We are relieved that at least Lindsey Stewart, who wrote a Pensions and Investments commentary asserting his personal opinion that, “Yes, there are too many shareholder proposals,” recognizes the importance of shareholder democracy. While we can reasonably disagree about how many proposals are too many, we hope his commentary doesn't unintentionally feed the frenzy to eviscerate shareholder rights, as legislation pending in Congress would do. We can certainly expect recalibration of the proposal process in a new administration, which is a virtue of the ability of investors and the SEC to learn from prior seasons and refine their application and interpretation of the rules.
The author may have unintentionally created the impression that depriving investors of rights that come with share ownership would somehow return the system to a “healthy balance." The article should not add fuel to the fire for counterproductive policy reforms calling for the elimination of shareholder rights to file environmental and social proposals.
While the article acknowledges the role of anti-ESG campaigners in flooding the zone with poorly supported anti-ESG proposals, the anti-ESG campaign is also suppressing voting support by pressuring and threatening large asset managers.
Most of the increase in the number of low votes is directly attributable not just to the explosion of anti-ESG proposals filed (over 100), but also to the decisions by the largest asset managers (who own a significant part of the market due to their size) giving in to aggressive pressure by members of Congress and state officials in opposition to their support for environmental and social proposals. By effectively removing the largest voting bloc from supporting environmental and social proposals through intimidation tactics, anti-ESG campaigners have suppressed voting support. Proposals that in past years might have garnered 20%-30% support are seeing single digits.
In addition, as the article correctly notes, the anti-ESG campaigners aren’t concerned with having winning proposals. Rather, at times they have even acknowledged that their goal has been to break the shareholder proposal process. In any event, due to the built in guardrails of the shareholder proposal process, by our count over three-fourths of anti-ESG proposals that went to vote will not pass resubmission thresholds and will be blocked from appearing on the same proxies for at least three years. That is the process functioning, not failing.
The article also conflates voting support with quality in its assertion that a low vote likely indicates that a proposal does not meet a fiduciary standard worthy of investor support. The right of shareholders to file proposals on emerging risks sometimes leads to a few investors, a minority voice, to demonstrate prescience and foresight that management and fellow investors may neglect at great cost. The poorly supported proposals later proved to be highly material.
For instance, prior to the banking crisis of 2007-2008, shareholders had attempted to elevate attention to the risks of predatory lending through shareholder proposals. In 2004, shareholders submitted a proposal at American International Group requesting that the board conduct a review to study ways of linking executive compensation to successfully addressing predatory lending practices. Although the proposal only received 2.8% voting support, it is an example of the prescience of shareholders as to material risks to their companies. Aggressively filtering out proposals beyond the current standard in order to prevent “too many” low-supported proposals could necessarily screen out some proposals that, with the passage of time, could be proven to raise highly material issues neglected at great cost to investors.
The article also implies that a number of companies are openly opposing the entire system, when in fact, only one company, Exxon Mobil, has been this aggressive (filing a high-profile lawsuit against proponents of a shareholder proposal). Even the CEO of Exxon stated at a recent Council of Institutional Investors conference that he and his company support the shareholder proposal process.
Shareholders’ rights to place proposals on the proxy, and to express a collective voice by voting on such proposals, are part of the bundle of rights investors value as owners of a company. They are part of the social compact between investors and companies that builds the trust needed for capitalism to thrive. Companies benefit from the information provided by voting outcomes, even in the event of low votes, because it helps a company, board and counsel calibrate what the “reasonable investor” of the company would view as material information for disclosure and action.
Though most proposals are advisory, the shareholders’ rights to file proposals and to vote ensure that directors and officers are advised on a timely basis about the collective concerns of investors. In addition to proposals that get significant voting support, about one-third of filed proposals are withdrawn, most of these yielding productive corporate action following engagement.
Mr. Stewart asserts that some proposals are more worthy than others. That is baked into the dynamic “marketplace of ideas” where some proposals rise to the top and others with low votes are rejected and filtered out from reappearing in future meetings. That is, after all, the essence of shareholder democracy.
Sanford Lewis is director and general counsel, and Cynthia Simon is policy director at Shareholder Rights Group. Lewis is based in Amherst, Mass. Simon is based in Washington, D.C. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.
