October 25, 2019
The Honorable Jay Clayton
Chairman
US Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Washington, D.C. 20549
Re:
Potential Rulemaking on Shareholder Proposal
Filing and Resubmission Thresholds
Filing and Resubmission Thresholds
Dear Chairman Clayton,
We are writing to you, as some of the leading
proponents of shareholder proposals, to urge you to truly take a stand for
retail and Main Street investors by resisting current efforts to curtail our
rights to file proposals. Your recent public remarks raise new concerns for us
that you may be on the verge of succumbing to that pressure. We learned today in a report by Reuters and
FT, that it appears that the Commission may be poised to vote on proposed rule
changes on November 5.
Please don’t silence retail investors by rigging the
rules against us
In a September 24 House Financial Services
Committee Oversight hearing, you publicly stated that you “don’t like it that
25 or 30% of proposals are filed by a few proponents.” The implication seemed
to be that you are looking to adjust the thresholds for shareholder proposal
filing and resubmission to reduce or curtail the ability of the “few”
proponents to file proposals.
Given your focus on protecting the rights of
retail and Main Street investors, this leads us to believe that you may have
been misled by the advocates for amendments to the shareholder proposal rule.
Therefore, we are writing to correct a number of misperceptions implicit in
this statement and to ensure that the Commission has adequate information
before initiating an unnecessarily costly, contentious and harmful rulemaking.
The filing of a significant portion of
proposals by a few individual proponents is neither new, nor unsupported by
fellow investors. In fact, the 14a-8 proposal process, since its inception, has
always had the effect of empowering a few shareholders who have made it part of
their investing strategy and mission to improve the governance of the companies
in which they invest. From
the 1950s onward, there were active shareholders with limited stock holdings
like the
Gilbert brothers and Wilma Soss who pressed for sensible and practical
governance changes by companies through the proxy process. Over time, many of
the changes they sought were implemented and even adopted as SEC rules. Compared
with historical numbers, the proportion of proposals currently filed by
so-called gadflies, the active corporate governance proponents, has fallen from
100% when the shareholder proposal rule was first instituted, down to 50% some
years ago, and to 30% today.
What has changed over these years, and the
reason we believe you are under pressure to suppress the “gadflies,” is that
gadflies are winning much more support for their proposals. Large numbers of
mainstream, institutional, and values or faith based investors are voting in
favor of those proposals, very often leading to majority support or higher.
[1]
Disrupting such productive corporate governance engagements is not in the best
interest of the investing community or the capital markets.
You stated in the House Financial Services
Oversight hearing: “What will the new threshold be? We are working on it, but
in an ideal world it’s a threshold that has access for a long term investors in
the company and have a meaningful stake at a personal level." We believe
the existing thresholds accomplish exactly that goal, and do not merit a
rulemaking to make changes.
Significantly elevating the filing or
resubmission thresholds would not just affect the “gadflies,” it would hobble a
wide array of investors who are raise risk management and governance issues
with their investee companies and achieve significant progress through both
voting and engagement. The ownership thresholds of the current rule are
relevant to many of our organizations and funds which promote other governance
or ESG proposals. Our proposals for ESG disclosure and performance improvement
have also seen a significant spike in voting support among investors. This is
in alignment with the general interest of the investing community in ESG
investing strategies and disclosure.[2]
Our concerns about specific threshold changes
We understand that one proposal pending
before the Commission would significantly raise the required number of shares,
or the holding period, needed to file a proposal. Raising the threshold
significantly would prevent small diversified shareholders from participating
in the shareholder proposal process. If you lead the Commission to increase the
filing threshold significantly, you risk depreciating the bundle of rights
associated with share ownership. Those rights include the right to file
proposals.
Raising the filing threshold significantly
would harm retail investors whose diversified portfolios and acquired shares
were sufficient to engage with their companies, and now may find that those
rights have been depreciated and eliminated. Moreover, abrupt declines in share
prices at mismanaged companies would block the filing of proposals when they
are most needed, by impeding the submission of proposals from shareholders
whose stock has lost market value during the preceding year.
A second proposal under
consideration apparently involves a steep increase in the resubmission
threshold, undermining our ability to sustain necessary focus on emerging
issues for which support tends to grow over time. Issues that draw concern of
four or five percent of investors often prove financially material over time;
our proposals often serve as a needed alert, rather than a diversion.[3]
The resubmission thresholds are already functional. Shareholders are
quite able to reject ill-advised proposals through the current resubmission
thresholds. For example, in 2019 shareholders consistently provided less than
3% support to proposals seeking an ideological litmus test for board members at
Discovery, Starbucks, Apple, Twitter and Amazon. Shareholders at Exelon
similarly rejected a proposal to “burn more coal” with only 1.6 percent
support. Investors also rejected a request to report on how Gilead Sciences
spent its share of the federal tax cut, a proposal that earned only 2.2%. Those
proposals are barred under the resubmission thresholds from reappearing on the
proxy.
In addition, if the resubmission thresholds are increased
significantly, the recent growth of multi-class share ownership will combine
with predictable insider share voting to distort the outcomes even in the face
of substantial support by external investors. Undoubtedly, if the CEO, board,
and other insiders oppose the proposal, they will vote against it. Where
companies have multi-class share structures, company insiders will typically
represent a majority percent of the vote (while owning far less in economic
stake of the company).[4] It
makes no sense to allow dual class share owners and insiders to have such an
oversized opportunity to block proposals from recurring, effectively silencing
the voice of minority shareholders.
Major changes to submission or resubmission thresholds
under consideration could place the right to file shareholder proposals out of
reach of true Main Street and retail investors. In the event that the
Commission nevertheless votes to propose rule changes on November 5 as reported
by Reuters, we strongly recommend that
you allow ample time for public comment, at least 90 days.
We urge you to stand up for our rights.
Sincerely,
Sanford Lewis
Director
Shareholder Rights Group
Cc:
Docket: Staff Roundtable on the Proxy Process
4-725
Hon. Michael D. Crapo, Chair, Committee on
Banking, Housing, and Urban Affairs, United States Senate
Hon. Sherrod Brown, Ranking Member, Committee
on Banking, Housing, and Urban Affairs, United States Senate
Hon. Maxine Waters, Chair, Committee on
Financial Services, United States House of Representatives
Hon. Carolyn B. Maloney, Chair, Subcommittee
on Investor Protection, Entrepreneurship, and Capital Markets Committee on
Financial Services, United States House of Representatives
Hon. Patrick T. McHenry, Ranking Member,
Committee on Financial Services, United States House of Representatives
Hon. Robert J. Jackson Jr., Commissioner,
U.S. Securities and Exchange Commission
Hon. Hester M. Peirce, Commissioner, U.S.
Securities and Exchange Commission
Hon. Elad L. Roisman, Commissioner, U.S.
Securities and Exchange Commission
Hon. Allison Herren Lee, Commissioner, U.S.
Securities and Exchange Commission
Mr. William Hinman, Director, Division of
Corporation Finance, U.S. Securities and Exchange Commission
Mr. Rick Fleming, Investor Advocate, Office
of the Investor Advocate, U.S. Securities and Exchange Commission
Ken Bertsch, Executive Director, and Jeff
Mahoney, General Counsel, Council of Institutional Investors
Josh Zinner, CEO, Interfaith Center on
Corporate Responsibility
Lisa Woll, CEO, US SIF: The Forum for
Sustainable and Responsible Investment
Heather Slavkin-Corzo, Head of US Policy, UN
Principles of Responsible Investment
[1] For
instance, see: https://www.sec.gov/comments/4-725/4725-6009672-190810.pdf
[2]
https://siinstitute.org/special_report.cgi?id=80
[3]
Shareholders that in aggregate account for 3% or 6% of
the vote may hold a significant minority view that proves accurate and
prescient in identifying company risks. For example 5% of Monsanto investors supported
a proposal to require the company to assess the looming public health risks of
its product glyphosate; within a few years, it appeared that the liabilities
associating glyphosate with cancer causation are expected to drive Monsanto’s
purchaser, Bayer, into bankruptcy. https://corpgov.law.harvard.edu/2018/12/17/the-prescience-of-5-of-investors-a-monsanto-case-study/
[4]
In
effect, a shareholder proposal opposed by management at multi-class companies
may never have a fair opportunity to reach threshold vote levels. For example,
the 2018 shareholder proposal at Alphabet (which has three classes of stock
including an insider class with ten votes per share) seeking to “Give Each
Share an Equal Vote” garnered 28% of the overall vote after being resubmitted
for several years. However, the filer of this proposal estimates that 87% of
non-insider votes supported the proposal. The stark difference between 28%
(including insider votes) and 87% (only non-insiders) illustrates the peril
posed by calculating refiling ability when including insider ownership at
multi-class share companies. Had this proposal received this vote under revised
resubmission thresholds that require 30% vote in third and subsequent years,
the proposal would have been excluded from future filings despite the high
level of non-insider support. After refiling in 2019, this proposal earned 30%
of the overall vote which represents an estimated 92% of the non-insider vote.
More generally on the disastrous implications of dual class share structures,
see https://www.sec.gov/news/speech/fleming-dual-class-shares-recipe-disaster