Reform request on shareholder resolutions drawing a line in the sand for public companies, activists

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.

'It takes time'

Proponents of the current thresholds say many shareholder proposals take a while to generate support. "It takes time for institutional investors to analyze an issue, develop practical guidelines and for a consensus to emerge," said Brandon Rees, deputy director of corporations and capital markets at AFL-CIO in Washington, at a CII spring conference earlier this month. "If you raise those thresholds, you're cutting off that incubation period that is so vital for a consensus to emerge."

Patrick McGurn, special counsel and head of strategic research and analysis at Institutional Shareholder Services Inc., Rockville, Md., said the proxy-advisory firm's institutional clients take "at least a year" to develop policies on new issues. "So expecting those proposals to perform well right out of the box in year one sort of ignores the fact that investors quite often are facing these issues for the first time and they may be more reluctant to support them because they don't have an official policy in place at that point," he said.

Danielle Fugere, Oakland-based president and chief counsel of the non-profit shareholder advocacy group As You Sow, said calls to raise the resubmission levels are misguided, adding that there are "knee-jerk reactions" that say it's inappropriate for shareholders to weigh in on environmental, social and governance issues and they should instead focus on "bottom-line issues." To Ms. Fugere, ESG issues are bottom-line issues.

"How a company manages environmental risk, whether it's polluting, how efficient it is, whether employees want to work for a company, whether a company is creating harm for communities, which draws backlash and harms how it operates … ESG is very much an issue about the success of a company," she said.

The SEC ruled in favor of As You Sow earlier this month when it said that Anadarko Petroleum Corp. cannot exclude a shareholder proposal filed by the group that asks the company to issue a report describing if, and how, it plans to reduce its greenhouse gas emissions. The SEC said the proposal "transcends ordinary business matters and does not seek to micromanage the company to such a degree that exclusion of the proposal would be appropriate." A spokesman for Anadarko said the company acknowledges the SEC's decision and plans to include the proposal in its proxy statement.

In a December speech outlining the agency's 2019 priorities, SEC Chairman Jay Clayton said "it's clear" the agency should review the resubmission thresholds and added that a lot has changed since they were put in place 65 years ago. "We need to be mindful of these changes, and make sure our approach to the very important issue of shareholder engagement reflects the realities of today's markets and today's investors," he said.

Clear need for reform

And at the CII conference earlier this month, SEC Commissioner Hester M. Peirce said she sees a clear need for reform. "The current thresholds permit, indeed encourage, a handful of shareholders to put forward proposals that incur considerable costs borne by all shareholders," she said. "Shareholders are able to submit losing proposals over and over again. In recent years, many of these proposals are not even related to core corporate governance issues, but instead promote a tiny group of shareholders' personal political and social preferences."

The SEC hosted a roundtable discussion on the proxy process in November during which shareholder proposals were deliberated, and there could be a rule-making proposal later this year.

For the AFL-CIO's Mr. Rees, he'd like the SEC to focus on shareholder issues where there's broad consensus, like end-to-end vote confirmation. Currently, because there is no guaranteed end-to-end confirmation, votes can be undercounted, overcounted or not counted at all, which diminishes shareholder confidence in the system, panelists said at the November roundtable. Mr. Rees said at the CII conference that he hopes the SEC "does not take the bait on pushing along the trade association agenda, which in my view is to simply silence shareholder proposals that increasingly are gaining support over managements' objections."