took Transamerica to court in 1947 for refusing to place proposals by the famous Gilbert brothers on their proxy. That was the only time the SEC ever went to court to protect the right of shareholders to place a measure on a corporate proxy.
From that high-point, the SEC began chipping away at shareholder rights with regard to the proxy. The rules were amended so those shareholder proposals could only target issues directly related to the corporation. When a 1951 proposal to consider the advisability of abolishing segregated seating, the SEC insulated management from proposals motivated by a ‘general’ cause. Then came the ‘ordinary business rule,’ allowing exclusion of proposals concerned with day-to-day business decisions, followed by and other exclusions.
Under President Trump, SEC legal bulletins (SLB 14I, 14J, and 14K) provided roadmaps to corporations on how to exclude shareholder proposals. That guidance was topped off by amendments to “modernize” the shareholder proposal rule. Chairman Clayton asserted that 5 shareholders file most of the proposals, and they go unsupported. Mine averaged over 50% support for at least the last two years. The other “gadfly” filers also have track records that are better than institutional investors.
The Commissioners voting to approve the amendments said they did so to protect “Main Street” investors. Yet, the only support from investors came from fake letters, a few of which Chairman Clayton read into the record when introducing the rules. The SEC’s own Chief Economist found the rules would exclude 75% of shareholders from the process. His report was not submitted until the comment period was over. Coincidence? I doubt it. See Memorandum from S.P. Kothari, Chief Economist, to File No. S7-23-19, Analysis of Data Provided by Broadridge Financial Solutions, Inc. (Aug. 14, 2020).
Far from aiding Main Steet investors, amendments bar most shareholders from filing proposals for three or four years. Shareholders can no longer aggregate holdings to meet new ownership requirements. We are limited in our use of agents, and the amendments make it more difficult to resubmit proposals.
The SEC made no effort to analyze the number of shareholder proposals that would be excluded or estimate the benefits of shareholder proposals. The High Cost of Governance Deficits: A Case for Modern Governance by Diligent Institute found companies that had adopted the type of proposals I file (e.g., annual election of directors and simple majority vote standards) had higher equity returns. The top 20% of the S&P 500, as measured by strong corporate governance, outperformed the bottom 20% by 17% over the period measured. Delaying implementation of such proposals will clearly result in opportunity costs to shareholders of billions of dollars.
Although the case for environmental and social proposals is not as strong regarding positive shareholder returns, positive evidence is mounting. McKinsey Quarterly cites a meta-analysis of more than 2,000 studies on the impact of ESG propositions on equity returns. 63% found positive returns, 8% negative returns, while the remaining were neutral.
Hopeful Signs for 2021 and Beyond
Historic Speech by Allison Herren Lee
Given that troubled history, there are now too many recent positive developments to cover in a brief article. Below are a few recent developments, many noted by Global Proxy Watch (GPW), that condensed source of news for insiders on corporate governance and stewardship.
On March 15th, acting chair Allison Herren Lee mapped how she is bringing “investors’ voices to the forefront.” This was a historic speech at the Center for American Progress, well worth watching below.
- Directed the Division of Corporation Finance to enhance its focus on climate-related disclosures.
- Requested public comment on climate disclosure.
- Said additional disclosure is needed on human capital management and political spending
- Asked staff to develop guidance on the no-action process, which could affirm that proposals on socially significant issues cannot be excluded just because they involve “ordinary business.”
- Intends to re-open a 2016 universal proxy rule proposal, allowing shareholders to split their vote in contested elections without having to attend the meetings.
- Asked for input to overhaul 2010 climate disclosure guidance, including what should be covered and whether to require assurance.
- Inquired about “developing a single set of global standards applicable to companies around the world,” without explicitly referencing the EU and IFRS initiatives.
- Said Congress should lift their ban against the SEC finalizing a rule requiring issuer disclosure on political spending.
- Highlighted the need to standardize proxy voting disclosure reports by funds, so fund investors understand how proxies are voted on their behalf.
That last point could be the biggest game-changer of all. It would encourage investors to seek funds that vote aligned with their own values. Investors will then be able to make money while making the world better. See Mutual Fund Wars Over Fees AND Proxy Votes, which discusses my rulemaking petition.
Two days later, Lee expanded on her plans to “make every vote count.” She noted the rise of passive index funds and ESG funds in particular.
We know investors are demanding ESG investment strategies and opportunities, but funds may not always reflect those investor preferences in their voting. Addressing this agency cost is at the heart of corporate governance today …
A new rule could, for example, standardize voting disclosures, structure and tag the data, provide more clarity in the description of issues voted on, provide the number of shares voted versus shares available to vote, and facilitate more timely disclosure so investors can act quickly to reward fund managers that best match their needs and expectations. Accordingly, I have asked staff to begin preparing options for updating Form N-PX.
A move in this direction could lead to a dramatic surge in reports, such as those by Morningstar’s Jackie Cook, who is the only one routinely comparing how funds vote. (download Sustainable Fund Proxy Votes Show a Range of Support for ESG Measures)
Morningstar’s research shows that the largest passive index fund providers have been among the least likely to support ESG shareholder proposals in the past (see here for asset manager votes on climate change in 2020 and here for votes on DEI and social justice). Even ESG funds offered by asset managers that focus predominantly on passive investing strategies voted against key climate change, diversity, and other ESG resolutions that a significant proportion of other shareholders supported in 2020 (See Exhibit 7 of this report).
After talking with many employees of those largest passive index funds, I believe they would be happy to vote in favor of ESG measures if their customers demanded it. The more those customers see reports like those produced by Jackie Cook, the quicker that will happen. Mercy Investments and Boston Trust Walden withdrew proposals seeking the equivalent of Aligning BlackRock’s voting record with Larry Fink’s letters. Tim Smith of Boston Trust Walden says: “In past years, when resolutions were withdrawn, there was incremental progress on climate. This year seems different.” “The tone at the table has changed,” he says. “Five years ago they were defending their record, but now they are explaining the many steps they have taken demonstrating how serious they are.”
Additional Positive Developments to Protect Shareholder Rights in 2021
The US Chamber of Commerce endorsed Gary Gensler, and two Republicans joined ten Democrats on March 10 to advance his nomination to the full Senate. Recently, he sided with the public over Wall Street. (Gary Gensler SEC Chairman: Predictions and Advice)
The US Chamber of Commerce told Lee on March 15th, “we believe there is much common ground to ensure that investors receive material information as it relates to climate change.” As GPW notes, “new CEO Suzanne Clark sets a fresh, collaborative tone after 24 years of reliable pugnacity under predecessor Tom Donahue.”
GPW also asks, “Is the SEC staff taking cues from the about-face on ESG ushered in by Biden? Sure looks that way from the March 19 rejection of a ConocoPhillips request to exclude a climate risk resolution from its 2021 AGM filed by Dutch shareholder group Follow This. The staff also rebuffed an Occidental Petroleum request on a similar resolution.
Sanford Lewis is more cautious. Yes, Staff did not regard the proposal at ConocoPhillips as micromanagement. However, it “only asks the company to set emission reduction targets; it does not impose a specific method for doing so.” “If the proposal had asked the company to align those targets with the temperature goals of the Paris climate agreement, as previously excluded proposals have done, would it have been excludable as ‘imposing a specific method?” he asks. We won’t know, he says, until such a proposal is again filed. (The tide has turned: SEC sides with investors and civil society on shareholder resolutions, Responsible Investor)
On March 18, CII asked the Senate Banking Committee to prohibit exchanges from listing issuers with dual-class shares that lack sunset provisions or do not make diversity disclosures. Both were recommended in the SEC Investor Advocate’s 2020 annual report.
Last, let us circle back to the opening of this post. On March 25, 2021, Senator Sherrod Brown (D-OH), chair of the Senate Banking, Housing, and Urban Affairs Committee, introduced Senate Joint Resolution 16 (S.J. 16). Under the Congressional Review Act (CRA), the resolution would reverse SEC changes to Rule 14a-8, “Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8.” The final rule was issued by the SEC on September 23, 2020.
The changes made by the Rule included the following:
- More than 1,000% increase in the holding requirements necessary to file a shareholder proposal. They rise from $2,000 held for one year to a tiered approach requiring $25,000 held for one year, $15,000 held for two years, and $2,000 held for three years.
- Increase in the thresholds to resubmit a proposal from 3, 6, and 10 percent to 5, 15, and 25 percent for the first, second, and third years, respectively.
- Shareowners are no longer permitted to aggregate shares to meet holding requirements.
A successful CRA resolution requires only a majority vote in both the House and the Senate and the President’s signature. Since it cannot be held up by filibuster, insiders believe it has a good chance of enactment. Find more information at US SIF.
Shareholder Rights in 2021: My Efforts Also Look Promising
My own efforts are also moving forward with the support of friends and CorpGov.net readers. Although a recluse due to an acute sensitivity to fragrances, I am working with more people than ever, despite the pandemic. I continue to file most of my proposals through John Chevedden. Cooperative efforts continue with As You Sow and the Center for Political Accountability.
I also now teach a class on corporate accountability, which becomes a workshop after the first three lectures. The critics are right; we should not depend on three families to file such a large proportion of shareholder proposals. I hope to foster 100 more. The offering is made through the Renaissance Society, an extension program of California State University. The class can be taken from anywhere with a good internet connection. This semester we are meeting on Mondays, Feb. 8 to May 3 (12 weeks) from Noon to 1:30 pm Pacific Time. I signed up for the same time slot in the Fall.
My wife and I filed about 90 proposals so far, with a few more deadlines coming up for meetings to be held later in the year. Elect uncontested directors by majority vote is one we filed 22 times. Almost half were withdrawn after reaching an agreement with boards, often to adopt with no need for a shareholder vote. We reached an even higher proportion of proposals seeking disclosure of political expenditures. Many of our filings to create proxy access were also withdrawn after board action. We continue to file proposals to declassify boards, remove supermajority provisions, allow special meetings, and provide rights of written consent.
Of course, proposals on new topics face more resistance. I lost no-action requests on all proposals related to disclosing external costs. The Shareholder Commons is posting the substantive documents on this campaign. Our first proposal to convert a company to a public benefit company is coming up at Tractor Supply on May 6, 2021.
Results are already in for most of the proposals we filed to add an employee to the pool of board candidates. I am disappointed that most representatives refused to negotiate. We would have withdrawn if any substantive counterproposal yielded increased voice for workers and dialogue between boards and employees. At least the vote is trending up, from an initial vote of 2.67% in favor at WD-40 to the most recent vote of 7.2% in favor at Starbucks. This will be a long-term project, like my efforts to gain proxy access, which began with a 2002 petition.
I am always interested in what others think about where we should head. Leave comments below, email me or start a conversation with me on Twitter (@corpgovnet) or Linkedin. I am especially interested in corresponding with workers. How can shareholders help you have more voice? I would also like readers to consider taking my ‘class’ or being a guest speaker. It is a small but growing group.
Sorry about all the new ads. I’d like to at least cut them in half but don’t know how. Maybe I will quit having a business, since I am not getting consulting gigs and ads rarely pay enough to cover expenses.