Plaintiffs charge that the SEC’s rule changes are unlawful under the Administrative Procedure Act and contrary to the Commission’s role as “investor advocate”.
NEW YORK, NY—JUNE 15, 2021—Investors announced the filing of a complaint this morning in the U.S. District Court for the District of Columbia challenging the Securities and Exchange Commission (SEC’s) recent amendments to the 14a-8 rule governing the filing of shareholder proposals. The revised rule creates impediments to shareholders’ ability to raise issues of material concern through resolutions filed with public corporations.
For decades, the 14a-8 rule has allowed shareholders to submit proposals for inclusion in a company’s proxy statement asking the company to consider additional material disclosures, policies, or governance changes. In September 2020, the SEC imposed a new rule that sharply restricts shareholders’ ability to submit proposals through dramatically increased requirements for the amount of stock held, the duration of stock ownership, and the votes required for resubmitting proposals. While the SEC positioned the new rule as a cost-savings measure, the complaint demonstrates that it significantly undermines shareholder rights, particularly the rights of mainstream investors.
The plaintiffs include the Interfaith Center on Corporate Responsibility (ICCR), a coalition of over 300 faith-based institutional investors representing more than $US4T in assets that have been engaging corporations and filing shareholder proposals to mitigate harmful environmental, social, and governance (ESG) impacts for 50 years; As You Sow, a leading practitioner of corporate engagement and shareholder advocacy; and James McRitchie, a shareholder advocate and one of the most active individuals submitting shareholder proposals related to corporate governance in the U.S.
“The new rule guts the existing shareholder proposal process, which has long served as a cost-effective way for shareholders to communicate their concerns to management,” said Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility. “The rule provides little serious economic analysis supporting the need for these substantial changes. It is instead based on the wholly unsupported assumption that shareholder proposals are simply a burden to companies with no benefits for companies or non-proponent investors when there is 50 years of evidence to the contrary.”
“The Trump Administration's effort to curtail shareholder rights runs directly counter to broader trends in the business and investor communities toward greater accountability to stakeholders,” said Danielle Fugere, President of As You Sow. “More and more investors are signaling the importance of ESG performance in making their investment and stewardship decisions. Evidence of this trend can be seen in the impressive number of majority votes and withdrawals at companies this proxy season – particularly on critical climate-related themes. Shareholder proposals are an important tool in helping executives and investors better manage risk and create and protect long-term value. Rather than restricting these tools, the SEC should be focused on expanding them.”
“Companies with strong corporate governance policies, of the type I submit, outperformed those with poor policies by 15% over the most recent two-year period, according to a 2019 Diligent Institute study,” said James McRitchie of Corporate Governance. “The new SEC thresholds will result in billions of dollars in lost opportunity costs, especially at smaller companies, since they receive less scrutiny from institutional investors than established S&P 500 companies.”
While the three are named as lead parties to the complaint, the action is supported by a large community of institutional investors representing trillions of dollars in assets that have long used the 14a-8 process to bring material concerns to the attention of boards, management, and fellow shareholders.
"The shareholder proposal is an essential tool for ensuring that the voices of Main Street investors are heard by portfolio companies. The New York City Retirement Systems' long and proud history of corporate engagement has produced significant social benefits and enhanced long-term shareholder value," said New York City Comptroller Scott Stringer. "That's why I have actively opposed the Trump Administration's draconian changes to the SEC's shareholder proposal rule that would further tip an already unbalanced playing field to benefit company management at the expense of both large and small investors. I strongly support the plaintiffs and investors taking this important step to overturn the SEC rule change, protect shareholders' ability to hold companies accountable, and create meaningful, systemic change in corporate America."
There are hundreds of examples of companies changing their policies and practices as a result of productive engagement with shareowners, yet a handful of corporate trade associations including the Business Roundtable and the National Association of Manufacturers have engaged in an intense, multi-year lobbying campaign to curtail investors’ access to the proxy. Rather than fulfilling its stated purpose as an “investor advocate” and enforcing shareholder protections, the revised rule is seen as a blatant capitulation on the part of the Trump-era SEC to these trade groups’ desire to relieve corporate executives of accountability to investors.
The complaint further argues that the SEC made no serious effort to quantify the costs and benefits of its rule. An overwhelming number of investor comments were submitted in opposition to the proposed rule change, and these comments were supported by rich empirical evidence documenting how shareholder proposals enhance shareholder value. But the Commission arbitrarily refused to quantify the benefits that proposals achieve — leaving it fundamentally unable to weigh those benefits against any cost savings its new rule would supposedly achieve.
“The shareholder proposal rule amendments the SEC adopted last year were an attempt to weaken the voice of investors by making the filing process more complicated and costlier. But that undercuts investor confidence in the fairness of the financial markets,” said Amy Borrus, Executive Director of the Council of Institutional Investors. “It is also unnecessary interference in the marketplace. For decades, the shareholder proposal process has been a well-functioning pillar of corporate governance in U.S. capital markets. It is a cost-effective way for shareholders to communicate with each other and for shareholders as a group to communicate with management through votes on proposals. Not surprisingly, CEOs and corporate directors do not like being second-guessed by shareholders on environmental, social and governance matters.”
“As long-term investors, we seek to foster more sustainable and resilient businesses. We encourage companies to address ESG risks that have the potential to significantly erode long-term shareholder value,” said Amy D. Augustine, Director of ESG Investing at Boston Trust Walden. “Engagement with companies has led to an impressive track record of improved corporate oversight and management of material risks. Evidence abounds in this proxy season alone, in which dozens of proposals were withdrawn as a result of negotiated agreements between company management and shareholders. This suit is essential to keeping the process fair and reasonable.”
Interfaith Center on Corporate Responsibility (ICCR) — Celebrating its 50th year, ICCR is the pioneer coalition of shareholder advocates who view the management of their investments as a catalyst for social change. Its 300-member organizations comprise faith communities, socially responsible asset managers, unions, pensions, NGOs and other socially responsible investors with combined assets of over $4 trillion. ICCR members engage hundreds of corporations annually in an effort to foster greater corporate accountability. Follow us on Twitter, LinkedIn, and Facebook.
As You Sowis a nonprofit organization that promotes environmental and social corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies. See our resolutions here.