Column: The SEC is trying to stifle shareholders’ right to challenge corporate managements
For all the lip service that corporate executives pay to the principle of honoring shareholder rights and interests, it’s not uncommon for them to signal that their lives would be easier if they didn’t have to deal with busybody investors.
That’s the subtext of a pair of rules the Securities and Exchange Commission is pondering that would “limit public-company investors’ ability to hold corporate insiders accountable,” according to SEC Commissioner Robert J. Jackson Jr.
So said Jackson, one of the two Democratic members of the commission, when he voted against the proposed rules in November.
The SEC majority doesn’t see the rules the same way. It describes the rules as “modernizing” the process by which shareholders can submit proposals for votes at corporate annual meetings, and ensuring that institutional investors get the most accurate and objective information from proxy advisory firms they hire to guide them on how to vote on the measures. Both rules are open for public comment through Feb. 3.
One point is indisputable: Many corporate managements desperately want the rules to pass, and shareholder activists are solidly against them.
That’s not too surprising. The rules would make it much harder for activists to place proposals on the agendas, or proxy statements, of annual meetings. The SEC’s analysis states that the proxy proposal rule would reduce the number of proposals by about 37% and save public companies tens of millions of dollars a year in corporate expenses.
The rules also would put a leash on proxy advisory firms — especially the two big firms, Institutional Shareholder Services and Glass Lewis & Co. — by requiring them, among other mandates, to share their advisory opinions with company managements for comment before submitting them to clients.
The shareholder resolutions most often at issue for corporate managements cover such issues as separating the chairman and CEO jobs to improve accountability, disclosing potential environmental issues, or complying with social principles on subjects such as firearm or tobacco sales.
Activist shareholders argue that these are legitimate, even essential, topics to raise with managements. But executives sometimes complain that they interfere with the proper management of their companies and don’t often win over a majority of shareholders even when they’re repeatedly resubmitted year after year.
That’s a false standard, says Sanford Lewis, director of the Shareholder Rights Group, which has submitted comments to the SEC criticizing the rule changes. Although shareholder resolutions are advisory only, any sign of shareholder discontent can prompt managements to take them seriously.
“A lot of engagements between shareholders and managements happen when there’s a 10% vote,” Lewis says. “Some managements might think that means enough shareholders want them to address an issue.”
As for the proxy advisory firms, although they recommend voting with management some 90% of the time, they can generate sizable votes in opposition to management initiatives or pay when they recommend “no” votes.
We last reported on the proposals to limit shareholder resolutions and tighten regulations on advisory firms in 2018. Although the rules were then still in the formative stage, corporate America had launched an aggressive and markedly sleazy campaign in their favor. This involved the creation of something called the Main Street Investors Coalition.
Although the group identified itself as a protector of the small investors’ interests, in fact it was a front for the National Assn. of Manufacturers, the board of which bristles with executives from corporations such as Exxon Mobil, General Electric, General Motors and Koch Industries.
Another backer was the 60 Plus Assn. That organization might sound like a grass-roots group, but it’s a right-wing advocacy organization that has been associated with the Koch brothers’ network and has promoted pharmaceutical industry interests and advocated against the Affordable Care Act.
The Main Street Investors Coalition seems to have disappeared — its website is effectively blanked out — but its style of behavior hasn’t disappeared. In November, when the SEC voted to place the rule changes up for comment, SEC Chairman Jay Clayton boasted of the support for the measures the agency had received from “long-term Main Street investors, including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single mom, a couple of retirees who saved for retirement.”
As Bloomberg subsequently reported, many of the letters bore signatures of people who said they hadn’t written them, or came from relatives of officers of, yes, 60 Plus. This caused some discomfiture for Clayton when he aired out the same “Main Street” spiel at a hearing before the Senate Banking Committee on Dec. 10.
“You got duped,” Sen. Chris Van Hollen (D-Md.) lectured Clayton. “You should be cautious before you say this is the top priority of Main Street investors; this is the top priority of a lot of corporate CEOs who don’t want to be second-guessed.”
“I still believe we’re looking out for Main Street investors,” Clayton replied sheepishly.
There may be reasons to tighten regulations on proxy advisory firms, whose recommendations are sometimes followed slavishly by institutional investors such as pension agencies and index funds unwilling or unable to research every shareholder proposal submitted to thousands of public companies.
“It’s time for the SEC to take a deep dive on the proxy advisory industry,” David F. Larcker, a governance expert at Stanford’s Graduate School of Business, told me. “Do they have practices and processes that really enable them to render expert advice? It’s hard to tell whether their recommendations are correct or not.”
He notes that there is little research examining whether their past recommendations have been borne out in the performance of their target companies.
As for shareholder proposals, Larcker says it may make sense to find a way to “distinguish nuisance proposals from really substantive ones. Let’s make sure that the people bringing these proposals forward have an economic interest in the outcomes.”
Yet there’s little evidence that the proxy advisors have systematically advanced erroneous judgments, and no evidence of a surge in shareholder proposals that would warrant erecting new barriers. “These are solutions in search of a problem,” says John Chevedden, a veteran shareholder activist.
Nevertheless, the SEC’s rule changes would knock many activist shareholders off the field. First, they would sharply raise the required ownership of those proposing shareholder resolutions. Under the existing rule, anyone who has held 1% or $2,000 in a company’s stock for at least a year is eligible to submit a proposal. The new rule would raise that to $25,000 if held one year, $15,000 if held for two years, and $2,000 if held for three. It would also prevent small shareholders from aggregating their holdings to meet the thresholds.
The proposed rule also would raise the bar for resubmitting shareholder resolutions by increasing the level of support they must show to be accepted in subsequent years. Currently, resolutions must win approval of 3% of shareholders to be accepted a second year, 6% for a third year and 10% for a fourth or fifth year.
The new rule would set the thresholds at 5%, 15% and 25%, and allow managements to exclude a resolution in the fourth year or thereafter if it failed to win a majority of votes and also suffered a decline of 10% or more from the previous year.
Shareholder activists say those terms fail to recognize what it takes to build a head of steam behind many resolutions over time. At the troubled Wells Fargo, for example, a shareholder proposal urging the separation of the CEO and chairman posts was resubmitted for more than eight years under the old rules, peaking at 37.8% approval in 2012 and floated down to 17.2% in 2016 — but the bank actually followed the recommendation in 2017. Under the new rules, the shareholder proposal would have failed to appear on the proxy after 2013.
At Chevron, Lewis points out, a shareholder resolution seeking corporate disclosure of leaks of methane, a greenhouse gas, reached 45% approval in 2018. Its rising approval over several years helped to prompt the company to announce “new measures to address methane management,” according to the Shareholder Rights Group comment to the SEC. But under the new rules, it would have been excluded from the proxy after 2014, potentially reducing an incentive for Chevron to meet the challenge of climate change.