US SIF engages with SEC as it reviews rules on conflicting shareholder proposals

Socially responsible investors in the US representing more than $2trn in assets are urging the Securities and Exchange Commission (SEC) to re-interpret US proxy voting rules so that shareholder proposals can no longer be automatically excluded when a company decides to “match” them – as occurred in the Whole Foods case which sparked off a top-level review of the whole process.

Last January, SEC Chair Mary Jo White ordered a review of so-called Rule 14a-8(i)(9), which allows a company to exclude a shareholder proposal that “directly conflicts” with one from management.

The review was prompted by the actions of retailer Whole Foods, which, after receiving a motion from activist investor Jim McRitchie seeking proxy access – that is the right to nominate board directors – announced a similar proposal for its annual general meeting (AGM).

Whole Foods asked the SEC for permission to exclude McRitchie’s proposal under the rule and got it.

But following protests from McRitichie and the SRI community, White froze the rule’s enforcement so it could be reviewed.

This had the effect of preventing companies from excluding shareholder proposals during the 2015 US proxy season through the matching tactic.

White herself has likened the tactic to “gamesmanship.” The freeze on the rule also boosted New York City Comptroller Scott Stringer’s Boardroom Accountability Project to promote proxy access.

According to Stringer’s office, more than 60% of the 59 companies for which there are voting results now allow shareholders owning 3% of the share capital for three years to nominate board directors.As part of its review, the SEC has solicited comments from companies and investors.

Lisa Woll, Chief Executive of the US SIF: The Forum for Sustainable and Responsible Investment, in a submission signed by SRI investors with more than $2trn in assets, essentially calls for maintaining the freeze.

Woll writes: “The potential for exclusion under Rule 14a-8(i)(9) should not apply to shareholder proposals submitted prior to the public announcement of an allegedly conflicting management proposal.”

The letter also recommends that when a binding shareholder proposal conflicts with one from management, the shareholder should be given the option of making the proposal advisory. Furthermore, when using the “direct conflict” argument to exclude shareholder proposals under Rule 14a-8(i)(9), companies should explain to the SEC how specifically they do so.

Speaking for companies, the corporate CEO lobby Business Roundtable argues that Rule 14a-8(i)(9) ensures that shareholders are not confused by two similar proposals.

At a meeting of its Investor Advisory Committee earlier this month, the SEC’s Deputy Chief Counsel Jonathan Ingram said that while the staff had completed its research into Rule 14a-8(i)(9), a decision on its interpretation had not been made.

In related news, the board of US pharmaceuticals distributor McKesson says a proposal to grant proxy access to those who own 3% of its share capital for three years was approved at its AGM on July 29. Link to comments.