New SEC Staff Legal Bulletin Raises Questions and Uncertainties for Investors and Companies

Sanford Lewis

Shareholder Rights Group

In a guidance issued November 1, the SEC Staff has taken an innovative “outside the box” approach to the shareholder proposal process.  The new Staff Legal Bulletin 14I has raised numerous questions and uncertainties among investors and companies.

The House of Representatives earlier this year passed a radical revision to the shareholder proposal process in a section of the Financial Choice Act, which would dramatically constrain the ability of shareholders to file proposals, including requirements that would limit the filing of proposals to only the few wealthiest shareowners. That bill is not expected to pass the Senate and become law. However, this approach was recently echoed in a Treasury Department report that recommended an upward revision of proposal filing and resubmission thresholds.

These reform efforts do not appear grounded in evidence of an actual problem with the shareholder proposal process. For instance, there has been no increase in the number of proposals filed or appearing on corporate proxies in recent years. Instead, shareholder proposals are winning larger supporting votes from shareholders, demonstrating that the process is functioning well and fulfilling its intended purpose: to act as an investor protection vehicle. In addition, cost estimates offered by companies have been highly exaggerated. There is really no evidence that the shareholder proposal process is posing new or difficult burdens on companies.     

However, the SEC Staff has now taken action that might be understood to be an attempt to respond to corporate critics.  In its new Bulletin 14I, the SEC Staff requests that boards of directors weigh in on issues of whether a proposal is relevant to a company or addresses a significant policy issue that transcends ordinary business.   A board’s negative determinations on significance or relevance will apparently be given substantial consideration in Staff decisions as to whether a shareholder proposal must appear on the proxy: 

Accordingly, going forward, we would expect a company’s no-action request to include a discussion that reflects the board’s analysis of the particular policy issue raised and its significance. That explanation would be most helpful if it detailed the specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned. We believe that a well-developed discussion of the board’s analysis of these matters will greatly assist the staff with its review of no-action requests under Rule 14a-8(i)(7). [Emphasis added]

In light of the SEC’s investor protection mission, the SEC Staff might find a board statement useful, but legally speaking, it cannot be the final word.  The shareholder proposal process is typically utilized by investors to address issues that are being neglected by corporate boards  —  blind spots that may lead to crushing liabilities or reputational damage.

As important, the proposal process has long allowed investors to provide guidance to companies on issues where the board and company policies are posing harm to society or the environment. (Examples recognized by the courts or the Commission include dangers of nuclear power, the production of napalm by Dow Chemical used in the Vietnam War, discrimination and concerns over animal cruelty in the production of foie gras.) The courts and the SEC have long held that board and management do not hold a monopoly on expertise on these issues of societal impact beyond those of shareholders, and that shareholders have a right through the proposal process to weigh in.

Moreover, we have seen an increasing interest by share owners of all sizes in proposals for addressing systemic risk, such as risk to the entire economy or to the natural resource base on which the economy depends.

The history of board reactions to shareholder proposals is telling. In thousands of instances, boards reflexively recommend a “No ” vote on resolutions whether they are addressing a  governance matter or a social or environmental issue like climate change.  Even where a resolution topic has merit, boards and corporate secretaries have long tried to keep corporate proxies free from resolutions that provoke debate among investors.  Investors perceive the goal of the corporate secretary at many issuers as using legal tools to contest resolutions, even if they are matters of legitimate policy debate, rather than engage in balanced consideration of the pros and cons of the issue.

No wonder that many investors are skeptical about the approach of the Bulletin. Will boards effectively deliberate on relevance and significance, or use this invitation as an opportunity to continue and further advance their reflexive opposition to proposals? Does the board’s potential fiduciary liability for neglecting important issues provide a check on abuse of the new bulletin? It seems a stretch to assume that in every instance a board finding of irrelevance or insignificance is “considered” and “unbiased.”  

So while the board might share useful insights on how they think about an issue, these insights are surely not the exclusive evidence of whether a proposal addresses a significant policy concern for investors or is relevant to the company. If the SEC is to continue protecting investor rights and interests, the Staff surely needs to give substantial weight to investors’ evidence as well.

It is in the realm of possible outcomes that this Bulletin could prove a positive benefit to investors, by encouraging boards to consider the significance and relevance of a proposal. At least theoretically, this could encourage more in depth board consideration of a proposal, and increased communication with investors instead of merely issuing routine statements in opposition to proposals.

The outcome is uncertain. To say the least, we can expect an interesting proxy season ahead.

Letter from SRG to SEC on Potential Staff Legal Bulletin

Prior to the issuance of the new SEC Staff Legal Bulletin 14i on November 1, the Shareholder Rights Group learned that the Bulletin might be in the works. We sent a letter to SEC Chairman Jay Clayton and Corporation Finance Director William Hinman expressing our concern and urging further consultation with shareholders before issuance.

The Bulletin, which was issued at the start of the new shareholder proposal filing season, raises many new questions and concerns as well as new opportunities for shareholders to engage with boards of directors through the shareholder proposal process.  We are in the process of evaluating the many questions raised by the new Staff Legal Bulletin and plan to submit our questions to the SEC soon.

In the meantime,  interested investors or media can contact the Shareholder Rights Group for additional information at 413 549-7333.

Corporate "Reforms" Threaten Shareholder Ownership and Governance Rights

Proposed Reforms would increase risk, limit oversight, 
and insulate boards and management 

Sanford Lewis
Director, Shareholder Rights Group

This blog post was adapted from comments submitted by the Shareholder Rights Group to the Securities and Exchange Commission regarding the petition to alter resubmission thresholds for shareholder proposals. This post also appears  on the Harvard Law School Forum on Corporate Governance and Financial Regulation. PDF

            Various efforts to reform the shareholder proposal process, SEC Rule 14a-8, ask the Securities and Exchange Commission to formally curb the ability of share owners to file proposals.  The proposed reforms, including a 2014 petition by a consortium of corporate interest groups and a recent proposal by the US Department of Treasury [1], take a bigger-is-better approach.  They seek both to require higher votes than currently required to resubmit proposals for the proxy subsequent to a vote, and to raise the filing threshold so that only larger share owners could file proposals. 

These reform efforts fail to recognize and account for the high value of the services that the proposal process provides to corporations and investors in risk oversight, conflict resolution and governance. These services require that investors of all sizes,  with diverse investment strategies,  are able to bring forth issues relevant to the success of the corporation through the shareholder proposal process.

             The so-called ’reforms’ are also grounded in a mistaken underlying assumption that proposals have merit solely when more than a 50% majority of votes are cast ‘for’ them.  For instance, the petition filed in 2014,  that seeks to elevate thresholds for refiling previously voted proposal,  asserts that the existing Rule creates a “tyranny of the minority” by requiring repeat consideration of proposals that fall short of majority votes.[2] Similarly, proposed legislation to raise the threshold for filing proposals[3] could be understood to imply that only wealthy investors have valid ideas that are worthy of shareholder consideration.[4] While cast in terms of democracy, the reform proposals seem downright authoritarian – assuming that only the largest and wealthiest investors should have access to the shareholder proposal process.

Shareholder Proposal Process Success
Merits Reward, not Punishment

Over the course of decades, shareholder proposals have drawn increased support from voting share owners.  Perversely, the reforms would justify imposing steeper resubmission thresholds based entirely on the success of the process.  For instance, the Chamber’s petition on resubmission thresholds notes that the number of proposals excludable under the Rule’s current threshold has declined due to increasing support for proposals[5] – which is because the portion of “Yes” votes on these proposals has increased.  In America, isn’t success typically rewarded, not punished, as the reformers propose? 

 There is also no added burden on corporations.  While the mix of subjects addressed over the years has evolved, and the absolute number of proposals filed does vary in individual years, observed objectively the average number of proposals submitted to companies has not grown, but rather has held steady at about 830 proposals per year.[6] Nor is there an abundance of shareholder proposals appearing on the proxy year-after-year despite non-majority support.  For example, since 2010, of the roughly 2,000 proposals that appeared on proxies,  proposals on environmental or social issues that have received prior votes under 20% for two or more years have only been resubmitted 35 times.[7]

The lack of a genuine problem should be enough to suggest that this ought not be a priority for the SEC rulemakers.   While lack of need is enough of a reason to reject the proposed reforms, this evaluation leaves more than half of the story untold.  It is essential to also recognize that screening out new proposals or resubmissions of existing ones would not be harmless, but would mean the loss of crucial services to investors and corporations.

 Shareholder Proposals
As Catalyst for Engagement

             While proposals published in the proxy inform shareholder voting, they are also an effective catalyst for engagement and private ordering.  Nearly all shareholder proposals are advisory in nature, i.e., not providing a legal mandate for corporate action.  That is why Rule 14a-8 often functions at its best in providing input and advice to boards and management from investors, and encouraging dialogue among subgroups of investors with diverse investment strategies.  Every year, shareholder proposals enabled by SEC Rule 14a-8 lead to engagement and dialogue among investors, boards and management at hundreds of companies on issues of governance, risk oversight, and long-term value creation.

While the origins of the shareholder proposal rule may be in ensuring informed voting, as used by investors and issuers today, the process arguably offers its greatest value in harmonizing disparate investment strategies among an ecosystem of diverse investors, and in inviting open dialogue that allows investors of all sizes to contribute to the success of the corporation.   Some subgroups in the investment ecosystem – such as activist hedge funds and short-term traders – may pressure companies for short-term stock price increases, but they do so largely without availing themselves of Rule 14a-8.[8] In contrast, the typical proponents of shareholder proposals under Rule 14a-8 are often providing early warnings of long-term risk issues, or seeking disclosure of metrics or governance changes that bring a longer-term value creation perspective to corporate deliberations.   

The Size of Stock Holdings does not
Constrain Investor Insight or Foresight
            Individual filers and institutional funds with relatively small holdings are responsible for a high proportion of first-time proposals on emerging issues of corporate governance and risk management.  These ahead-of-the-curve proposals often encapsulate an investor’s insight or foresight on risks and opportunities.  They can bring management and board attention needed to prevent disruptive trends from becoming destructive.  The proposal process allows companies to seize opportunities to lead or drive the market, and to head off crushing liabilities, reputational damage, or consumer revolts.

Many shareholder proposal filed each year do not appear on the proxy. While some proposals are allowed to be excluded by the SEC under the no action letter process,  many are withdrawn voluntarily by investors after the  board or management agrees  to take measures to address the issues raised.  

Even before adding up large supportive votes, these shareholder initiatives can be critical to the success of companies, if they cause management and board to pay attention to investors’ concerns.  For example, consider the 2000 and 2003 proposals filed by religious investors at banks regarding subprime lending and securitization.  The responsive companies – those that took action on the issues raised by the proposals – reportedly avoided being part of the financial crisis.[9] The proposal process serves as a self-help remedy for investors to seek management response on issues of concern.

Resubmission Thresholds Define 
Learning Curve for Companies and Investors

It is vital to recognize that the current 3%, 6%, and 10% thresholds of Rule 14a-8(i)(12) often prove relevant to the learning curve  for companies and investors.  The fact that a proposal has achieved the established Rule 14a-8(i)(12) benchmarks, and may appear on the proxy in a subsequent year, often inspires the board or management of companies to engage in dialogue and implement actions responsive to the proposals. 

A typical example involves a company that is ignoring an issue when it receives a shareholder proposal on the topic, such as addressing its risks associated with subprime lending or reputation endangering use of child labor in its supply chain.   While the management may initially view the issue raised in the proposal as irrelevant to their effective stewardship of the company, if at least 3% of the shareholders vote in favor so that the proposal may be resubmitted, this is a plain signal to the management that the issue may not go away. Often this is enough of a gentle nudge to spur them to at least do some analysis as to how the issue may affect the company.  If the proposal is submitted again in the subsequent year, management is more prepared to engage with the concerned shareholder about the issue. Thus, the thresholds for resubmission often trigger a learning process for board and management.

Similarly, the resubmission process enables a gradual process of educating and enlisting broader investment community support sufficient to sustain a proposal on the proxy.

Building further support beyond the on-ramp of the first three years also triggers company engagement – when proposals continues to grow to 20%, 30%, or 40% of levels.[10] Crossing the 50% vote threshold to achieve majority support certainly is another trigger for board and management action, but reality of practice in this field is that any level of shareholder support for a proposal can be a trigger for this private ordering process, beginning with the resubmission threshold levels.

            Support for shareholder resolutions sometimes takes decades to build – such as on proposals seeking better risk management on climate change, amending equal employment opportunity policies to include LGBT people, or seeking governance changes such as board declassification.  Proposals on these topics hovered around 10% support for a decade or more in the 2000s and eventually moved into widespread adoption and majority support.
            A gradual growth trend in voting support during the early years of a proposal’s consideration mirrors the trend of many of what today are established societal norms.  Seen in proper context, a gradual trend does not imply that proposals are irrelevant to larger investing institutions (or investors, or society at large).  In a number of instances, while withholding supportive votes, larger shareholding institutions have attempted to address the same issues raised in proposals through engagement with companies, and only after those engagements have failed to yield sufficient results have the firms developed voting policies to support these proposals. 

For instance, in the last year some of the country’s largest investment firms, including BlackRock and Vanguard, supported climate proposals after what they saw as a failure or breakdown of progress in their own engagement processes.

            Proposals at ExxonMobil asking the company to assess the impact of climate change on its business model tended to get 10% support for many years.  But shareholder support rose to 30% support in 2016 and then 62.3% support at the company’s most recent annual meeting in 2017.  This only happened after winning eventual “Yes” votes from some of the largest firms.[11]

The evolution and success of shareholder proposals as a central tool of corporate governance, risk management, and conflict resolution does not merit rollback rulemakings.  The proposed reforms seem more geared toward insulating boards and management than to ensuring the success of the corporate enterprise, benefitting investors, or serving society.  If anything, the demonstrated trends of investor support for shareholder proposals invites policy enhancements that truly serve investors and corporate governance and that reinforce the best of the 14a-8 process, not the proposed curbs on the governance and ownership rights of shareholders.


Thanks to Bruce Herbert, Richard Liroff, Holly Testa and Julie Gorte for essential editorial feedback.


[1] pages 31-32 Treasury recommends that the $2,000 holding requirement for shareholder proposals be substantially revised and that the resubmission thresholds for repeat proposals be substantially revised from the current thresholds of 3%, 6%, and 10%.

[2] The petition under consideration at the SEC would seek to raise the thresholds for resubmitting proposals after they are voted on at a company. SEC Rule 14a-8(i)(12) provides for exclusion of shareholder proposals submitted to a company in prior years based on the level of voting support for the proposal. In essence, the rule provides that shareholders need to obtain at least 3%, 6% and 10% of shareholder support in the first three years of filing in order to be able to resubmit a proposal. The US Chamber of Commerce and the Financial CHOICE Act sought to upwardly revise those thresholds in line with the previously considered and rejected proposal to increase these thresholds to 6 percent, 15 percent and 30 percent. These thresholds were considered by the SEC in 1997 and rejected after public comments.

[3] The so-called Financial CHOICE Act.

[4] The House of Representatives passed the Financial CHOICE Act, in which would screen out not just small investors, but all but the largest shareholders from filing proposals. It would require shareholder proponents to hold one percent of the issuer’s voting securities for three years, instead of the current requirements to hold $2000 worth of shares for one year.

[5] Petition 4-674, p. 14. 

[6] Less than half of the 11,706 proposals submitted to companies went to a shareholder vote. The SEC permitted companies to omit 1741 proposals. The remainder of the proposals were either withdrawn by the proponent or otherwise did not go to a vote. Analysis of Institutional Shareholder Services, Voting Analytics Shareholder Proposals Database, a database of Russell 3000 Companies.

[7] Based on data analysis by Jonas Kron, Trillium Asset Management, analysis of Sustainable Investments Institute Database, courtesy of Heidi Welsh.

[8] Activist hedge funds typically deploy more costly forms of engagement through Rule 14a (directly soliciting proxies) rather than Rule 14a-8.

[9] As Attorney Paul Neuhauser has noted:
The first shareholder proposals concerning predatory subprime lending were submitted in 2000 and the first asking securitizers to police the loan pool were submitted in 2003, in each case years before subprime lending became recognized as a major problem. The shareholder proposals constituted an early warning system for those who heeded them. Although these proposals were submitted to a number of companies and survived company challenges at the SEC, they never appeared on any proxy statement because the recipients in each case agreed to a change of policy with regard to predatory lending to subprime borrowers (in one case the securitizer called the proponent the day after it lost its no-action request at the SEC to request a meeting and dialogue on the matter and at the meeting agreed to alter its due diligence process with respect to loans purchased for securitization). Notably, the securitizers that received the precatory proposals and changed their practices have not been among those who have suffered during the recent unpleasantness. 
Paul Neuhauser, comment letter to SEC, Oct. 2, 2007,

[10] Although the reform proposals act as if these percentages are a consistent indicator across companies, in practice they are not. As a means of assessing the level of interest and support among shareholders to an idea that management is opposing, there is no practical merit in counting votes controlled by management. Given the growth in dual class ownership, as well as the role of controlled companies, passive investing strategies, and management affiliated or controlled voting blocs, such as ESOPs, it may actually be more appropriate to lower the current resubmission thresholds, rather than raising them.

[11] This evolving approach is captured in the comments of Glenn Booraem, Vanguard’s Investment Stewardship Officer, in the Vanguard Investment Stewardship Report:
First, companies should expect that we’re going to focus on their public disclosures, both about the risk itself and about their board’s and management’s oversight of that risk. Thorough disclosure is the foundation for the market’s understanding of the issue. Second, companies should expect that we’ll evaluate their disclosures in the context of both their leading peers and evolving market standards, such as those articulated by the Sustainability Accounting Standards Board (SASB). Third, they should expect that we’ll listen to their perspective on these and other matters. And finally, they should see our funds’ proxy voting as an extension of our engagement. When we consider a shareholder resolution on climate risk, we give companies a fair hearing on the merits of the proposal and consider their past commitments and the strength of their governance structure.⁠
Vanguard, Investment Stewardship, 2017 Annual Report, p. 11.