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US investors meet SEC’s Gallagher to make case for shareholder resolution process

Engagement with regulator amid fears of erosion of right to file resolutions

US investors, worried about a “coordinated” threat to their right to file resolutions at company annual meetings, have met with sceptical Securities and Exchange Commission official Daniel Gallagher to argue that the system is not broken as claimed.

SEC Commissioner Gallagher sparked concern among SRI investors in March with his remarks that the process had been hijacked by “activist investors and corporate gadflies”. This was followed by various other comments in the media from NASDAQ officials, culminating in a petition from business lobby group the US Chamber of Commerce, supported by the American Petroleum Institute and the Financial Services Roundtable, calling on the SEC to review and change the proxy rules.

“We are witnessing a coordinated buzz about so-called ‘problems’ with the shareholder resolution process led by SEC Commissioner Daniel Gallagher,” said Walden Asset Management’s Director of ESG Shareowner Engagement Tim Smith.

It was ironic, Smith said, that the opposition came as many shareholder initiatives on ESG were reaching “new highs” of shareholder support at AGMs: “Perhaps it is this traction at the ballot box that has stimulated the attempt to roll back shareholder rights.”

“In May we met with Commissioner Gallagher to put our case on the record,” Smith said in a Walden newsletter. “We are confident that Walden and the institutional investor community will make a persuasive case that the existing shareholder resolution process is not broken.”Smith said he suspects the Chamber hopes the SEC will open the door to a review that would lead to “multiple radical changes limiting the influence of shareholders.”

To counter this, Walden will explain how shareholder proposals on ESG matters often raise issues with a direct impact on long-term shareholder value (e.g. climate change risk and board oversight).

“We will make the case that fiduciary duty compels us to raise these matters that address long-term risk and brand reputation. And finally, we will argue that sometimes voting support is modest in early years but later garners significant shareholder backing as knowledge about an issue accumulates.”

Walden’s peer Trillium Asset Management has also taken to the media, this time on corporate political transparency. It follows an editorial last month in the Wall Street Journal (Good News in the Proxy Wars) that argued that “the left’s” campaign to get more disclosure about corporate political spending was “falling flat”. Trillium’s Jonas Kron and Bruce Freed, president of campaign group the Center for Political Accountability (CPA), responded in a letter to the paper saying it misrepresents their work.
“The editorial makes a case that corporate political spending is critical to a company’s success but should not be disclosed to its shareholders or the public. It is an odd position for a newspaper dedicated to informing investors of the benefits and risks of corporate business decisions,” Kron and Freed write. They add that secret political spending was “distorting markets, harming competition and exposing companies” to political risk.