As voting rights and access to the ballot box dominate national debate, a parallel struggle is unfolding in corporate America: who gets to decide what a company’s shareholders are allowed to vote on?
In a stunning parallel to the current fights over election rights, the Securities and Exchange Commission (SEC) is proposing to rescind its shareholder proposal rule, a more than 80-year-old process that lets shareholders engage with fellow shareholders and their portfolio companies. For retirees and retail investors whose savings are invested in public companies, the federally regulated shareholder proposal process is one of the few direct tools available to ensure effective risk management and corporate governance.
For decades, shareholders have relied on this right to bring important issues to fellow investors for a vote. Shareholder proposals have held boards accountable by requiring that they receive a majority vote to remain on the board. Other proposals have pushed companies to address climate-related financial risks that could pose significant liabilities in the future. Proposals have addressed excessive executive pay and other abuses of power. Recently, proposals have sought transparency on risks related to companies’ deployment of Artificial Intelligence. Shareholder proposals are an effective way to communicate with management about how it safeguards the company against a range of AI risks.
A shareholder seeking more information about an issue from a company can submit a proposal, which acts as a referendum to gauge whether other investors also think the information is material to their decision-making. Even proposals that receive majority support from investors are non-binding, making the filing of shareholder proposals an inherently non-adversarial engagement tool. It is also an efficient process, because it means inclusion of a few pages in a much larger mailing that the company is already sending to all shareholders.
Despite the importance of the shareholder proposal process, the SEC is threatening to turn shareholder democracy on its head by locking out these proposals from corporate voting materials. Every public company circulates an annual proxy statement to its shareholders, signifying the items to be voted upon at the company's annual meeting. The vast majority of votes are currently cast through the proxy card which contains yes or no checkboxes for each item to be voted; the proxy card is accessible to widely dispersed shareholders who do not intend to attend the meeting in person.
Under the SEC proposed changes, shareholder proposals would be locked out of the company's proxy materials. Shareholders could still raise proposals from the floor of a meeting under state law. But a proponent who wants votes from people not attending the meeting would have to file and mail their own proxy materials a very expensive proposition that only the most well-funded investors can do.
The rule in place today empowers small shareholders to raise important issues; the rescission of the rule would shut retail shareholders out of the process. Only the wealthiest investment firms and investors would be able to submit shareholder proposals and send mailings necessary to get substantial votes. These investors, however, seldom file shareholder proposals because their holdings in the company are large enough that they don't need to file proposals in order to get the attention of the board and management.
The SEC’s proposed rules would prevent proposals expected to be introduced in the meeting from appearing in full on the company’s proxy statement and provide no opportunity to vote on them on the company’s proxy card.
Before the SEC Rule Change
Today, shareholders have the right to file proposals and to bring important matters before their fellow shareholders. The mechanics of this process have strong guardrails to filter out unreasonable requests. For example, proposals must be relevant to the company, not merely address the company's ordinary business, and the proponent must meet ownership requirements. Proposals cannot exceed 500 words, and rules disqualify them from being refiled if they receive votes below a certain threshold. Once a proposal is successfully filed, it appears in the company’s proxy statement — an annual filing the company distributes to all its shareholders with information on all items that will be voted on. This includes issues shareholders want to raise, as well as management topics such as background information on director elections and approval of executive pay.
Along with the proxy statement, the company distributes a proxy card that most shareholders use to cast their vote and make their voices heard.
This is an essential right that comes with owning part of a company through shares, but the SEC is trying to take that away.
Today, the proxy card lists director elections and management’s proposals first. Proposals submitted by shareholders under Rule 14a-8 follow. Each item has its own boxes to vote For, Against, or to Abstain. Exhibit A shows an example.
Exhibit A. Proxy card under current rules (illustrative)
Under the proposed rules, the company’s proxy card would list no shareholder proposals at all. Shareholder proposals are silenced on the corporate proxy card. Instead, the SEC proposal entitles management to cast the investor’s own votes AGAINST any shareholder proposal raised at the meeting — unless the investor checks a small, poorly explained box to withhold management's discretionary authority.
As Exhibit B shows, the shareholder proposals on the card would be replaced by a single question: will the shareholder let management vote the shareholder’s own shares as it sees fit? There would be no option on the company ballot to vote FOR any of the shareholder proposals presented, only an option to notify the company that the shareholder doesn't want the company to cast his or her votes against one or more of those shareholder proposals that are not even visible on the management ballot card.
Exhibit B. Proxy card under the proposed rules (illustrative)
The card would not list the proposals or provide any information about shareholders' concerns or requests. Shareholders would have to dig through a separate document, the proxy statement, to find a one-line description generated by the company of any shareholder proposals the company expects to come up for a vote.The full 500 word proposals would not appear in the proxy statement at all.
The proxy rules have long ensured that individual shareholders can easily vote on proposals raised by fellow shareholders. The SEC proposes to end that.
Section 14(a) of the Securities Exchange Act of 1934 is the law on which the shareholder proposal process was built. It rests on a simple principle: investors shouldn't be asked to hand over their voting authority without adequate information about what will be decided. Rescinding Rule 14a-8 abandons that protection. It would return us to the pre-1934 world, where poorly informed shareholders signed blank checks and management called the shots.
Those who are alarmed by this move by the SEC have till November 20th to comment. You can comment directly on the SEC website or go to http://protectshareholdervoice.com for additional notes and a tool for commenting.