On July 30, 2018, SEC Chairman Jay Clayton announced his intent to hold a SEC Staff Roundtable on the proxy process. The announcement reported that shareholder engagement is up, with 72% of S&P 500 companies reporting engagement with shareholders in 2017 compared to 6% in 2010. The announcement asked the staff to consider various topics for possible inclusion in the Roundtable, including questions related to the voting process, retail shareholder participation, shareholder proposals, technology and innovation and other actions. Among other items discussed in the Chairman’s statement, is the idea of potentially putting additional constraints on shareholder proposals, even though there is no evidence of dysfunction that would merit the proposed limits on shareholder rights.
The following references from the investment community respond to many of the issues raised in the Roundtable announcement.
The following references from the investment community respond to many of the issues raised in the Roundtable announcement.
Frequently Asked Questions
about Shareholder Proposals
Q. How frequently do public companies receive shareholder proposals?
A. Most public companies do not receive any shareholder proposals. On average, 13% of Russell 3000 companies received a shareholder proposal in a particular year between 2004 and 2017 according to the ISS database. In other words, the average Russell 3000 company can expect to receive a proposal once every 7.7 years. For companies that receive a proposal, the median number of proposals is one per year.
Q: What type of companies are more likely to receive shareholder proposals?
A: Large companies are far more likely to receive shareholder proposals because these companies represent a greater portion of investors’ equity portfolios. According to the ISS database, S&P 500 companies received 659 proposals as of the end of the 2017 third quarter. This equals 77% of the 852 proposals received by Russell 3000 companies, and corresponds to the S&P 500’s coverage of the Russell 3000’s market capitalization. Small companies rarely receive proposals - only 3.7% of shareholder proposals in the ISS database were filed at companies with a market cap under $1 billion.
Q: How many Rule 14a-8 shareholder proposals are filed per year?
A. According to the ISS Voting Analytics database of Russell 3000 companies, shareholders submitted an average of 836 proposals at 386 companies per year between 2004 and 2017. The number of submitted proposals fluctuated between approximately 800-900 proposals per year, except for a dip to 603 proposals in 2011 and 673 proposals in 2012 after the SEC’s adoption of say-on-pay vote requirements.
Q. What percentage of proposals actually go to a vote at annual meetings?
A. Less than half of all submitted proposals actually go to a vote. Out of the 11,706 proposals that the ISS database tracked between 2004 and 2017, only 5,342 of these shareholder proposals (46%) went to a shareholder vote. The SEC permitted companies to omit 1,741 proposals (15%). The remaining proposals were withdrawn after mutually agreeable outcomes with companies or otherwise did not go to a vote.
Q: Are shareholder proposals filed at companies that recently had an IPO?
A: A small proportion are filed at companies with a recent IPO - less than 9% of Russell 3000 companies that have had an IPO since 2004 have received a shareholder proposal.
Q. How many proposals receive less than 10% support? 30% support?
A. The current resubmission thresholds create significant pressure on shareholder proponents and a higher threshold would have dramatic results. The ISS database tracked 459 shareholder proposals that went to a vote at Russell 3000 companies as of the third quarter of 2017. Of these proposals, 104 proposals (22.7%) received less than 10% of the For/Against vote. In comparison, 252 proposals (54.9%) received less than 30% of the For/Against vote.
Q. How often do shareholder proposals with low votes get resubmitted year after year?
A. Resubmissions for a third or fourth time are very rare. Since 2010, shareholders resubmitted environmental and social issue proposals only 35 times after receiving votes under 20% for two or more years. This affected only 26 companies.
Q. How frequently do individual investors use the shareholder proposal rule?
A. According to the ISS database, the Chevedden, Steiner and McRitchie families submitted approximately 1,700 shareholder proposals between 2004 and 2017. Proposals by this group of individual investors represent 14.5% of the 11,706 shareholder proposals contained in the ISS database. On average, 40% of shareholders voted in support of these shareholders’ proposals when they went to a vote.
The Business Case
USSIF/Council of Institutional Investors/Ceres/ICCR
“The shareholder resolution process is important because it allows investors to communicate with boards, management and other shareholders about ways to protect their interests in a proactive, forward-looking way on important corporate governance, risk and policy issues affecting companies, before a crisis arises that erodes shareholder value.”
“Small shareholders filing proposals often catalyze beneficial actions and changes in corporate governance and practices that benefit the company and all shareholders. And many large asset owners and asset managers who rarely file shareholder proposals now vote for ESG proposals filed by smaller shareholders.”
Julie Gorte, Pax World Funds
"A new paper sponsored by the National Association of Manufacturers purports to show that shareholder resolutions do not benefit shareholders. The study alleges that while climate change is real, resolutions related to companies reporting on business management and risks in a world undergoing a low-carbon transition do not improve value for shareholders. The authors then select—perhaps a better term is cherry-pick—ten resolutions filed over a four-year period from 2013 to 2017. They don’t say how they picked those ten, which is an early indication that this study may be flawed. According to the Sustainable Investments Institute, 425 climate-related shareholder resolutions were filed during that 4-year period and 142 of those resolutions were filed with companies in the Oil, Gas and Consumable Fuels industry. Of that 142, 36 resolutions specifically addressed company reporting on the 2⁰ transition."
"So why pick only ten resolutions? Why those ten? Why are only three of the ten about the subject the authors claim to be examining? Crickets."
"Pax World and other shareholders file shareholder proposals not to get companies to tell us what they think the future of climate change will be—another unfounded assertion in the paper—but to understand how companies are likely to be affected by the world’s transition to a lower-carbon economy, and what the company is doing to address the related risks and opportunities. What really would inform investors of how well the company will weather the economic transition isn’t the shareholder vote, it’s the company’s strategic response to how it will manage that transition. Our objectives are to improve how the company performs in the long term, not how it performs in the weeks between the publication of a DEF-14 and the vote on proxy items."
Retail Investors and the Unmasking of the So-Called Main Street Investors Coalition
New York Times: What’s Behind a Pitch for the Little-Guy Investor? Big Money Interests, Andrew Ross Sorkin, July 24, 2018
“It is a Washington organization that purports to represent the little guy — the retail investor that it says has no voice in corporate America…The group is actually funded by big business interests that want to diminish the ability of pension funds and large 401(k) plans — where most little guys keep their money — to influence certain corporate governance issues.”
“Why would the Main Street Investors Coalition want to do this? Because it should probably be called the National Association of Manufacturers — after all, that’s the name of the industry group that helped start it and is among its largest funders...The truth of the Main Street Investors Coalition is that it is an organization aimed at preventing investment firms from raising issues like climate change. Mr. Banks said as much when explaining how he had decided to start the group.”
“In reality, it is a corporate-funded group with no real ties to retail investors, and its advocacy is as fake as its name.”
“MSIC uses inflammatory language, unsupported assertions, and out-and-out falsehoods to try to discredit the institutional investors who file and support non-binding shareholder proposals. While these proposals are filed at a very small fraction of publicly traded companies and even a 100 percent vote does not require the company to comply, somehow, this very foundational aspect of free market checks and balances is so overwhelming a prospect to corporate executives that they are unable to provide a substantive response and instead establish what in Washington is referred to as an “astroturf” (fake grassroots) organization, setting up a false dichotomy between the interests of large and small shareholders.” “The MSIC perpetuates the myth that incorporating environmental, social and governance (“ESG”) factors inherently conflicts with protecting and advancing shareholder value. However, the 1,200 members of the United Nations-backed Principles for Responsible Investment – including Fidelity, BlackRock, Vanguard and State Street – with over $70 trillion in assets under management, have committed to consider ESG issues in the investment decision-making process since these factors may affect shareholder value.”
Responses to Corporate Initiatives for Rulemaking to Constrain the Shareholder Proposal Process
Shareholder Rights Group
“It is well known that larger investors, in particular, tend to assess new issues first through engagement processes rather than voting in favor of the proposals… An increase to the resubmission threshold would derail this important process and end discussion of what have frequently become important issues for company management and boards to consider.”
“By creating a steeper on-ramp, the effect of the proposed changes to the resubmission thresholds would undermine the ability of shareholders to flag and engage with companies and fellow shareowners on emerging issues, or present innovative ideas. As such, it would reduce the dynamism of shareholder participation and engagement.”
“The lack of a genuine problem should be enough to suggest that [rulemaking on the shareholder proposals process] ought not be a priority for the SEC rulemakers… 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.”
“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.”
“Aside from serving to increase accountability, proposals often serve as an “early warning” system. Had companies listened, we might have avoided the 2008 financial collapse, since proposals concerning predatory subprime lending and the securitization of such subprime loans were introduced in 2000. Proposals beginning in 2003 asked securitizers to police their loan pools.” [link]
Roster of Comments on Rulemaking Petition: Request for Rulemaking to Amend Rule 14a-8 Under the Securities Exchange Act of 1934 Regarding Resubmission of Shareholder Proposals.
Proxy Advisory Firm Legislation
Letter From Council of Institutional Investors and 45 Investor Organizations on Proxy Advisory Firm Legislation
“H.R. 4015, the “Corporate Governance Reform and Transparency Act of 2017,” and similar language which was incorporated in Subtitle Q of Title IV of H.R. 10, “the Financial CHOICE Act,” would require, as a matter of federal law, that proxy advisory firms share their research reports and proxy voting recommendations with the companies about whom they are writing before they are shared with the institutional investors who are their clients. In essence, while the stated goal of the proposed legislation is the “protection of investors,” as the primary customer of proxy advisory firm research, institutional investors believe that adding the new proposed requirements to the industry is unnecessary, overly burdensome and counter-productive."
“The proposed legislation appears to be based on several false premises, including the erroneous conclusion that proxy advisory firms dictate proxy voting results and that institutional investors do not drive or form their own voting decisions. Indeed, many pension funds and other institutional investors contract with proxy advisory firms to review their research, but most large holders have adopted their own policies and employ the proxy advisory firms to help administer the voting of proxies during challenging proxy seasons.”
2018 SEC Decision-making on Shareholder Proposals
“Recently, SEC and external actions have had—or propose to have—a significant impact on this process… the pressure on the SEC from the corporate community to limit shareholder proposals has persisted, and helped to prompt changes in policy during the 2018 proxy season.”
“At a time in which shareholder proposals are receiving unprecedented levels of voting support due to recognition of risks to investments, the micromanagement rulings threaten to undermine market-wide investment objectives on an array of issues implicating corporate risk management and financial and ESG performance.” [link]
“The recent decision in EOG Resources,Inc. (February 26,2018) involved the exclusion of a form of shareholder proposal that has long been considered by the SEC staff to be acceptable and to not constitute micromanagement for purposes of Rule14a-8(i)(7).”
“For decades, shareholder proponents and corporate counsel have relied upon reasonably consistent decision-making in this area, allowing us to craft our proposals and our arguments to steer clear of micromanagement. It has been our understanding that… a target-setting proposal would generally be appropriate, but a target-setting proposal that specified an unreasonable timeframe for completion, or detailed specific targets with set dates, would arguably constitute micromanagement as these additional details would invite shareholders to delve too deeply into complex matters that should be reserved for management.”