New Shareholder Proposal Rules Make it Harder For Shareholders to Submit Ballot Proposals

In a 3-2 vote, the U.S. Securities and Exchange Commission recently made it more challenging for shareholders to submit proposals or resubmit proposals that previously failed.  The SEC rules on these issues have not been updated since 1998 and 1954, respectively.

Shareholder proposals are recommendations by shareholders to the board of directors of publicly traded companies, which are voted on at the company's annual general meeting.  They address topics such as executive pay, the company's social and environmental policies, and workplace diversity.  Shareholder proposals can shape corporate governance, even if it takes several attempts for a proposal to gain traction.  While non-binding, a majority of proposals raise significant questions regarding governance best practices with a focus on risk and long-term sustainability.  Proposals can achieve majority shareholder support, and often votes of 25% or higher will elicit a meaningful corporate response.  Two examples in which small investors pushed big companies include Starbucks, which committed to cut landfill waste, and Chevron, which pledged more transparency about its lobbying on climate change, after shareholders presented proxy voting proposals.

Initial Proposals

Previously, shareholders who owned at least $2,000 in company stock for one year could submit a shareholder proposal.  Under the new rules, shareholders who own $2,000 in company stock must wait at least three years before they can submit a proposal.  Shareholders who own $15,000 in stock must wait two years, while shareholders who own $25,000 can submit a proposal after one year of ownership.  The new rules also prohibit multiple shareholders from aggregating their holdings in order to meet ownership thresholds and jointly submit a proposal.

Those opposed to the new rule worry that small investors are being silenced.  "Many proposals related to the COVID-19 pandemic and climate risk will no longer make the ballot," said commissioner Caroline Crenshaw.  Crenshaw also noted the hard choice the rule prevents for investors: "maintain a diversified and well-balanced portfolio as experts recommend but be shut off from corporate discourse, or participate in the conversation but take on the greater risk of investing $25,000 of retirement savings in a single stock."  Commission Allison Herren Lee commented that under the new rule, "the rights of smaller investors valued at zero."

Resubmitted Proposals

Proxy proposal resubmissions allow proposals to gather momentum.  Previously, a 3% vote was required for a first resubmission in the following five years.  Under the new rule, a minimum 5% vote is required for the first resubmission.  Proposals resubmitted twice or three or more times in the prior five years previously required minimum votes of 6% and 10%, respectively, but now require a minimum of 15% and 25% in support.  The Sustainable Investments Institute contends that under these new rules, 30% of the 614 proposals that went to vote between 2010 and 2019 would not have been eligible for resubmission.

Bad For Investors

Hundreds of investors representing trillions of dollars in assets opposed the new limits by filing comments to the SEC over the past year.  These investors represented asset managers, pension funds, labor unions, state and local governments, universities and religious institutions.

Josh Zinner, CEO off the Interfaith Center on Corporate Responsibility, stated that the shareholder proposal process has enabled corporate management and boards to understand shareholder priorities and concerns for the past 75 years.  "The new rules appear to be based on a wholly unsupported assumption that shareholder proposals are simply a burden to companies with no benefits for companies or non-proponent investors when there is 50 years of evidence to the contrary."  Christopher Cox, associate director at the Seventh Generation Interfaith Coalition for Responsible Investment asserts, "This rule impedes the voice of shareholders bringing to the attention of companies things they need to pay attention to."

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For more information, see the SEC website, Statement by Commissioner Lee, Statement by Commissioner Crenshaw, Washington Post, Investors Rights Forum