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What We Told the SEC About Shareholder Resolutions

Why proxy voting matters even for investors who will never cast a vote

Aron Szapiro

 

On Nov. 15, the SEC held a roundtable on key aspects of the U.S. proxy system—the system through which investors propose and vote on resolutions that can help govern the companies in which they invest.

We believe that investing is a long-term dialogue between investors and the companies in which they invest and that shareholder resolutions facilitate this dialogue. The main message in our response to the SEC was that, despite recent proposals to do so, raising the bar for shareholders who wish to file shareholder resolutions would be a step in the wrong direction. Here’s why we think shareholder resolutions make financial markets better for ordinary investors.

Shareholder resolutions help investors seeking long-term value

Shareholder resolutions have been an integral part of how shareholder democracy works in the United States for more than half a century and have a long track record of creating shareholder value. Shareholder resolutions provide an important mechanism for surfacing information and conducting an open forum about the risks engendered by environmental, social, and governance issues in a well-functioning market. 

Shareholder resolutions send an important signal to management about the concerns of shareholders and often lead to important changes. Strong shareholder support has led to new general practices, legislation, and SEC rules. Examples include electing directors by majority vote and giving shareholders the opportunity to vote on executive compensation practices.

Shareholder resolutions lead to enhanced disclosure on sustainability and climate risks

Through these resolutions, shareholders have signaled that they need more information on climate and sustainability risks and how companies plan to manage them. There's an emerging consensus among asset managers and investors that information about the management of natural capital (air, water, and land), human capital, and social capital (license to operate) can help investors determine a firm’s potential for long-term value creation.

The average support for shareholder resolutions on environmental and social issues has been steadily increasing. From 2004 to 2018, the average support for these issues doubled.

Critically, we appear to have reached an inflection point where management adopts key features from many resolutions without the need for a vote. Evidence for this can be seen in the number of shareholder proposals that have been withdrawn. According to the Sustainable Investments Institute’s 2018 report on Social, Environmental & Sustainable Governance Shareholder Proposals, withdrawn proposals numbered 212, greater than the 177 that made it to a proxy vote last year.

Additionally, large asset managers like BlackRock, Vanguard, and State Street, through engagement activities, public communications, and, more recently, their proxy votes, are also signaling a growing recognition of the materiality of environmental and social risks to their investment portfolios.

The benefits of shareholder resolutions to the system greatly outweigh the costs

Morningstar data on shareholder resolutions show that just 488 shareholder resolutions were published in 309 proxies in 2018. Numbers have remained fairly constant over the past two decades, dipping by about 20% in the past two years.

Further, resolutions pass every year. In 2018, 54 (11.5%) of shareholder resolutions that were voted on passed. These included a record number of resolutions addressing social and environmental issues, such as 60% support for two-degree reporting at Kinder Morgan, 63% for reporting on the reputational and financial risks of the opioid crisis at Depomed, and 69% support for gun safety disclosure at Sturm & Ruger. Governance and voting rights enhancements supported by shareholders included simple majority voting bylaw provisions, rights to call meetings, proxy access, director elections by majority vote, and single-class boards.

In sum, there's no good reason to restrict shareholder resolutions and much to be gained from leaving the current system in place. A well-functioning market depends on rules that ensure a level playing field and on the availability of good information, particularly for minority-owner investors. Shareholder resolutions help keep these vital elements intact.

That’s why we urged the commission not to make any changes that would undermine shareholders’ ability to put forward and vote on shareholder proposals. Instead, we urged the SEC to direct its efforts at ensuring that “proxy plumbing” works and all votes are counted.

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