Securities and Exchange Commission kicks off rethink of shareholder proposals process

Chairman Clayton announces roundtable looking at entire proxy process

The Securities and Exchange Commission, the US regulator, has kicked off a re-think of the shareholder proposals process, as part of a wider look at the entire proxy process.

Up for grabs could be the costs of proposals, the threshold for minimum ownership needed to submit proposals, rules about resubmitting proposals, the role of retail investors and even whether “meaningful ownership” can be shown by ways other than the size and duration of a shareholding.

Also under the spotlight, at a roundtable announced by SEC Chairman Jay Clayton, are the voting process itself, the role of proxy advisory firms and technology such as blockchain.

“All shareholders, as the ultimate owners of the company, bear the costs associated with management’s consideration of a proposal and its inclusion in the proxy statement,” Clayton said. The event will take place in the autumn, although the details have yet to be finalised.

He said that many believe investor engagement has enhanced company performance – and that the costs of the process could be significantly reduced “without limiting (and potentially increasing) the benefits of shareholder engagement”. He also noted that it is a “small group of shareholders” which submits a significant percentage of shareholder proposals each year. Areas Clayton identified as warranting attention:

  • Whether the current thresholds for minimum ownership to submit a proposal appropriately consider the interests of all shareholders, taking into account the potential costs/benefits. He also flagged up whether rules that allow companies to omit resubmitted proposals, depending on their levels of support, are appropriate.
  • “Whether meaningful ownership in the company can be demonstrated by factors other than the amount invested and the length of time shares are held.”
  • Whether the voices of long-term retail investors are appropriately represented in the shareholder proposal process and in the “shareholder engagement dynamic more generally”.

Noting that shareholder engagement is a hallmark of US public capital markets, Clayton said the proxy process is a “fundamental component” of that engagement, and that 72% of S&P 500 companies now report engagement with shareholders – up from just 6% in 2010.Beyond looking at shareholder proposals, Clayton flagged up issues around the voting process itself, highlighting over-voting and under-voting of securities, “empty voting”, vote confirmation and the costs of distributing proxy materials and communication with shareholders more generally.

As for proxy advisory firms, Clayton highlighted a range of areas of attention such as potential conflicts of interest and the “appropriate regulatory regime” for them. He asked whether prior SEC guidance should be “modified, rescinded, or supplemented”.

His statement referenced a client note from law firm Gibson Dunn earlier this month which said shareholder proposals “continue to be used by certain shareholders and to demand significant time and attention” – although it also said that average support for proposals voted on increased to 32.7%, “suggesting increased traction among institutional investors”.

Gibson Dunn found that social and environmental proposals represent 43% of all proposals submitted – with climate change being the largest category (getting average support of 32.8%) and board diversity a topic with “continuing momentum”.

The firm also flagged up the PX14A6G (“exempt solicitation”) filings, where investors can communicate with other investors. These are up 43% in 2018 from 2016, driven by activity from investor activists like John Chevedden (although big institutions like CalPERS and SRI firms also use it). Gibson Dunn said the PX14A6G filings are “prone to abuse because they have, to date, escaped regulatory scrutiny”.

The latest SEC scrutiny comes as a new body, the corporate-funded Main Street Investors Coalition is looking, in the words of sustainability advocacy group Ceres, to “undermine critical shareholder rights”. Governance pioneer Nell Minow went even further, slamming MSIC for its “inflammatory language, unsupported assertions, and out-and-out falsehoods”.

Meanwhile, faith investment group the Interfaith Center on Corporate Responsibility (ICCR) has hailed 2018 as a “year of great accomplishment” in terms of using the proxy process to move companies on ESG themes.

“In spite of uncertainty generated by new proxy protocols at the SEC, strong support for our members’ resolutions helped secure corporate commitments on issues such as ethical recruitment, methane emissions reductions, gun safety and opioid accountability, the ICCR said.