Our second in a series of articles about socially responsible investing in the Trump era.
Since the 1960s, one of the most powerful tools used by the socially responsible investment (SRI) community to hold corporations accountable for their impacts on workers, communities, and the environment has been the shareholder proposal. In the new political era, the right to file such proposals is now at stake.
Since hardliners took control of Congress last November, the SRI community has been bracing for an expected assault from the “pro-business” community on the right to file proxy resolutions. On February 22, that day arrived when the Business Roundtable (BRT), a group representing some of the most powerful CEOs in corporate America, delivered a regulatory hit list to a sympathetic White House.
The animus to shareholder resolutions is not new. In 1997, the Securities and Exchange Commission (SEC) solicited public comment on whether to make it harder for shareholders to file resolutions, an idea it abandoned after considerable opposition from the public and the investment community. The idea was broached again in 2010 by the commission but again not pursued. In 2014, the Chamber of Commerce petitioned the SEC to significantly raise the voting percentage thresholds for resubmitting proposals that fail to elicit “meaningful shareholder support.” This means that instead of a first-year proposal requiring the support of only 3% of votes to be resubmitted the following year, it might require twice that percentage under a revised rule.
Eligibility Requirements Under Challenge
Rule 14a(8) of the Securities and Exchange Act of 1934 states that a shareholder proposal must receive the support of 3% of all votes cast to be resubmitted a second year; in its second year, it must surpass 6% to be submitted for a third go-around; and every year after it must receive at least 10% to go back on the ballot. If it fails to reach 10% in subsequent years, it cannot be re-filed until three years have passed. Shareholders must file with no less than $2,000 worth of stock that they have owned for at least one year.
|Current Eligibility Requirements Under Question
Rule 14a(8) of the Securities and Exchange Act of 1934 states that a shareholder proposal must receive the support of 3% of all votes cast to be resubmitted a second year; in its second year, it must surpass 6% to be submitted for a third go-around; and every year after it must receive at least 10% to go back on the ballot. If it fails to reach 10% in subsequent years, it cannot be re-filed until three years have passed.
Shareholders must file with no less than $2,000 worth of stock that they have owned for at least one year.
Opponents of the current rules also wish to raise the minimum amount of stock required to file a proposal. The BRT wants to replace the current minimum ($2,000) with a sliding scale based on the market capitalization of the corporation, ranging from 0.15% to 3% ownership of outstanding shares. (Three percent of Apple’s outstanding shares is equal to 157,500,000, or just about $22 billion worth.) They also propose to lengthen the required holding period from one to three years.
These are just a few of the proposed changes that, if implemented, would fundamentally erase the ability of small shareholders to bring proposals to a vote.
“In too many cases,” the BRT opined, “activist investors with insignificant stakes in public companies make shareholder proposals that pursue social or political agendas unrelated to the interests of the shareholders as a whole.”
We beg to differ. Outside of the most insulated circles, the notion that sustainable environmental, social, and governance (ESG) policies and practices are “unrelated to the interests of the shareholders as a whole” is steadily fading into irrelevance. The website of virtually every corporation features a sustainability section that identifies daunting ESG issues it faces, from climate change and water scarcity to ensuring respect for labor and human rights in its supply chain. Investors expect corporations to be thinking both broadly and holistically about the risks and opportunities associated with sustainability issues, whether those investors are Goldman Sachs or small investment firms in idyllic Vermont. According to US SIF, 20% of professionally managed assets in the U.S. use ESG screens, up by 33% since only 2014. As this number has grown, so has the average vote for environmental and social proposals, which commonly seek more disclosure from management as to how sustainability challenges are handled. It is (also) up by 33% in the past decade.
This is one reason why, in our view, the critics are trying to fix a system that ain’t broke. From reading their complaints, one gets the false impression that corporate America is overrun with shareholder proposals because filing them is as easy as waving a magic wand. In fact, the process is not particularly easy. Proposals must be very carefully crafted to skirt a set of exclusionary rules designed to prevent the frivolous ones from ever reaching a vote, and this frequently requires legal counsel. Costs incurred go well beyond $2,000, and there is no point in going to the trouble if you don’t believe your proposal is in the best economic as well as social interests of the corporation.
Critics are trying to fix a system that ain’t broke. They need to understand that corporations, investors, and other stakeholders benefit from the process.
As a result, corporations are simply not being overrun by shareholder proposals, contrary to claims. There are about 4,000 publicly listed companies in the U.S. In 2016, 382 shareholder proposals were filed on environmental and social issues. If those proposals had been distributed one per company, over 90% of publicly traded companies would not have received any proposals last year. But some companies received multiple proposals, so the ranks of the unbothered are actually over 90%.
As regulators and lawmakers consider these ill-conceived attacks on shareholder rights, they need to understand that corporations, investors, and other stakeholders benefit from the process. For example, it’s not very well known that not every shareholder proposal ends up going to a vote. In any given year, a substantial number are withdrawn following discussions with corporate executives (we’ve written about our recent experiences here, here and here). Sometimes these discussions amount to no more than an exchange of views; many other times, however, proponents agree to withdraw their proposals in exchange for concrete corporate commitments to constructively address the issue at hand.
In other words, the shareholder proposal process opens up a channel of communication between investors and corporations that often leads to win-win outcomes on issues that can become critical to a company’s social license to operate. For example, corporate preparedness for climate change might arguably be years behind what it is but for shareholder dialogue and proposals. There are also times in which corporations have ignored advice from the sustainable investment community at their peril; the most compelling examples in recent years are the unheeded warnings that religious investors made to the major financial service firms about subprime mortgage risks. Yet critics of the shareholder proposal process myopically point to shareholder votes as the only metric that matters. The Manhattan Institute’s Proxy Monitor project, which consistently distorts statistics to minimize the impact of shareholder proposals, has proposed eliminating them altogether.
This administration and Congress abhor not just specific regulations, but the fact that regulations exist at all.
The BRT and Chamber’s campaign to cripple shareholder proposals must be understood in its larger context. It is part of a much larger, ambitious attempt to roll back all manner of environmental and worker protections that are erroneously seen as threatening corporate profits and economic growth. This administration and Congress abhor not just specific regulations, but the fact that regulations exist at all.
One of President Trump’s first actions after taking office was signing an executive order stipulating that for every new regulation issued by an executive branch department or agency, at least two prior regulations must be eliminated to offset any new costs. Another executive order directed the Treasury Department to deliver an outline to the White House for scaling back financial regulation within 120 days. These have coincided with bills attempting to repeal important provisions of the 2010 Dodd-Frank Act, which was enacted to prevent a recurrence of the conditions that led to the 2008 financial crisis. If these weren’t enough, the Regulatory Accountability Act, passed by the House in early February, is designed to interfere with and stall the process for enacting and improving all executive agency regulations to render them as toothless as possible.
Should the SEC or Congress proceed as expected, policymakers will need to hear from the public that corporations and their stakeholders are well served by current SEC rules. As the situation develops, Clean Yield Asset Management will share information with our clients and seek your assistance in lobbying the appropriate officials to resist all attempts to silence the voice of small shareholders.
“Why Washington’s Anti-Regulation Agenda Will Hurt the Economy,” by Mindy Lubber, GreenBiz.com, February 16, 2017.
2016 Report on US Sustainable, Responsible and Impact Investing Trends, US SIF: The Forum for Sustainable and Responsible Business.Tags: Business Roundtable, Dodd-Frank, President Trump, Regulatory Accountability Act, SEC, Securities and Exchange Commission, shareholder activism, shareholder advocacy, U.S. Chamber of Commerce