SEC RULE CHANGES WILL BLOCK MOST SHAREHOLDERS’ ABILITY TO FILE PROXY PROPOSALS
Commission succumbs to industry pressure in a move that will reduce corporate accountability on critical environmental, social, and governance issues.
NEW YORK, NY, WEDNESDAY, SEPTEMBER 23rd, 2020 – In what is being seen by investors as a major setback for corporate transparency and shareholder democracy, the SEC today announced the imposition of new rules severely restricting shareholders’ access to the corporate proxy by limiting the filing of resolutions. The SEC’s move comes after years of lobbying by powerful industry trade associations that have sought to limit shareholder engagement with corporations on critical environmental, social, and governance issues.
The SEC’s Rule 14a-8, which had been in force for decades, has allowed shareholders with a minority stake held for over one year to file proposals asking companies to consider additional disclosures, policy, or governance changes they believe would benefit the company and protect shareholder value. While non-binding in nature, the vast majority of these proposals raise significant questions regarding the environmental and social impacts of corporate policies and practices, or governance best practices, with a focus on risk and long-term sustainability. It is not at all uncommon for these proposals to achieve majority shareholder support and often votes of 25% or higher will elicit a meaningful corporate response.
The new rules, announced today, will significantly limit investors’ ability to submit these proposals by raising the thresholds of ownership both in terms of the number of shares and length of time they must be held. Before the new rule, a shareholder who has held shares in a company for at least a year needed to hold at least $2,000 in shares. Under the new rule, new purchasers of stock must hold $25,000 in shares for at least a year, or hold $2000 in shares for at least three years.
In addition, the new rules make it much more difficult to refile a proposal that has been voted on. The prior rule required 3% support on a first-year vote, 6% on a second vote, and 10% on a third vote to keep a proposal before a company’s shareholders. Now resubmission will require 5% on a first vote, 15% on a second vote and 25% on a third vote. This will stifle deliberation by shareholders on emerging issues.
“The new rule guts the existing shareholder proposal process, which has long served as a cost-effective way for shareholders to communicate their priorities and concerns to management, with little economic analysis supporting the needs for these substantial changes,” said Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility. “The new rules appear to be based on a 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.”
For decades, the shareholder proposal process has served as a cost-effective way for corporate management and boards to gain a better understanding of shareholder priorities and concerns, particularly those of longer-term shareholders concerned about the long-term value of the companies that they own. Engagement by shareholders has served as a crucial “early warning system” for companies to identify emerging risks and there are literally hundreds of examples of companies changing their policies and practices in light of productive engagement with shareowners.
“I had the privilege of working for ICCR in its early years and have been involved in company engagements and the filing of shareholder resolutions for fifty years and have seen first-hand the power of the proxy to help shape corporate policies and practices for the good of both businesses and society,” said Timothy Smith, Director of ESG Shareowner Engagement, Boston Trust Walden. “While the SEC has updated the shareholder resolution rules over the decades it has never led such a wholesale disenfranchisement of shareholders as it has today. Ironically, the SEC is taking these backward-looking steps at the same time that the Department of Labor (DOL) is rushing towards a pre-election decision to restrict investor proxy voting on ESG proposals.”
The Commission’s effort to curtail shareholder rights runs directly counter to broader trends in the business and investor communities toward greater accountability to stakeholders and investor reliance on environmental, social and governance (“ESG”) performance in investment and stewardship decisions. Investors say 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 press for dramatic restrictions on shareholder proposals. Rather than fulfilling its mission to be the “investor advocate” and enforcing shareholder protections, the new SEC rules are seen as a blatant capitulation to these trade groups’ desire to relieve corporate executives from accountability to investors.
“The provisions of the new rule, separately and together, are a mix of the ill-advised and unlawful, involve impractical micromanagement of relationships between clients, advisors, shareholders and companies, and in undermining shareholder rights will have significant unintended consequences on investor protection, the public interest, efficiency and competition,” said Sanford Lewis, Director, Shareholder Rights Group.
Laura Campos, Director of Corporate & Political Accountability at the Nathan Cummings Foundation noted that, “Rather than protecting investors, these new rules serve only to remove an important check on the myopic pursuit of short-term profits at the behest of corporate executives and their trade associations. As support for shareholder proposals on investment-relevant issues like climate change and racial equity has grown, so too have efforts to shut down shareholders’ ability to file proposals.”
“The SEC has intervened to disrupt a system that has worked with fairness and integrity for over 50 years,” said Andy Behar, CEO of As You Sow. “Companies have gained deep insight into potential material risks to their businesses, courtesy of their shareholder engagements. Investors have had a forum to raise their concerns, assisting companies to outperform. This is an ecosystem based on mutual respect and a common goal; helping companies be as good as they can be. The new SEC rules will not stop this relationship, they will simply force shareholders to escalate to litigation and other means. This will ultimately cost companies valuable time and resources.”
Note to the editors:
Joint letter from investor groups regarding the shifting interpretation of 14a-8 No-Action Challenges can be found here.
Case Studies showing the impact of the new rules on shareholder engagement can be found here. Note that the rules will apply to the 2022 Proxy Season.
About the Interfaith Center on Corporate Responsibility (ICCR)
Celebrating its 49th 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 $500 billion. ICCR members engage hundreds of corporations annually in an effort to foster greater corporate accountability. www.iccr.org
About the Shareholder Rights Group
The Shareholder Rights Group is an association of investors formed in 2016 to defend share owners'
rights to engage with public companies on governance and long-term value creation. Visit our website.