“Stop the SEC: This is Not the Time to Slash Shareholder Rights and Reduce Oversight of Companies”

Illinois State Treasurer Michael Frerichs calls on commissioners to rethink plans to amend SEC Rule 14a-8

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During this time of uncertainty, with COVID-19 jeopardising people’s health, up-ending people’s lives, and creating turmoil in the financial markets, we all seek assurances that institutions we’ve come to depend on will keep working effectively. 

That’s why I am concerned that the US Securities and Exchange Commission (SEC), whose mission is to protect investors and maintain fair and efficient markets, will soon approve a proposed rule that would impede those functions.

The proposed rules would make it much harder for investors to manage risk at a time when systemic threats, including climate change and global pandemics, loom over the economy and companies’ long-term prospects.

The SEC has proposed amendments to its rule governing shareholder resolutions. These changes represent a direct attack on the rights of shareholders. The amendments would limit investors’ ability to file proposals for inclusion on a company’s proxy ballot for a vote by all shareholders. The proposed changes would increase share ownership requirements for investors seeking to file resolutions, as well as increasing the percentage of supporting votes a shareholder resolution needs in order to be resubmitted. They would also forbid investors from pooling shares to qualify for filing, and restrict proxy advisor firms’ objectivity.

These changes may seem minor at first glance, but they would eliminate a multitude of shareholder proposals from proxy ballots. One study shows that the resubmission change alone would have eliminated a third of all shareholder proposals filed between 2004 and 2017. This is not conducive to a transparent and functioning proxy system for investors and publicly-traded companies. 

The shareholder proposal process, as currently structured, provides an orderly and cost-effective means for investors to communicate with companies on risks and opportunities of material interest. It allows investors to signal issues of concern in the interest of enhancing long-term company value. Additionally, it provides a framework for companies to respond to owners with information about their strategy, governance and risk management approaches.

The proposed changes would undermine this process, stifle constructive dialogue on critically important governance topics, and disenfranchise ’main street’ investors with fewer assets.  

Shareholder resolutions, which are non-binding recommendations to a company’s management, are one of the few tools investors have to hold companies accountable and request information that is material and relevant for investors as they make decisions about their investments. The proposed rules would make it much harder for investors to manage risk at a time when systemic threats, including climate change and global pandemics, loom over the economy and companies’ long-term prospects. 

For example, one significant risk that investors – and the public at large – are concerned about is climate change. Investors want to know how companies are mitigating climate risk and addressing the need for a Just Transition for relevant workers. Within the current process, companies have been able to gain insights and generate increased shareholder value through dialogues on these sustainability topics and many others.

Shareholder resolutions on sustainability issues have received record amounts of support in recent years, garnering an average vote of 29% of shares voted in 2019, according to Morningstar. Many of these proposals may not have been brought to a vote if the rule changes had been in effect. Yet in 2019, the result of 39% of 141 climate-related proposals tracked by Ceres was a commitment by the company to address the request in the proposal. In fact, resolutions often lead to dialogues between companies and their investors that help companies prepare for the future.

As the Treasurer of the State of Illinois, I am responsible for safeguarding and prudently investing $30bn on behalf of taxpayers, college and retirement savers, and local government entities. Thus, I am concerned that these unnecessary, heightened restrictions will stifle investor protections and efforts to improve transparency.

The shareholder resolution process has worked well for more than half a century. It has brought investors and companies together to collaborate on opportunities to enhance value and create meaningful dialogue on material risks and opportunities. 

Now is the wrong time to disrupt a well-functioning system, and simultaneously restrict transparency in the capital markets and limit investors’ ability to manage investments. 

I urge commissioners to rethink efforts to amend SEC Rule 14a-8.

Michael W. Frerichs is Illinois State Treasurer