Paul Hodgson: SEC’s proposed shareholder proposal regs? Drop them in the public interest

How the SEC’s attempt to all but ban shareholder proposals could have disastrous effects

A shareholder proposal calling for a report on US meat company Tyson Foods’ human rights due diligence received the support of 57% of publicly held shares. 

But, because Tyson Foods has dual class shares, with the Tyson family holding 89% of the voting power, the ‘official result’ was just shy of 15%. The proposal would have therefore failed the SEC’s new resubmission threshold and could not be resubmitted.

But was such a proposal necessary?

“In the time since the vote,” says a case study written by shareholder advocate the Shareholder Rights Group and the coalition of faith-based investors the Interfaith Center on Corporate Responsibility (ICCR), “more than 9,937 Tyson employees at 37 poultry, pork and beef plants in seven states have tested positive for COVID-19, an infection count reported to be more than double that of any other meatpacker.” 

Plants were forced to close, despite a presidential executive order that they stay open and, as of early July, more than 25 Tyson workers had died from the virus. Lawsuits are already being filed by the families of these workers. “The fallout from the company’s poor handling of human rights during the pandemic,” continues the case study, “and related supply chain disruption has damaged shareholder value, and the company is likely to continue to face extraordinary expenses due to human rights violations.”

The case studies accompany a comment letter sent to the US Securities and Exchange Commission that is endorsed by US sustainability non-profit Ceres, the Council of Institutional Investors (CII), trades union AFL-CIO, ICCR, US SIF: The Forum for Sustainable and Responsible Investment, the Shareholder Rights Group and the Sustainable Investments Institute (Si2).

Issued in November last year, the SEC’s proposed amendments to the shareholder proposal process raises ownership requirements and increases support thresholds that would allow proposals to be resubmitted in subsequent years. 

Because they were issued in November, the proposed regulations could evidently not account for new risks associated with the pandemic or the Black Lives Matter movement’s calls for diversity and inclusion. But shareholders were already aware that companies were not prepared for such new risks and – as the case study cited above demonstrates – were calling on companies to prepare for them, “in some cases well before general market awareness of their scope and intensity”.

Rehearsing often cited arguments, the comment letter notes that support for new proposals is “often understandably low in early years” and may take some time to increase, but, as the current season demonstrates these so-called ‘unpopular’ proposals can and do win majority support.

The SEC’s proposed rules alleged that some 37% of proposals would be eliminated but offered no justification for this elimination beyond what the letter describes as “a meagre $70.6m (less than €60m)” savings for companies. In contrast, it notes, a single shareholder proposal “can result in multiple millions of dollars of positive value or avoided loss to shareholders”.

Rather than relying on the SEC’s probably faulty estimates, Si2 has updated from February its analysis of the effects of the new resubmission thresholds which raise the current 3% and 10% levels to 15% and 25%. The new thresholds would prevent 27% of social and environmental shareholder proposals voted in 2020 from being resubmitted in 2021. Under existing rules, only 9% couldn’t be resubmitted.

The largest number of proposals that would be blocked are requests for disclosure of political contributions and lobbying expenditures, said Si2, but notes that three-quarters (42 of 56) of this kind of proposal in the latest proxy season earned more than 30% support, with majority votes at six companies.

Nearly half the shareholder proposals on decent work issues in 2020 – most focused on gender and race pay disparities – would have missed the proposed 15% and 25% thresholds, even though some received huge majority support.

Si2’s analysis also looked back at what effects the proposed regulations would have had on shareholder proposals over the last 10 years. The effects on board ESG matters (“board diversity plus requests for board member oversight and/or expertise on specific issues”), for example, were the most dramatically affected. Almost half, 46%, of such shareholder proposals voted from 2010 to 2020 would have been kicked out.

In addition to the new resubmission thresholds, the SEC’s proposals call for a new ‘momentum’ rule, which would kick out proposals if there was a decline in support of 10% or more. This would affect a “vanishingly small number of proposals – just 16 out of 2,193 voted since 2010” says the letter, “demonstrating that there is simply no evidence that such a rule is necessary, appropriate or justified. Rather, it appears designed to assuage a narrow interest group of a few companies and should be dropped in the public interest.”

Moving to an analysis of the new ownership requirements, that require a higher level of ownership over a longer period, the letter concludes that: “Specifically, at least nine proposals in the 2020 proxy season that garnered the support of the majority of the company’s shareholders could not have been filed if the proposed ownership thresholds were in effect.”

In additional cases studies, the group cites resolutions at Facebook on its inability to control hate speech which led to a value-destroying advertising boycott by many major companies and organisations following the police killing of George Floyd, as well as a whistleblower resolution at Alphabet (Google). While it is true that the proposed new ownership requirements and resubmission thresholds take no account of companies with outsize voting influence for founders or families through the use of dual class shares – the case at Tyson, Facebook and Alphabet – it would have been an effective addition to the case studies had the group featured a company with one vote one share.

The comment letter concludes with three final complaints. First, the SEC claimed that technological advances, such as social media, had replaced the need for shareholder proposals but offered no evidence for this. 

In the second, it accuses commissioner Elad Roisman, the main ‘author’ of the new regulations, of designing the proposed rule changes specifically to prevent the filing of E&S resolutions rather than governance proposals, continuing the current SEC’s war on social and environmental issues.

In the third, it cites further proposed changes to Regulation S-K, the regulation that governs material and financial disclosures made by companies. Because it has been steadily moving towards principles-based disclosures rather than prescriptive ones that might be of some use to investors, the letter says the SEC should have costed the fact that even more shareholder proposals demanding material disclosures would be necessary.

One is tempted to ask whose side this Commission is on. The signatories of this letter are in no doubt.