Action Alert

On November 5, 2019, the Securities and Exchange Commission voted 3-2 to propose changes to the proxy rules that reduce the accountability of company CEOs and boards of directors to shareholders and the public. The combined effect of the two proposed rule changes (on proxy advisors and on shareholder proposals) would make it far more difficult for shareholders to vote independently of management. It would do so by rigging the rules to make it more difficult to file shareholder proposals or issue proxy advice on a wide array of issues from excessive executive pay to climate risk or to board and staff diversity.

The SEC estimates that the changes to the shareholder proposal rule alone would reduce the number of shareholder proposals considered at annual meetings by 37%, but the SEC has failed to take into account the likely losses in investor protection. These changes could risk trillions of dollars of negative impact on investments and impose added costs by diverting the underlying concerns into more costly procedures: litigation, books and records requests, and regulatory standards. The proposals would have the effect of disrupting a functioning and dynamic ecosystem of investor engagement that includes proxy advisors, passive and active institutional investors, and individual investors.  

1. The proxy advisors proposal would treat proxy advisors’ recommendations as ”solicitations” subjecting them to increased liability exposure and allowing issuers, but not shareholder proponents, the right to review and comment on final proxy advisor recommendations prior to publication.

• The effect is to offer a one-sided opportunity for issuers and their attorneys to threaten litigation in order to block proxy advisors’ favorable recommendations on shareholder proposals.   

2. The filing thresholds for shareholder proposals would steeply increase the level of shareholding required to file a proposal from the current $2,000 for one year to $25,000 if held for one year, $15,000 if held for two years, and $2,000 if held for three years.

• These expanded thresholds are clearly intended to reduce the role of the smallest investors, whose proposals have often been pivotal in corporate reform efforts.

• The SEC estimates that these thresholds will cut proposal filings by 28%.  There is no good economic justification for cutting these proposals.

• The proposal also arbitrarily blocks shareholders from aggregating their shares to meet the thresholds.

3. The resubmissions thresholds for shareholder proposals would be changed steeply. To resubmit a proposal would require a 5% vote the first year, 15% the second year, and 25% a third year. This is in contrast to the current resubmission levels of 3%, 6%, and 10%, respectively. In addition, a new requirement would impose a “momentum” exclusion if a proposal experienced a 10% drop in voting support after the third year, even if that proposal still received nearly majority support.

 • Based on recent voting history such rules would have excluded many past proposals that ultimately succeeded in producing votes or company action on proxy access, diversity, climate, and other ESG issues. Had those proposals been excluded, shareholders’ ability to have successful engagements would have been dramatically limited without the leverage of potential proposal resubmission.

4. Obstructing representation of investors. The proposal would disallow investors from hiring an advisor to speak on their behalf in dialogues with a company and make the filing and annual meeting process far more onerous and expensive. It would require any individuals filing proposals, regardless of their representation, to meet directly with companies. It would prevent impact investing firms from filing multiple proposals on behalf of different clients at a given company. It may prevent an individual from introducing more than one proposal at the company’s annual meeting, even if on behalf of other investors.

• There is no good justification under the securities laws for disrupting these representative relationships, which are a matter of state agency and contract law, not federal securities law. This set of proposals regarding representation represents a harmful infringement on financial firms as small businesses.

5. Rushing to decide. The SEC is rushing to make a decision on the proposed rule changes, allowing only a 60-day comment period.  The Council of Institutional Investors and the Shareholder Rights Group have requested that the SEC extend the comment period from 60 to at least 120 days

More Info:  InvestorRightsForum.com  or sanfordlewis@strategiccounsel.net 413 992-8297

14a-8 Rulemaking

How to Comment

The SEC is accepting comments on the proposed rules until February 3, 2020.

Write to:  Vanessa A. Countryman, Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File No. S7-23-19. 

Email to: rule-comments@sec.gov, subject line include reference to File No. S7-23-19

SEC Rulemaking Proposals Threaten Investor Engagement on Critical Issues

January 7, 2019

Additional Information

sanfordlewis@strategiccounsel.net

[Link to SRG letter] 

The Shareholder Rights Group (SRG), a coalition of investors who exercise their right to file shareholder proposals, has written to the Securities and Exchange Commission (SEC) in opposition to proposed rule changes that would effectively undermine the ability of shareholders to continuously promote increased corporate responsibility and improved corporate governance. 

Currently, shareholders that own at least $2,000 in stock for one year have the right to engage an investee company on an issue of concern through procedures set forth in the SEC’s Rule 14a-8. In late 2019, the SEC proposed dramatic changes to the Rule, undermining shareholders’ rights to hold companies accountable for risk mitigation and crisis management. In addition to making it harder to file proposals by requiring larger or longer-term holdings, the rulemaking proposal would make it more difficult for shareholders to submit a proposal to a second or third vote by imposing steep voting thresholds – 25% support by the third year, and disallowing a proposal if it suffered a loss of momentum after that. The SRG letter notes that “In practice sometimes 10% or 20% of investors represent the leading edge of an issue - the prescient minority, and therefore it is not wise for the management to discount the topic they are surfacing.” 

The SRG’s letter highlights three case studies in which shareholders preemptively sought disclosure or oversight of certain issues that have proven to be significant concerns for those companies. Specifically, the SRG’s letter explains how the proposed rule changes, if they had been in effect at the time of shareholder engagement, would have interfered with investors’ ability to directly respond to recent corporate responsibility crises and controversial operations at Boeing, Wells Fargo, and Chevron. 

Boeing: Prior to the two crashes of Boeing’s 737 Max airliners in 2018 and 2019, shareholders had encouraged better disclosure of Boeing’s notoriously aggressive lobbying policies, expenditures, and internal controls. Under the SEC’s proposed rulemaking on resubmissions, shareholder proposals on lobbying would have been barred beginning in 2017 – shortly before the 737 Max crashes. Yet, after the 737 Max crashes, shareholders supported lobbying disclosure with 32.6% of the vote in 2019. Had the proposed resubmission thresholds already been in place, shareholders would have been denied an opportunity to address this matter with the company in the wake of these catastrophic events.

Wells Fargo: Wells Fargo has suffered and continues to suffer a prolonged crisis of public, government, and consumer trust, having paid over $17.2 billion in penalties since 2000. The establishment of 3.5 million fictitious or unauthorized accounts, and improper practices in which 800,000 people were forced to take redundant auto insurance from 2012 to 2017, have punctuated an era of predatory practices. Had the SEC’s proposed resubmission thresholds been in place, shareholder proposals concerned about the ethical and business risks of predatory lending would have been excludable from 2013 to 2016. Additionally, under the SEC’s proposed threshold changes, shareholder proposals seeking an independent board chair would not have been permitted from 2013 to 2016 – a change that the company quickly enacted after its 2016 account fraud scandal. The failings of leadership, toxic corporate culture, and misdirected incentives have cost at least $24 billion in market value, despite early prescient shareholder engagement.

Chevron: In the U.S., advancement on corporate climate change mitigation initiatives has been driven to a large degree by shareholder proposals and shareholder engagement. One informative example is the progression of hydraulic fracturing and methane proposals at Chevron. Shareholder engagement from 2011-2015 had led to significant advancement of Chevron’s environmental practices and reporting; during this timeframe, shareholder support ebbed and flowed reaching highs of 40% (prompting corporate action) and dipping to 26% before rebounding to over 30%. In 2018, approximately 45% of Chevron’s shareholders voted in favor of a shareholder proposal related to fugitive methane reduction, which again inspired a corporate response on the issue. However, had the SEC’s newly-proposed “momentum requirement” been in place, this natural variation of shareholder support would have meant that investors would not have been offered the opportunity to vote on that 2018 proposal that they resoundingly supported. 

The SRG’s letter explains that “[i]n our assessment, the SEC’s proposed proxy rule changes would disrupt functional working relationships between shareholder proponents, institutional investors, and proxy advisors and companies. The proposed rule changes would make the path of investor engagement steeper and more convoluted, adding unnecessary costs and red tape, and making it more difficult for investors to foster sustainability, risk management, and governance improvements at their companies. It would block the most established and effective path for improving environmental, social, and governance (ESG) disclosure and performance of the market.”

The Shareholder Rights Group urges all concerned investors to write to the SEC in opposition to the proposed rules by the February 3 comment deadline. Additional info on the proposed rule changes, including links to the proposed rules are included at InvestorRightsForum.com

The SEC is accepting comments on the proposed rules until February 3, 2020. Write to:  Vanessa A. Countryman, Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090; Email to: rule-comments@sec.gov. Email or hard copy subject line should include reference to the File No. S7-23-19 (shareholder proposals) and File No. S7-22-19 (proxy advisors).