A Securities and Exchange commissioner is calling for changes in securities rules to limit social and political shareholder resolutions companies must include in annual ballots mailed out to stockholders.
At a recent securities regulation conference in Dallas, Commissioner Richard Y. Roberts suggested social and political resolutions be excluded from proxy statements unless they directly affect a company's bottom line.
"I view (shareholder proposals) as a mechanism for shareholders to sound off on matters that impact their investment .*.*. not whether a company is a good corporate citizen or not," Mr. Roberts told Pensions & Investments. "I would like to see a stronger economic nexus apparent in some shareholder proposals."
Mr. Roberts' recommended changes could be a big blow to religious groups and public pension funds with a social agenda that file hundreds of proposals at companies in their investment portfolios each year.
"We are determined to defend the rights of shareholders to debate the major issues facing corporations today," including social issues, said Diane Bratcher, director of communications at the Interfaith Center on Corporate Responsibility, New York, a coalition of about 250 religious institutions and their endowments and pension funds.
Mr. Roberts' proposal comes at a time when the SEC's ability to let companies exclude many of these social proposals has been curtailed because of a recent court decision. The SEC has become more critical of social proposals since 1991, and has permitted companies to exclude them from their annual shareholder proxies on grounds they relate to "ordinary business operations." But pending the appeal of the federal court decision in Cracker Barrel Old Country Store Inc., which last fall blocked the SEC from granting this permission, the SEC has declined to give companies any guidance (P&I, Nov. 29).
Consequently, companies are trying to exclude social proposals from their ballots on various other grounds, including that they relate to operations that account for less than 5% of a company's assets and earnings, or deal with matters that are "not otherwise significant" to the company.
Social activism got a big boost from a federal district court in Washington which ruled in a 1985 case that shareholder resolutions do not have to be of economic importance to a company in order to be considered significant. That decision has allowed social activists to file proposals ranging from asking companies not to invest in certain parts of the world, such as Burma or Northern Ireland, to banning product testing on animals, or on environmental and employment-related issues.
Now, Mr. Roberts is recommending eliminating the significance provision: The only test would be if proposals are related to 5% or more of a company's operations or some other threshhold. That would make it much easier to block social proposals.
"While I am not certain precisely what the magic number should be, I am favorably disposed to some strict numerical economic significance test," Mr. Roberts said in his speech.
This economic test would not, however, apply to corporate governance proposals, under Mr. Roberts' proposal.
Moreover, activists still would be able to place environmental proposals at companies that operate in polluting industries or where cleanup expenses could be large, Mr. Roberts explained. Similarly, tobacco-related proposals still would pass the test at cigarette manufacturers.
Mr. Roberts also has recommended getting rid of the ordinary business exception because the controversy over the definition of such matters has placed SEC officials between shareholders and business groups. Activists claim the agency is pro-business, business representatives claim the agency is soft on fringe groups.
Ms. Bratcher claims Mr. Roberts' suggestions for streamlining the rules governing shareholder proposals are nothing more than a ploy to make it easier for corporations to omit shareholder resolutions from their proxies.
Certainly, there is little doubt companies are using every possible reason this year - the SEC gives 12 - to omit shareholder proposals from their proxies.
By early March the agency already had responded to 254 requests from companies to exclude shareholder proposals on various grounds, compared with 300 at the same time a year earlier, Meredith B. Cross, chief counsel at the SEC said at a conference in Washington last month. Of the 254 requests for exclusion of shareholder proposals this year, about 45% of the companies raised the ordinary business rule as grounds for exclusion, about the same as last year. But many companies also sought exclusion on other grounds, such as that the proposals related to an insignificant part of their operations. And the SEC yielded to requests from companies in more than half of all instances, Ms. Cross said.