“If you wanted to design a rule to strike from the proxy statement relatively high scoring proposals about political activity, which are currently getting more than 25% support, this is the rule you would write. It seems surgically designed to exclude these proposals.”
This is the conclusion reached by Heidi Welsh of the US-based Sustainable Investments Institute, from an analysis of the effects of the SEC’s proposed changes to resubmission thresholds for shareholder resolutions; the latest attempt by the SEC to interfere in the ability of shareholders to vote on what they want.
Welsh looked at what would have happened if the regulations’ proposed replacement of the old resubmission thresholds of 3%, 6% and 10% with 5%, 15% and 25% thresholds had been in effect in the past.
“Is it okay to write a rule that makes things easier for the very tiny club of persistently targeted companies? Does it help the capital markets, does it help boards make better decisions, does it help investors? Or does it just make meetings calmer for companies that are persistently challenged by their investors?" – Heidi Welsh
She looked at the last ten years of environmental and social proposals at all U.S. public companies, applying the proposed resubmission thresholds to each resolution, as well as if it were the same proposal and had failed any of the thresholds during the so-called cooling off period, the subsequent three years following its last submission.
Political activity proposals most affected
Welsh found that proposals on political activity were the biggest category and the largest number to reach a vote, but they would also be disproportionately affected by the new rules. Not as badly, but still disproportionately affected, were sustainability, climate change and other environmental proposals, along with human rights resolutions. Together these proposals represented almost three-quarters of all the resolutions that would have failed the tests under the proposed rules.
Altogether, almost a third of all E&S resolutions would have failed had the proposed resubmission thresholds been in place, according to Welsh’s analysis; 614 out of 2019 voted on in the period. Political activity resolutions, non-climate-related environmental and human rights proposals had the highest fail rates, at 17%, 20% and 19% respectively.
Welsh scathing about rule change
Welsh is scathing about the proposed regulations themselves as well as the perceived need for them: “The average number of proposals going to a vote at a company each year is between zero and two. If you parse that further and look at the number of companies with two or more social or environmental votes, on average, you end up with a very, very short list of companies; around a dozen—topped by Chevron and Exxon Mobil. You could call this the ‘Chevron/Exxon rule’,” she says.
Further she asks: “Is it okay to write a rule that makes things easier for the very tiny club of persistently targeted companies? Does it help the capital markets, does it help boards make better decisions, does it help investors? Or does it just make meetings calmer for companies that are persistently challenged by their investors? It’s skewing what you can even vote on. But that doesn’t mean that these issues will go away.”
Why corporations need resolutions off the ballot
Welsh has a theory, a convincing one, that is backed up by her analysis of the data, about why the SEC is bowing to corporate pressure on rules that no one else is questioning. “Investor dissent, measured by shareholder votes, is on the rise,” she says. “It is not true that there are more shareholder proposals, though; the total actually has shrunk. It’s fallen because some corporate governance issues that used to dominate have been accepted as best practice and so there are fewer resolutions on those issues. As that has happened, the number of social and environmental proposals as a proportion of the total has grown, while their support also has increased. This also helps to explain why the proportion of withdrawn proposals has gone up.”
In other words, the rule changes are needed because support for proposals is increasing and corporations want them off the ballot before they get to majority support; election interference in other words. “The way I read the data,” adds Welsh, “this is an effort to shut down the investor dissent channel.”
Arguments will end in the courts
Welsh also warned that the whole affair is going to land in the courts as shareholders, with their eyes on the results of the forthcoming presidential election, see the potential for another four years of whittling away at their rights and their power. “The thing that the rule is most vulnerable on is the economic analysis,” she says. “It’s very thin, and missing any discussion of benefits. It also accepts as gospel self-reported data from corporations who have an interest in skewing the analysis on how much money they spend each year dealing with shareholder resolutions. No one is required to hire Gibson Dunn,” she adds, referring to one of the law firms most commonly used by corporations to help persuade the SEC to allow them to exclude proposals.