Institutional investors have the opportunity to formally react and share with the SEC their concerns about the commission's proposed rules for the shareholder proposal process.
These are proposals at present, and asset owners and others will have 60 days from when the proposal is published in the Federal Register to comment before the SEC publishes the final rules. The proposed rules were approved Nov. 5 by a divided commission 3-2 vote along partisan lines. Any comments filed in response to the proposals need to clearly, and calmly, state the concerns investors have. The amendments are unlikely to stop the governance movement in its tracks, as some initial comments have seemed to imply.
"These proposed rules seek to remedy problems that do not exist but are merely false narratives put forward by corporate executives who want to limit the ability of investors to push for change and to hold them accountable for runaway CEO pay, excessive risk taking, and irresponsible and harmful business practices," said Scott M. Stringer, New York City comptroller and fiduciary of the $199 billion New York City Retirement Systems.
By that Mr. Stringer implies that corporate executives are greedy, incompetent bad actors — hardly a way to start a reasoned debate on the proposed changes.
Still, institutional investors do have the right, and the responsibility, to challenge potential curbs to shareholder rights.
The Council of Institutional Investors has asked for additional data so that commentators can respond appropriately to what has been proposed.
In a five-page Nov. 14 letter to SEC Chairman Jay Clayton, CII Executive Director Kenneth Bertsch and General Counsel Jeffrey Mahoney requested data underlying the SEC staff's formulation of the proposals "to allow commentators to have a meaningful opportunity to comment on the new proxy advice review regime the commission proposes to create."
The SEC should accommodate the CII's request.
One set of proposed amendments deals with proxy submission rules. It would replace the current requirement that a shareholder hold at least $2,000 or 1% of a company's shares for at least one year with one of three alternative thresholds:
- Continuous ownership of at least $2,000 of a company's securities for at least three years.
- Continuous ownership of at least $15,000 of the company's securities for at least two years.
- Continuous ownership of at least $25,000 of the company's securities for at least one year.
The proposed rule would also clarify that a single person may not submit multiple proposals to the same shareholder's meeting on behalf of different shareholders.
The SEC argues the changes are needed to demonstrate that the proponents have a long-term interest in the company.
One could argue, given the current levels of the stock markets, that the agency should have gone further since $2,000 is an almost meaningless investment in most listed companies.
The new limits will not hamper the activities of the asset owners who have reacted strongly to the new submission rules. They can easily meet the requirements given their huge assets.
The second part of the proposed amendments dealing with proxy submission seeks to update the levels of shareholder support a proxy proposal must receive to be eligible for resubmission at the same company's future shareholder meetings. The proposed amendment would require a first-time proxy submission to be supported by at least 5% of voting shareholders to be eligible for resubmission in the following three years, up from 3% currently. Those submitted two and three times in the previous five years would need 15% and 25% support, up from 6% and 10%, respectively.
Perhaps the resubmission requirements in the proposed amendments are too high — many proposals important to a company's bottom line start with low support but gain traction over time. But shareholders opposing the new thresholds should make reasoned arguments against them.
The third SEC proposed amendment deals with the proxy consulting firms such as Institutional Shareholder Services and Glass, Lewis & Co. The amendment would modify the definition of the terms "solicit" and "solicitation" to specify when a person who provides proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules. The Exchange Act of 1934 made it illegal for any person to "solicit" any proxy with regard to any registered security in contravention of commission rules.
The new amendment would revise the rule that provides exemptions from the information and filing requirements of the proxy rules. The key items of the proposed amendment are that proxy advice firms would have to disclose more about their processes and potential conflicts of interest, in the proxy voting advice provided to clients.
The proxy advice firms also will be required, subject to certain conditions, to provide companies with a limited amount of time to review and provide feedback on the advice, and correct factual errors, before it is disseminated to clients who have paid for it.
Since ISS and Glass Lewis already provide opportunities for companies to review, this new proposed requirement should not be a significant burden to the proxy process, provided it does not have a chilling effect on their ability to publish research critical of corporations or their leadership in a timely fashion.
It will require reasoned and factual arguments to convince the SEC that it might have gone too far and that the proposals will be harmful.
Those who object to the proposed amendments should make their concerns known to the SEC during the 60-day comment period. The SEC, too, must be transparent with its methodology supporting these changes.
