As public company annual meeting season nears, renewed calls for the SEC to raise the resubmission threshold on shareholder proposals are being fought by proponents of the current system who say the changes would hurt investors and companies.
Since 1954, a shareholder proposal needed 3% support in its first year, 6% after the second attempt and 10% after the third attempt within five years to be eligible for resubmission. In 1997, the SEC led by then-Chairman Arthur Levitt, proposed a rule raising the resubmission thresholds to 6%, 15% and 30%. But the rule was never finalized due to proponents for the status quo. In 2017, the U.S. House passed the Financial CHOICE Act, which called for enacting the 1997 proposal's resubmission thresholds, but the provision never cleared the Senate.
A call to action was renewed again last month when more than 300 companies signed a Nasdaq letter to the SEC urging proxy-system reforms, including raising the resubmission thresholds.
Jeff Thomas, a San Francisco-based senior vice president of Nasdaq's corporate services business unit, said the 6-15-30 thresholds would simply be more fair. "A 6% threshold is not saying you have to get anywhere near a majority," he said. "It's about making those thresholds reasonable and making sure it's not just a tiny, tiny minority of the shareholders advocating for things that frankly aren't related to the company's business."
Proponents of raising the resubmission threshold say the current system leads to wasted resources and reduced attention on matters of more economic significance.
"Shareholder proposals are being used in ways that had never been thought of," said Thomas Quaadman, executive vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness. "They're being used by activists to bring special interest agendas into the boardroom, whereas investors are invested in companies for a return."
"Zombie proposals" — those submitted three or more times without garnering majority support — are a drain of company time and resources, Mr. Quaadman said. A CCMC report released in October said of the 2,449 shareholder proposals submitted from 2001 to 2018 relating to special meetings and matters connected to environmental, social, political and human rights concerns, 32% were zombie proposals. If the thresholds were raised to the proposed 1997 standard, roughly a quarter of those zombie proposals would've been eligible for a fourth year on company ballots, the report stated.
"At some point in time, the will of the majority has to mean something," Mr. Quaadman said.
A report published in November from the Council of Institutional Investors Research and Education Fund analyzed more than 3,600 shareholder proposals that went to a vote at Russell 3000 companies between 2011 and 2018.
Under the current system, about 95% of proposals are eligible for resubmission after the first attempt and 90% after the second and third attempts, the report stated. If the thresholds were increased to 5-10-15, it would roughly double the number of ineligible proposals compared the number of proposals actually resubmitted over the seven-year period, and an increase to 6-15-30 would triple the number that are ineligible, according to the report.