The U.S. Securities and Exchange Commission formally proposed a new rule on Tuesday that could make it harder for shareholders to submit proposals dealing with social issues like executive pay and climate change.
The rule, now open to public comment, would hike the re-submission thresholds for shareholder resolutions, or recommendations that ordinary retail investors can make to a company's board. The SEC voted 3-2 to officially propose the rule.
Two of the SEC's commissioners, Allison Herren Lee and Robert Jackson Jr., dissented on the rule's proposal, saying that they would limit accountability of corporate executives and suppress shareholder rights.
Under the current system, shareholder resolutions can be excluded from firms' annual proxy materials if the proposals do not garner support from at least 3% of shareholders within one year of the proposal. The thresholds then rise to 6% within two years, and then 10% within three years.
"The assumption that vote totals reflect the merits of proposals risks depriving investors and the Commission of information that has long produced crucial transparency on corporate governance matters," said Commissioner Robert Jackson Jr. in prepared remarks.
If eventually passed, the new re-submission thresholds would become 5% on the first submission, 15% on the second and 25% of shareholder support on the third.
Also, if a proposal after three attempts does reach support from 75% of shareholders within five years, a proposal must take a "time out," SEC Chairman Jay Clayton explained in opening remarks. Any resolution that gains 25% of shareholder support year over year can be re-submitted if it is "potentially on a path toward more meaningful shareholder support," Clayton continued.
Investors who own at least 1% or $2,000 worth of a company's stock for one year can file shareholder resolutions and add their input to various board decisions.The SEC also proposed changing that eligibility threshold to a more "tiered approach." A shareholder would be able to submit a proposal if they held $2,000 worth of a company's stock for three years, $15,000 worth of stock for two years or $25,000 worth of stock for one year, under the new proposed rule.
The shareholder must also be able to meet with a company to discuss a proposal, and only one person can submit a proposal at a time, the rule stipulates.
If the resolution meets all of the SEC's criteria, the company must include the resolution in its annual proxy vote materials for its annual shareholder meeting. Separately, the SEC also voted to propose a rule that would require proxy advisors to provide more disclosures on possible conflicts of interests in their advice to institutional investors. The rule would also allow companies to review proxy materials before they are sent to shareholders. That vote was also passed 3-2.
Though shareholder resolutions themselves are non-binding, they can inform firms on shareholders' priorities, which have increasingly related to systemic social issues such as wealth inequality and climate change.
Whether a resolution gains support from 1% or 99% of a company's shareholders, a company's board still has the power to adopt investors' recommendations. Resolutions also can push companies to take actions, such as issuing reports on the climate impact of their operations, or being more transparent in how executive pay and bonuses are calculated, for example.
Shareholder advocacy groups have sounded the alarm on these rule changes, arguing they are an attempt fix to a problem that's never existed.
"We, along with many investors, are highly concerned about the proposed regulations," said Danielle Fugere, president and chief counsel of As You Sow, a shareholder advocacy non-profit. "When we see a proposal like this rule change, that would reduce the ability of shareholders to engage their companies to engage other shareholders. This is a loss of significant proportion."
Just last year, the number of shareholder resolutions filed with public companies decreased 8.9% for those in the Russell 3000 and 11.6% in the S&P 500, according to a joint-study from The Conference Board and the Rutgers Center for Corporate Law and Governance.
Though between 2015 and 2018, proposals related to environmental or social issues gained 25.7% of shareholder support on average, there's been a general uptick in that percentage over the past few years, the study found.
Chief executives from the Business Roundtable have lobbied for more stringent regulation on "modernizing" the shareholder resolution process. They argued last year in a letter to the SEC that the minimum threshold of shares required to file a resolution be "increased significantly."
"The current nominal monetary threshold for filing proposals risks obscuring matters of true economic significance to companies by potentially allowing annual meeting ballots to present multiple immaterial proposals for consideration," the letter said.
The Business Roundtable, which is solely made up of companies' chief executives, further recommended that the re-submission threshold be raised to 6%, 15% and 30% on the first, second and third years a shareholder resolution is filed.
The Roundtable said that the hikes in the thresholds would "work around the edges to eliminate repetitive proposals that a company's shareholders have decisively rejected one or more times."
According to shareholder advocacy groups, however, higher re-submission thresholds can help quash awareness around social issues that take time to prove financially material to the company's operations.
In 2013, for example, As You Sow filed a shareholder proposal that would require Abbott Laboratories to stop using genetically modified crops until long-term studies show that GMOs are not harmful to humans. While only 3.2% of Abbott shareholders supported the resolution, As You Sow filed similar resolutions until 2015, where 6% of Abbott shareholders supported it. Despite the thin support, Abbott Labs eventually released a non-GMO baby formula to meet consumer demand.
In August, the Business Roundtable broke with the decades-old orthodoxy of shareholder theory, which held that the interests of shareholders were the primary priority for a firm. The CEOs group issued a new definition of the purpose of a corporation, expanding a broader commitment to stakeholders like employees, customers and suppliers.
Yet, the latest proposed regulation on re-submission thresholds suggests a longer trend of companies reluctant to cede corporate control without a fight.
Earlier this year, the SEC ruled with Exxon Mobil in deciding that proposed climate targets in a shareholder resolution amounted to "micromanaging" by seeking to enact "specific methods for implementing complex policies."
SEC Chairman Clayton also voiced sympathy to the idea of increasing both re-submission thresholds and the initial ownership threshold needed to file a resolution in the first place.
"I don't like it that 25% or 30% of the proposals that we see are from a handful of people," said Clayton at a House Financial Services Committee Oversight hearing in September, emphasizing that he is not looking to prevent shareholders from making proposals.
Clayton said he wanted to reconsider re-submission thresholds since they were first implemented when physical mail was the main way to communicate with companies.
"There's a purported concern that these are just some small investors bringing too many proposals," said Fugere. "Well, those proposals are getting some of the highest votes. It shouldn't matter who is bringing the issue. The question is how important is it."
Clayton has also continued to appeal to Main Street investors and seek policies to expand access to capital markets.
The SEC will solicit public comments for 60 days before voting to officially increase the re-submission thresholds and eligibility requirements.