SEC Moves to Propose Limits on Shareholders' Voices

November 5, 2019

Do the new rules modernize investor relations, or undermine executive accountability, and ESG?

By Eve Tahmincioglu

The Securities and Exchange Commission Tuesday voted to propose new shareholder rules that would make it more difficult for investors to try and push companies to make changes, including things like environmental and social improvements.

The proposed rules include increases in the time an investor has to hold a stock before they’re able to submit proposals in the company’s proxy statement, and also limits the number of proposals. They also include restrictions on when proxy advisors can share their advice with investors.

SEC Chairman Jay Clayton described the new rules as a modernization of the proxy process. “The proposed amendments would facilitate constructive engagement by long-term shareholders in a manner that would benefit all shareholders and our public capital markets,” he said in a statement.

However, the SEC vote, which broke down 3 to 2 in favor of putting the new rules out, was met with derision from investor advocates, including pushback from the two SEC commissioners who voted against the proposed rules.

“This makes it much less likely investors will be able to hold management to account,” stresses SEC Commissioner Robert Jackson Jr.

Jackson also speculates that the new hurdles could impact corporate governance. “When shareholders have a complaint with management and the SEC don’t give them a chance to vote on that subject, what do they do? The answer may be withhold votes, votes against directors,” he explains. (Jackson put out a statement on the vote.)

Some see it as a blow to the environmental, social and governance (ESG) movement.

“The shareholder proposal process has been one of the most important factors in putting ESG at the top of the agenda at U.S. companies – and it’s working. U.S. companies are paying more attention to issues such as climate change and diversity, which, as the evidence shows, improve long-term returns,” says Will Martindale, director of policy and research with Principles for Responsible Investment, a UN-based responsible investment body representing investors with more than $86.3 trillion in assets under management. “We now know unequivocally that ESG issues are financial issues.”

But business advocates see it as a boon for corporations and investor communications.

“The current structure allows special interest activists to push narrow agendas even when shareholders have repeatedly rejected those proposals,” says U.S. Chamber Center for Capital Markets Competitiveness Executive Vice President Tom Quaadman. “These new SEC reforms will help improve communication between investors and businesses. Ultimately, these changes will allow the will of the majority to prevail.”

Here are some highlights of the proposed rules.

In particular, the proposed amendments to Rule 14a-8(b) would:

~ update the current requirement that a shareholder-proponent hold at least $2,000 or 1 percent of a company’s securities for at least one year to be eligible to submit a proposal. In addition to eliminating the 1% threshold, the proposal would amend the rule with the following three alternative thresholds, any one of which a shareholder could satisfy to be eligible to submit a proposal:

  • continuous ownership of at least $2,000 of the company’s securities for at least three years;
  • continuous ownership of at least $15,000 of the company’s securities for at least two years; or
  • continuous ownership of at least $25,000 of the company’s securities for at least one year.

~ require that a shareholder-proponent who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the shareholder-proponent’s behalf and to provide a meaningful degree of assurance as to the shareholder-proponent’s identity, role and interest in a proposal that is submitted for inclusion in a company’s proxy statement; and

~ require that each shareholder-proponent state that he or she is able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal, and provide contact information as well as business days and specific times that the shareholder-proponent is available to discuss the proposal with the company.

Go here to see more of the proposed changes.

There is a 60-day public comment period and those interested can submit comments using the SEC’s Internet submission form or send an email to rule-comments@sec.gov.