SEC chairman Jay Clayton
The power of the shareholder to hold accountable the companies in which they invest is under threat in the US.
On Tuesday, the SEC’s commissioners voted three-to-two in favour of a 179-page book of proposals to revise its rules around shareholder resolutions.
The SEC maintains that the new proposals will make the shareholder resolution process more efficient.
“Today’s proposed amendments follow from the staff’s extensive experience with shareholder proposals and recognize the significant changes that have taken place in our markets in the decades since these regulatory requirements were last revised, including, in particular, the types and use of communications, the types and frequency of shareholder-company engagement and the substantial shift to investing through mutual funds and ETFs, rather than directly by Main Street investors,” says SEC chairman Jay Clayton.
However, the revisions have mystified many investors, who say that they didn’t ask for any changes and that the rules have been working well for years.
The proposals are particularly unsettling, say shareholder groups, as they seem to be aimed at excluding smaller investors from making shareholder resolutions.
“It is incredible how many landmines the SEC commissioners are throwing in the way of concerned shareholders – particularly as the SEC chair says he wants to protect Main Street investors,” says Meg Voorhes, head of research for US SIF, the forum for sustainable and responsible investment.
Under the existing rules, the minimum stock ownership necessary to file a shareholder resolution at a corporation’s annual meeting is $2,000, which must have been held for at least one year.
The SEC is proposing instead that shareholders would have to own $25,000 of the target company’s stock for at least one year, $15,000 for at least two years or $2,000 for three years.
As Heidi Welsh, founding executive director of the Sustainable Investments Institute (Si2), points out – these thresholds are actually much higher because the fluctuation in stock prices would mean an investor would need to make sure their holdings did not dip below $2,000 over three years to qualify.
She adds: “More than $25,000 in one stock is a lot for some of these small foundations investors or faith-based organizations who have a diversified portfolio.”
The proposals also change the rules allowing investors to aggregate their holdings in order to file a resolution. Small shareholders united on an issue often come together to file a resolution – under the new rules the ability to collectively reach the threshold would not be allowed.
Shareholders seeking to resubmit failed proposals would also have new thresholds. To resubmit for the first time within five years, 5% of shareholders must have voted in favour of the proposal, up from 3% now. That increases to 15% in year two and 25% in year three – with any drop of 10% from year to year preventing a resolution from being refiled.
Josh Zinner is the CEO of the Interfaith Center on Corporate Responsibility (ICCR) – which has 300 institutional members, some of them smaller shareowners that have been engaging companies on environmental, social and governance (ESG) impacts for 50 years. He says he is outraged and concerned.
“Between the filing threshold increases and the doubling of percentages for resubmissions, it means that smaller investors are going to find it much more difficult to file resolutions,” he says. “It’s a blow against shareholder democracy.”
Zinner points to resolutions that have been brought to companies’ attention by smaller investors resubmitting several times that have resulted in positive changes for both companies and society.
“Many issues raised by smaller shareholders were deemed marginal or outside issues when they were first raised,” he says.
“Our members were filing resolutions on climate-change risk, board governance, or human-rights risks long before these became accepted as mainstream by corporations and investors, for example, and they did it by re-submitting proposals and educating other investors until traction was gained.”
Welsh at Si2 has data to show that nine social or environmental shareholder proposals in the past five years would not have made it back on the agenda under the newly proposed revisions, and on one hot issue in particular – seven of those proposals pertain to company reporting on election spending and lobbying costs showing that the revisions would decrease transparency. The other two pertain to the environment and to governance.
“It’s clear this is about reducing ESG resolutions,” says Andrew Behar, CEO at non-profit shareholder advocacy group As You Sow.
This is going to reduce the number of resolutions at precisely the time that companies need an independent outside view to help them work through the myriad of new risks- Andrew Behar, As You Sow
That small shareholders have the ability to submit proposals to point out potential corporate risk has been important in helping companies make better ESG-related decisions – chiefly because the largest shareholders seem to be quiet on these issues.
Indeed, at the end of the 2019 proxy period, BlackRock, JPMorgan Asset Management and Vanguard demonstrated the lowest level of support for climate critical resolutions, voting for them less than 15% of the time, according to data from Majority Action.
Behar says the new rules are intended to silence the shareholder’s voice and it is a loss for companies that benefit from these engagements.
“This is going to reduce the number of resolutions at precisely the time that companies need an independent outside view to help them work through the myriad of new risks,” he says.
Behar points to a resolution from a smaller shareholder at one company to expand its non-genetically modified organism products into the US that resulted in commercial success – a suggestion that would have be ousted under the proposed resubmission thresholds.
“It will make it harder for critical conversations at companies to percolate,” adds ICCR’s Zinner.
Another rule proposed by the SEC would diminish the power of proxy advisory firms that Zinner says again would diminish the voting power of investors who rely on such firms for independent advice on voting decisions.
Some bystanders comment that the unexpected proposed revisions appear to be politically motivated. The SEC commissioners’ votes for the proposals fell along party lines – the three voting for the proposals being Republican party representatives.
Pressure from businesses also seems to have played a role in the new proposals. The US Chamber of Commerce and organizations such as the Business Roundtable – an association of CEOs of the largest US companies chaired by JPMorgan's Jamie Dimon at present – have been pushing the SEC to make changes to the rules for many years.
The Business Roundtable submitted its support of rule changes again in June. The SEC’s revisions are subject to a 60-day public comment period.