Shareholder resolutions play a central role in corporate governance. For decades, these resolutions have:
- facilitated a dialogue between investors and corporate management;
- been used to suggest changes in corporate practice or disclosures;
- signaled shareholder concerns; and
- created momentum for regulatory initiatives protecting investor interests.
Plus, there’s ample evidence that shareholders’ participation in the proxy process via shareholder resolution filing has resulted in important enhancements to corporate disclosures on environmental, social, and governance, or ESG, matters. We believe the system has worked well and is not broken.
Even so, the SEC has proposed a rule that would make this process much more restrictive. It proposes, among other things, raising the submission and resubmission voting thresholds that qualify shareholder resolutions for the ballot. This would increase the thresholds of votes cast to 5% if previously voted on once in the past five years (up from 3%), 15% if previously voted on twice in the past five years (up from 6%), and 25% if previously voted on three times or more during the past five years (up from 10%). In all these cases, the most recent vote must have taken place within the past three years.
The SEC’s rationale for this change is that shareholder resolutions brought “year after year” that do not attain majority support are burdensome and unjustified. But in our comment letter to the SEC, we maintain that this proposal fails to account for the value brought by the filing of shareholder resolutions. The proxy process contributes to both corporate and social dialogue on significant issues pertinent to market rise.
Here’s a closer look at our perspective on the proposal.
The problem with restricting shareholder resolutions
Our opposition to the proposal includes two main points:
The proposed rule will stifle investor voice. Investors are continually learning about how various risks, including those that become the subject of shareholder resolutions, impact their investment portfolios. Shareholders often need time to learn and educate their peers about risks. The 2019 proxy season demonstrated that shareholders now are more concerned about climate risk, along with human rights risks and corporate political activity that present reputational risk. It is not necessary, nor is it in the interest of investors, for the SEC to further limit how often and under what circumstances investors can bring shareholder resolutions.
Shareholder resolutions spark dialogue and facilitate change through engagement as well as voting. Sometimes a proposal is withdrawn due to engagement and dialogue sparked by that proposal, as was the case with climate change proposals during this past proxy season. Shareholder resolutions also prompt institutional investors, such as asset managers, to engage with companies on high-profile issues. We see no reason to diminish this significant area of shareholder impact.
Why the SEC should eliminate the “cooling-off” period
The SEC’s proposal expresses a concern that shareholder resolutions enjoying low levels of support will be brought “year after year,” burdening company resources with the “repeated consideration of these proposals and/or their recurrent inclusion in the proxy statement.” In order to address this concern, the proposal sets a three-year minimum for resubmission thresholds and a five-year “cooling-off” period for proposals enjoying between 25% and 50% in support that have experienced a 10% decline in support (this is known as the Momentum Requirement).
The SEC fails to recognize that large increases in support can occur as a result of current events. For example, there may be a surge in shareholder resolutions regarding gun violence after school shootings; or an increase in support may be based on new information, such as a lift in shareholder resolutions regarding climate change after new data on its global impact.
Shareholder resolutions also take time to gain support but are often quite prescient. For instance, shareholder resolutions as far back as 2004 addressed predatory lending practices at Wells Fargo.
Why the “substantially the same” requirement should be eliminated Another concerning requirement in the proposal states that resolutions dealing with “substantially the same” subject matter as previous resolutions can be disqualified.
To understand the potential harm of this rule, consider its impact on diversity when coupled with the Momentum Requirement. Under the “substantially the same” disqualifier, proposals that have distinct intentions—such as diversity based on race and ethnicity versus diversity based on ideology—could be considered “substantially the same.”
Academic research has linked the rise in diversity proposals based on cognitive and experiential factors (in other words: diversity in perspectives, experiences, and contributions, instead of demographics) to a decline in gender and racial diversity on boards and in management. Since shareholders have become informed about diversity, they have been less likely to support proposals relating to ideological diversity. Morningstar estimates that such proposals only received 1.7% support during the 2019 proxy season.
If the SEC’s proposal were to become final, the current low level of support for demographic-based diversity proposals could harm their prospects. Even though diversity proposals have been gaining increasing support from shareholders (four passed with majority support during the 2019 proxy season), the level of support could mean they’ll be disqualified by the Momentum Requirement. Then, if these proposals are perceived as “substantially the same” as the proposals focused on gender and race diversity— which are diminishing in popularity—they could not be resubmitted until after the “cooling-off” period.
In our comment letter, we ask the SEC to clarify the “substantially the same” subject matter requirement to account for intentions, which has important implications in applying the existing resubmission rule. We also ask the SEC to eliminate the Momentum Requirement as we see no compelling need for it.
The shareholder resolution proposal is a solution in search of a problem The shareholder resolution system is not broken, and the SEC’s proposal would have mostly negative consequences.
Further, using the SEC’s estimates, we see that the proposal would only save corporations a small amount of money, while upending an important mechanism for investors to influence the companies in which they invest. Essentially, it would burden investors without much, if any, benefit.