WHAT’S AT STAKE
Shareholders have a number of ways to participate in corporate governance. Most obviously, they can vote for or against the directors whom management have proposed for election (or, in the rare cases of contested elections, they can choose between management nominees and challengers). In addition, they can make their own proposals, and management
must include those proposals in the company proxy statement if certain SEC rules are met as to the number of shares held by the proponents and the subject matter of the proposal.
For many years, these franchise rights were used to fight for better corporate governance—structural provisions like declassified boards, majority voting and proxy access that gave shareholders more power over the outcome of annual meetings. More recently, there has been greater use of these same tactics to further environmental issues like carbon
disclosure or social issues like political spending disclosure and gender parity. Shareholder support for these social and political initiatives has increased.
In response, recent SEC statements and proposals would erect greater obstacles to shareholder voice in several ways:
- Shareholder Proposal Contents: The SEC has indicated that companies will not have to include proposals on social and environmental issues if they “micromanage”
the company by prescribing solutions that the SEC staff views as “too prescriptive”, such as requesting that a company set targets for greenhouse gas reduction aligned with global climate treaties. This is the case even though the proposals are advisory in nature and do not limit the discretion of the management or directors of the companies.
- Shareholder Proposal Thresholds: Under proposed new rules, shareholder proponents will have to hold more shares for a longer time and will have to receive higher votes in order
to resubmit their proposals.
- Proxy Advisors: The SEC has proposed rules that will impose new limits on the actions of professional proxy advisory services and that will make it more difficult for asset
managers to rely on those services. These rules are particularly difficult to follow when advisors recommend against management.
This is not a complete description of the changes, but it should give you an indication of their direction. Curious readers can check out these links to learn more about the changes to the rules around proxy advisors, shareholder proposals and micromanagement.
UNIVERSAL OWNERS AS COUNTERBALANCE
You may be wondering why we are getting so wound up about some technical rule changes that likely make your eyes glaze over. What we find distressing is that these changes, though technical in nature, directly undermine our theory of change at The Shareholder Commons. We believe that if individual companies continue to only focus on profits, they will also continue to engage in
tactics that threaten our collective future by increasing carbon concentration, inequality, and other costly externalities. But we also believe that most rational shareholders should abhor this behavior.
Most shareholders are diversified and have long term interests—they are “universal owners.” These shareholders will do well only if companies make profits by truly creating value
because if, instead, individual companies chase profits with low road activity, our entire economy (and thus they themselves, along with their diversified portfolios) will suffer the consequences. These shareholders have strong incentives to support company actions that prioritize the health of the planet and its inhabitants over profit-at-any cost business models. But doing advocacy work as shareholders to get this idea across at individual companies is extremely difficult. Companies
focus today only on their bottom line, and fear that social and environmental proposals will detract from that focus.
Indeed, companies sometimes spend tens of thousands of dollars to keep these proposals out of their proxy materials—they do not want to hear from shareholders if their views might interfere with increasing share prices.
THE NEW RULES IGNORE THE INTERESTS
OF UNIVERSAL OWNERS
All of the proposed rules and changes make it harder for universal shareholders to push companies in a sustainable direction. For example, universal owners need to be able to make specific proposals in order to be able to ask that all companies make the same changes: such uniformity of action will allow companies to continue to compete, but from a level
and sustainable playing field. Without specific guardrails, companies will be caught in a prisoner’s dilemma, and continue to choose incremental profit over preserving vital systems, leading to an arms race of unsustainable practices.
Raising the threshold of ownership for making proposals also prejudices the interests of universal owners. It ignores the fact that modern investing theory requires broad diversification. Main Street shareholders with a reasonable 401(k) investment portfolios should be spreading their investments among hundreds of companies through passive or
active funds. They cannot afford to hold large positions in single stocks—and the proposed rule would exacerbate this problem by preventing shareholders from aggregating their ownership. This rule simply runs counter to the economic reality of modern investing—the average investor has small interests in many companies but can be greatly and negatively affected by costs that any one of those companies impose on the economy.
Finally, the rules that tilt the playing field against proxy advisors when they recommend against management and generally make it harder to function are especially pernicious. Shareholders own shares in hundreds or even thousands of companies. For there to be meaningful election contests, they should be able to contract out for expert advice, and
those experts should be able to provide that advice without unnecessary interference from the companies themselves, who have access to the corporate treasury to make their case to shareholders.
WHAT CAN BE DONE?
There are a few ways you can help:
- Get smart. I have provided a few links above, but would also recommend that you read the two dissents from the SEC Commissioners who oppose this move. The Harvard Corporate Governance Blog and the Investor Rights Forum are also great sources of material on this
issue.
- Comment. The SEC has asked for comments on the proposed rules. Let them know how you feel here. The Shareholder Commons will be putting in comments and we are looking for co-authors and signers. Let us know if you want to participate.
- Put it in context. The next time you have a conversation about the Business Roundtable and corporate purpose, ask why, if the BRT members want to be responsive to stakeholder interests, they are seeking to limit accountability for those interests to their own shareholders? It is the BRT and its allies who are pushing this.
- Let Congress know. This is not a partisan issue. Democrats and Republicans are talking about a new paradigm for business.
They need to hear from constituents that owners of companies who raise these issues are being muzzled at the corporate ballot box.
