The Financial CHOICE Act, which the House of Representatives passed in June on a largely party line vote, weakens many important provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and introduces a slew of changes that would harm U.S. capital markets, consumers and investors.
One of the most concerning aspects of the CHOICE Act is its treatment of the shareholder proposal rule, Section 14a-8 of the Securities Exchange Act of 1934. As long-term investors will attest, shareholder proposals are a vitally important, market-based mechanism for communicating with companies, directors and other shareholders. For decades now, the shareholder proposal rule has been highly constructive in facilitating dialogue between shareholders and companies. Yet, the CHOICE Act would eviscerate the rights of nearly all shareholders.
Last year, investors filed about 1,000 shareholder proposals, including about 500 focused on corporate governance issues and more than 400 focused on environmental and social issues. The intent of these proposals was to encourage companies to evaluate and improve various environmental, social and governance policies that could pose problems if unaddressed.
By prodding corporations in this manner, shareholders provide an important service both to management and other shareholders. For example, shareholder resolutions were the impetus behind the now-standard practice (enshrined further in U.S. stock exchanges' listing standards) that independent directors constitute a majority of the board and all of the seats on a board's audit, compensation, nominating and corporate governance committee. Numerous studies have confirmed the strong correlation between companies' financial performance and their ESG records. Today more than 20% of assets under professional management in the United States are associated with various forms of ESG investing, according to the US SIF Foundation.
Under current U.S. Securities and Exchange Commission guidelines, shareholders are required to own at least $2,000 worth of shares for one year to file a proposal. Under the CHOICE Act, there would be an astronomically higher threshold of at least 1% of a company's stock held for at least three years. To put that in perspective, shareholders would have to own at least $4.6 billion in Amazon shares and $2.4 billion in Wal-Mart shares for at least three years before they could submit proposals to these companies. In the case of Wells Fargo, raising the ownership requirement to 1% would leave only 11 investors with enough shares to file shareholder proposals.
If the vast majority of investors are no longer eligible to submit shareholder proposals, they might have to pursue more adversarial approaches, such as voting against directors, nominating competing board candidates and voting against executive compensation packages. Limiting the range of viewpoints and silencing concerned investors is undemocratic and anti-market, and ultimately puts all investors and consumers at risk. It also does a disservice to companies that will lose a very critical communication channel with their owners. The move to strike shareholder rights is just one example of the flaws in the CHOICE Act.
The Senate has yet to take action on the legislation or any portion of it. However, the Securities and Exchange Commission could emerge as the new battleground for rule 14a-8. The U.S. Chamber of Commerce has submitted a petition to alter the resubmission thresholds for proposals. Multiple responsible investor organizations, including US SIF, are making the SEC aware of the lack of support from investors for changes to the shareholder proposal process.
Lisa Woll is the CEO of US SIF: The Forum for Sustainable and Responsible Investment This article represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.
