Protecting the Shareholder Proposal Process
My home in Hyattsville, Maryland — where I have my office — is occasionally referred to as As You Sow’s DC office. My proximity to the city affords easy ability to attend Securities and Exchange Commission (SEC) meetings in person, such as the staff roundtable on the proxy process on Nov. 15. The SEC is the government agency that — among other responsibilities — regulates the shareholder proxy process including the statute that allows shareholder resolutions (Section 14a-8).
There were three panels last week. One on Proxy Voting Mechanics and Technology and another on Proxy Advisory Firms (those organizations like Institutional Shareholder Services and Glass Lewis). Analyses of these two sessions can be found here. The third — the only one I attended — was on the topic of shareholder resolutions and whether the process by which shareholders bring resolutions should be limited in a variety of ways including which shareholders should be able to participate and how many hurdles are put in place for those who can participate.
For many in the room the conversations were familiar. We’ve seen iterations of these debates many times. During the last such discussion, an investor compared these conversations to the movie Groundhog Day. We’ve been through discussions of the specifics of rules before, often with the same people.
Shareholder proposals have been around since the 1950s and have helped transform corporate governance. Jonas Kron, senior vice president and director of shareholder advocacy at Trillium Asset Management, highlighted that the process has served for decades as a cost-effective way to facilitate interactions between shareholders and companies and to raise issues of concern within the shareholder community.
There were multiple investors on the panel, and none argued for making the filing of resolutions more challenging. However, representatives from corporate special interest groups suggested multiple changes to limit the filing of proposals.
One perennial component focuses on how much stock an individual or institution should be required to hold in order to have a proposal appear on a proxy statement. The current somewhat modest threshold of holding $2,000 or more of a company’s shares for more than a year upholds a core principle of broad-based shareholder democracy. As several panelists noted, the quality of one’s ideas does not depend on the size of one’s ownership stake. Individual investors were represented on the panel by James McRitchie who ably defended the role average, truly Main Street investors can play.
Another issue for discussion was whether a proposal should be entitled to appear on proxy statements over multiple years, if they do not receive significant shareholder support. Currently a shareholder proposal must be supported by 3% of shareholders to appear in the proxy a second time, 6% for a third, and 10% thereafter. For large companies, crossing those current thresholds means having the support of many shares. The representative of the Chamber of Commerce characterized these as “zombie” proposals. To the contrary, on many new yet important issues, support grows slowly, but those issues are no less critical.
Michael Garland, assistant comptroller for corporate governance and responsible investment at New York City Office of the Comptroller, told the story of what may have been the first “social issue” shareholder resolution and how support for it grew slowly. The proposal first filed in 1992 called for the creation of an anti-discrimination policy at Cracker Barrel, which had at one time an explicit policy against hiring gays. The SEC initially declared that this proposal, filed by the New York City Employees Retirement System, was not an appropriate topic for a shareholder proposal. The New York retirement systems challenged the SEC decision in court. While the lawsuit was unsuccessful, the resulting investor outcry later prompted the SEC to reverse its position in 1998, allowing the proposal to ultimately open the door for other proposals.
When the anti-discrimination proposal was first voted on in 1993, it received support from 14% of shareholders. But over time, as the proposal was refiled, support grew. The company reversed its policy and the world became marginally more just.
Garland pointed out, however, that at the time it was filed this was considered a “social” issue inappropriate for the proposal format. In fact, like climate change and other topics that the Chamber and the Business Roundtable would now like to see kept off proxy statements, it was an important long-term investor issue. Garland noted that one of the largest companies in the New York Funds today is Apple, run by an openly gay CEO Tim Cook. Imagine a world where a company would arbitrarily turn its back on such talent.
During my years of involvement with shareholder resolutions, another issue that has been seen as socially driven is proposals related to climate change. Initially, climate-related resolutions were viewed by most companies as unimportant, but climate is now defined as material. As an example of a specific climate-related proposal with shareholder votes building up over time, As You Sow filed the first carbon asset risk resolution at CONSOL Energy in 2012. The resolution initially earned 19.7% and led to similar filings at a dozen oil and gas companies with gradually higher votes over time. At least two of these resolutions have now earned majority votes.
Looking back over time, the shareholder resolution system works. So why these discussions again? In great part, it is because the system has been effective in raising social and environmental issues to the fore and recognizing that they are, indeed, material issues for companies. In the end, there are many voices that would like to reduce attention to these fundamentally important issues and suppress innovative shareholder ideas, even where they have been shown to reduce corporate and shareholder risk over the long term.
Somethings have not changed, including short-term thinking in and around Wall Street.
If you have thoughts you’d like to share, the SEC is still accepting comments here. You can explain your interest in shareholder proposals by sending an e-mail to [email protected] (noting in the subject line that it relates to File Number 4-725: Staff Roundtable on Proxy Process) or use the submission form here. As you can see from comments already filed, you can be specific or informal in your thoughts.
Meanwhile, As You Sow and our advocacy allies will continue to make sure that shareholders have a voice in helping corporations avoid material risk and better serve all of their stakeholders now and over the long term on critical issues that help build a safe, just, and sustainable world.