Law Professor on Shareholder Proposal Reform

As you may have seen, SEC Acting Chairwoman Lee recently raised the possibility of a reviewing a recent rulemaking at the Commission around shareholder proposals. These announcements are also taking place in the backdrop of an unusually active proxy season.

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Professor Lawrence Cunningham argues the Commission should uphold those past reforms because they took sensible steps to align the interests of those submitting proposals with their fellow shareholders. He also points that a persistent issue in the proposal process, the fact that a small contingent of smaller shareholders routinely file the majority each season, may also warrant further attention from the Commission. One potential solution Professor Cunningham proposes is a cap on proposals for individuals and groups to prevent “cookie cutter” proposals and improve their quality.

Cap the Gadfly

In a series of public statements over recent months, Commissioners at the SEC have sparred over the proper role of shareholder input on corporate decision-making. Led by Acting Chairwoman Lee on one side and Commissioner Hester Pierce on the other, the partisan split at the Commission is now set on a serious tradeoff in corporate governance: the benefit that comes from a shareholder advocating for certain policies against the cost that doing so may impose on other shareholders.

Consider the rules governing 14-a8 shareholder proposal submissions. These let shareholders meeting certain eligibility criteria have relevant proposals included in a company’s proxy statement to all shareholders.

To address a clear imbalance in this tradeoff, last year the SEC made good progress on updating some outdated figures, which the new administration should uphold. First, the rule’s eligibility criteria have always required shareholders to own a minimum level of a company’s stock for a minimum period.  The minimum ownership used to be $2,000 in amount and at least one year in duration.

While those remain the minimums, subtler rules now apply: for small stakes like $2000 the minimum duration is three years; for stakes of at least $15,000 the minimum duration is two years; and only for stakes above $25,000 is one year duration enough.

Second, the rule limited a shareholder’s right to resubmit proposals year after year to those that had won a minimum level of shareholder support.  The resubmission rules used to require getting at least 3% on the first vote, 6% on the second, and 9% on the third. To align with the historical outcomes, the SEC has upped these thresholds to 5%, 15% and 25%.

The Issue With Shareholder Proposals

While these two rule changes are steps in the right direction, a larger problem persists: a small number of well-heeled gadfly investors file the vast majority of shareholder proposals and fewer than 10% of all ever secure a majority of the votes.

While there are millions of shareholders, virtually all shareholder proposals in recent years have been made by only 200 to 300 of them. They have filed an annual total of between 700 and 800 proposals, most overwhelmingly rejected by fellow shareholders. Average support hovers around 30% of the vote.  Fewer than 10% of such proposals win a majority vote.

Some prolific shareholders file the identical proposal with scores of companies in a given year, without any regard for whether or not the proposal is appropriate or tailored to a given company. For instance, California Public Employees Retirement System (CalPERS), Federated Hermes, and Caisse de dépôt et placement du Québec (CDPQ) this year filed the same climate change reporting proposal at 37 different companies.

Nearly half the annual proposals are made by parochial funds such as religious orders, public advocacy groups, and social investing funds. While their causes may be righteous, the agendas of such organizations are unlikely to align with that of shareholders advocating what is best for the corporation.

Among individual shareholders making proposals, from 2003 to 2014, a total of five people were responsible for filing the vast majority. During 2019, nearly 40% of all individual shareholder proposals were filed by just three people and their families. In the current season, one of these has filed 90.  While well-intentioned and believed to be worthy of the attention of fellow shareholders and companies, does it seem likely that such individuals knew enough about the particular companies to compel other shareholders to bear the cost in time and attention of assessing their ideas?

The Shareholder Soapbox Is A Cheap Megaphone

The proponents’ promiscuity and persistence may be a factor in their fellow shareholders’ routine rejections. Yet defeat does not deter because the shareholder soapbox is a cheap megaphone. The formal process, with inclusion on the official company proxy statement, automatically lends the proposals legitimacy. Proponents become agenda-setters even if fellow shareholders do not endorse their ideas.

A simple reform would preserve the idea of genuine shareholder voice while minimizing gratuitous costs on others: cap the annual number of proposals any given shareholder can make across all SEC-registered companies. Such data are easy to aggregate and the rules could permit any company receiving proposals from over-the-limit shareholders to exclude their proposal. The limit should be set only after public comment, but to be suggestive, consider a cap of 10 for individuals and 25 for institutions.

If only a handful of gadflies continue to file most proposals, you can be sure they will continue as cookie-cutter content that garner little shareholder support while offering an amplified voice.  But if shareholders were limited to submitting 10 to 25 or so proposals across all companies annually, you can expect to see higher quality proposals tailored to particular companies and deeper levels of shareholder support.

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