The Securities and Exchange Commission (the “Commission”) is
on the verge of a November 5, 2019 rulemaking regarding the shareholder
proposal process, driven by a well-funded disinformation campaign by the
Business Roundtable (BRT), National Association of Manufacturers and U.S.
Chamber of Commerce (“Chamber”). Below we provide a reality check on the myths
and materially misleading interpretations and statements being proliferated by
those organizations. Many investors have previously submitted information to
the Commission, including the docket of the Proxy Process Roundtable,
correcting each of these myths.
Myth: The shareholder proposal process
is costly or distracting.
Reality: The shareholder proposal
process is one of the least costly ways of alerting companies and their
investors to emerging issues and improving governance.
Most shareholder proposals
seek to warn a company and its investors about emerging issues relevant to the
firm’s long-term sustainability, and/or to improve governance, disclosure, risk
management or performance. The evidence strongly supports the market’s
conclusion that such actions are value creating, and can provide an early
warning of issues that may portend bankruptcy or lost opportunities.
• A study of climate change disclosures, one of
the most common issues raised in shareholder proposals, shows that engagement
through the shareholder proposal process improved companies’ disclosure of
climate change-related issues, and that such climate change disclosures
increased market valuation of those companies.[1]
A recent study[2]
that looked at 847 engagements with 660 companies around the globe over a
decade (2004-2014) found that successful engagements — those that did improve
environment, social and governance (ESG) performance — were correlated with
higher sales growth without changing profitability. Moreover, a portfolio of
firms that were engaged by shareholders outperformed a matched portfolio of
companies that were not engaged by 4.7 percent.
Another study[3]
which examined 2,152 ESG engagements at 613 publicly traded firms over a decade
(1999-2009), also found that the companies that were the subjects of these
engagements had higher abnormal returns of around 1.8 percent during the year
following the engagement, and the successful engagements were associated with
higher abnormal returns of 4.4 percent over the following year (and zero for
the unsuccessful ones).
• The Commission’s shareholder proposal rules,
including recent staff implementation, have stringent regulatory guardrails to
prevent proposals from diverting attention to trivial matters. In particular,
the recent emphasis on requiring the topic of a proposal to be relevant and
“significant” to a company prevents a trivial proposal from surviving the no-action
process.
• The shareholder proposal process is far less
costly than alternative processes for raising similar issues. When shareholders
are unable to effectively engage investee companies using proposals, they are
required to fall back on other strategies including voting against directors,
lawsuits, books and records requests, litigation, and requests for additional
regulations.
• The Business Roundtable has dramatically exaggerated
the cost to companies. This includes efforts to exclude proposals, as well as
the costs of publication and opposition to a shareholder proposal. Any costs
associated with seeking the exclusion of shareholder proposals through the
SEC’s no-action process are voluntary expenditures by companies.
• In the end of the process, most proposals
are advisory in nature. Even if a proposal’s recommendations are
supported by a majority of shareholders, the board and management are not
legally mandated to take any action in response.
Myth: The shareholder proposal process
has run amok.
Reality: The shareholder proposal process is working
steadily, within guardrails provided by SEC Rules. It is an effective tool for
protecting investor interests, as reflected in rising levels of voting support
for environmental, social and governance proposals.
• The
number of proposals or resubmissions has not increased in a manner that
justifies a rulemaking. There is no surge in shareholder proposals filed,
resubmitted or voted upon. According to Broadridge[4] the number of shareholder proposals submitted
for a vote in 2019 was the lowest in the last five years: from a high of 549 in
2015 to 420 in 2019. The number of environmental and social proposals put to a
vote rose slightly from 110 in 2018 to 115 in 2019.
• The
most significant change in recent years is a surge in voting support by
investors for both governance and environmental or social issue proposals.
The success of the existing shareholder proposal process in providing
opportunities for investors to support improved corporate governance and
performance on social and environmental factors is a poor justification for a
rulemaking to constrain the process.
• The number of proposals filed by so-called
“gadflies” – individuals who file multiple proposals on corporate governance –
are at a historical low. The proportion of proposals filed by these
shareholders has fallen from near 100% in the 1950s when the shareholder
proposal rule was first instituted, down to 30% of proposals filed in 2019. The
proposals filed by small shareholders catalyze valuable changes that benefit
the company and all shareholders. Improved governance systems have been
implemented by hundreds of companies and even adopted as SEC rules. Many large
asset owners and managers who never file shareholder proposals vote in favor of
environmental, social, and governance proposals filed by smaller shareholders.
Myth: Proxy statements are packed with
unsupported “zombie”
proposals re-filed despite opposition by
investors.
Reality: Few proxy statements contain poorly-supported
proposals repeated year after year.
The existing rules require
that a new shareholder proposal win at least 3% voting support to be
reintroduced after it has been voted on. To be reintroduced a second year
requires a 6% vote in favor, and after a third year, requires a 10% vote. The
BRT and Chamber have advocated a sharp increase in these thresholds -- 6% the
first year, 15% the second year, and 30% the third year.
• In practice the
BRT proposed thresholds, under consideration by the Commission, would have barred numerous successful
proposals in recent years from the opportunity to win support. Proxy access
provides an illustration. A proxy
access proposal, (granting investors the right to nominate board directors to
appear on the proxy) received 4.4% support the first year it was filed at
Netflix (2013), but won a majority vote when refiled two years later (2015).
The Board finally enacted proxy access in 2019. The same patterns applied at
Cisco and Citigroup, where support jumped significantly from below 6% when the
proposal was first filed (2014: 5.4% Cisco, 5.5% Citigroup) and then winning huge
a majority of support in a second filing (2015: Cisco 64.7, Citigroup 86.9%).
Cisco adopted proxy access in 2016, and Citigroup in 2019.
• The change in thresholds would undermine the
ability of shareholder proposals on emerging issues to gain support over time.
From 2011-2018, shareholders re-filed only 74 proposals (out of thousands of
proposals) that had garnered less than 6% support at their first presentations
at annual meetings. Eight of those 74
proposals, or roughly 10%, earned substantially larger support the second time
they were submitted, including several
that achieved majority support when submitted a second time. The
continuation of a total of 74 proposals during this timeframe in order to allow
10 of them to garner significant support is not inappropriate; it represents a
functional marketplace of ideas.
• Many
proposals that garnered substantial support upon re-filing would have been
excluded if the second and third year thresholds were raised to 15% and 30%. Among governance proposals from 2011 to 2018 this
includes: six for an independent board chair (UMB Financial, American Express,
AutoNation, Chevron, Wendy's, and KeyCorp), twelve proposals seeking disclosure
of political contributions or lobbying payments (Wynn Resorts, Allstate, Republic
Services, Nike, FedEx, Express Scripts, Charles Schwab, IBM, Citigroup,
Verizon, UnitedHealth Group, and Devon Energy), three proposals urging One
Share One Vote (Alphabet, United Parcel Service, and Telephone and Data
Systems). Shareholders who were prepared
to support these proposals upon the re-filing would have been denied their
rights to do so if re-filing thresholds had been increased, especially if third
year resubmission thresholds exceeded twenty percent.[5]
• The corporate trade associations assert that
proxy statements are crowded with “zombie” proposals rejected by shareholders
year after year. But in reality, submissions of proposals for a
third or fourth time are very rare. From 2011-2018, shareholders resubmitted
environmental and social issue proposals only 35 times after receiving votes
under 20% for two or more years. Over
this past decade, this affected only 26 companies. Only one third of the
proposals that received less than 6% support when submitted the first time were
resubmitted a second time. This small number of resubmissions does not justify
a rulemaking or change in the resubmission threshold.
• Poorly
performing proposals are already screened out by the current thresholds. 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%. These
proposals would be barred from resubmission.
Myth: The viability and legitimacy of shareholder
proposals can only be evaluated according to whether they are supported by a
majority of shareholders.
Reality: Productive shareholder engagement enabled by
the proposal process allows good ideas to emerge and improve company disclosure
and performance.
Minority shareholders filing
proposals often introduce new ideas that encourage improvements to governance,
risk management, disclosure, and performance at their companies through
effective engagement. According to the Interfaith Center on
Corporate Responsibility (ICCR), about one third of ICCR member proposals are
withdrawn because they produce effective engagement. Part of that
engagement is dependent on the ability of shareholder proponents to persist for
a second or third year, if necessary, to continue engaging with board,
management and fellow investors.
Myth: Silencing the voice of a significant minority of
investors in the shareholder proposal process would pose no harm to companies
and their investors.
Reality: The minority voice in company governance
often identifies emerging risks and prevents board and management from
jeopardizing a company’s future.
Shareholders that in aggregate account for 3% or 6% of
voting investors may hold a significant 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. [6]
Myth:
Raising the filing or resubmission thresholds would constitute
“modernization” of the proposal process to reflect
current times.
Reality: Current market conditions justify keeping or
even lowering current thresholds.
Modern conditions that did
not exist when the shareholder proposal rule was initially adopted do not merit
raising the filing or resubmission thresholds. In fact, modern market
conditions merit lowering the bar for
filing and for resubmission.
• The
average holding period for stocks has shrunk. Whereas in the 1950s,
investors bought and held for decades, by 2004 average holding period was 6
months. Even passive investors experience significant annual turnover of their
portfolios. According to one study, half of the companies in the S&P 500
Index are expected to be replaced over the next decade due to mergers and
acquisitions and other changes in the index constituents.[7]
• Encouragement
of diversified portfolios is contrary to higher filing thresholds. The
current threshold requires a shareholder to maintain at least $2,000 in
shareholdings in order to be able to file proposals. This places the
opportunity for filing of shareholder proposals within reach of an individual
with average holdings. But, increasing the amount of shares to be held would
conflict with the goal of ensuring that Main Street shareholders seeking active
engagement also maintain a diversified portfolio by limiting the number of
companies in a small shareholder’s portfolio.[8]
• The
growth in multi-class share ownership distorts vote counting. Undoubtedly,
if the CEO, board, and other insiders oppose the proposal, they will vote
against it. In many cases where companies have multi-class share structures,
company insiders represent a majority percent of the vote (while owning far
less in economic stake of the company). 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.
For additional documentation
see
[1] Caroline Flammer, Boston University, Michael W. Toffel
and Kala Viswanathan, Harvard Business School, Shareholder Activism and Firms’ Voluntary Disclosure of Climate Change
Risks, October 2019.
[2] Tamas Barko, Martijn Cremers, Luc Renneboog, “Shareholder Engagement on Environmental,
Social and Governance Performance,” European Corporate Governance
Institute, September 5, 2018.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2977219
[3] Elroy Dimson, Oguzhan Karakas, Xi Li, “Active Ownership,” June 4, 2013.
http://www.hbs.edu/faculty/conferences/2013-sustainability-and-corporation/Documents/Active_Ownership_-_Dimson_Karakas_Li_v131_complete.pdf?pwm=6295
[5] Brandon Whitehill, Clearing the Bar: Shareholder Proposals and
Resubmission Thresholds, CII Research and Education Fund, November 2018.
[6] Sanford Lewis, Shareholder Proposals at Monsanto Were
Warning of Troubles Ahead for Bayer's Acquisition, https://www.investorrightsforum.com/new-blog-1/shareholder-proposals-at-monsanto-were-warning-of-troubles-ahead-for-bayers-acquisition
[7] Scott Anthony, et.
al, “2018 Corporate Longevity Forecast: Creative Destruction is Accelerating,”
Innosight, February 2018.
[8] Christine Jantz, “Considering the Effect of Filing Thresholds on Main Street Investors”,
Sept. 2019. https://www.investorrightsforum.com/new-blog-1/christine-jantz-considering-the-effect-of-filing-thresholds-on-main-street-investors