SOS – Shareholder Advocacy Is Under Attack from the SEC

For those of us investing in publicly-traded corporations through stocks and mutual funds one of the primary levers we have to influence the practices of the companies in which we invest is through shareholder advocacy. In the United States this vital mechanism for keeping corporations in check is being threatened by the Securities and Exchange Commission (SEC) and we only have until Monday, February 3^rd to voice our concerns about the proposed changes. Consider this my public service announcement (PSA).

As my previous post highlighted, I am attempting to move the majority of my retirement funds into meaningful investments outside of the stock market. However, a small percentage of those retirement funds remain in socially responsible stocks and mutual funds. I will admit to having not yet flexed my shareholder muscle, putting more effort into divesting than exercising these rights.

Recently though, I learned about As You Sow, one of the most highly-regarded voices in the realm of shareholder advocacy, and had been planning to start getting a lot more engaged. I did go ahead and sign the petition to the SEC that As You Sow is circulating adding a brief personal note and you can too, but you have to do it by 2/3/20 so please act now if this is important to you as well.

Edit: Since publishing this post a few hours ago I learned that comments on “Proposed Rule: Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8” can be submitted directly on the SEC website.  Taking the time to submit a well thought out comment on the SEC’s website will be even more impactful than signing the petition so if you have the time and inclination I hope you will consider doing this.  I will be doing so shortly.

Because:

1. I am writing this post under a significant time constraint;
2. my legal vocabulary and knowledge in this area don’t pass muster;
3. a number of others more well-versed in this matter have already crafted some pretty informative pieces on this topic;

I am going to copy and paste fragments here from a couple of other online sources summarizing this matter and providing some helpful contextual background.

What is Shareholder Advocacy?
– A Brief Primer

The Conscious Company Glossary has this to say about shareholder advocacy –

“According to US law, anyone who owns shares of a company has the right to influence its policies. At the annual general meeting of a company, every

shareholder is asked to vote on a range of issues including electing the board, approving CEO pay, governance and policy questions, and an array of environmental and social issues that shareholders have raised. Shareholder advocacy is the practice of using that right to influence a corporation’s behavior by filing resolutions or otherwise requesting dialogue. In recent years, shareholder advocacy has proved to be an effective technique for improving the environmental, social, and governance policies of major corporations.”

Check out this helpful FAQ on shareholder advocacy from Green America to learn more and get some practical advice for how to start flexing that muscle.

Why Does Shareholder Engagement Matter?

The AFL-CIO notes that:

“Many of today’s best practices in corporate governance were established as a result of shareholder resolutions. Examples of these corporate governance reforms include making director elections more democratic, establishing independent board chairs, requiring the use of independent auditors, and limiting abusive executive compensation practices like golden parachutes.”

The team at Natural Investments points out that:

“The consensus on socially responsible investing is that the current regulatory framework pertaining to shareholder rights, while imperfect, is not broken. It supports investors seeking to act as responsible stewards. Though sometimes defined by companies as immaterial, shareholder advocacy actually raises salient issues before they become crises and advances measures to protect shareholder value…

It should be noted that while a few shareholder proposals have resulted in laws being passed or stock exchange standards being upgraded, most proposals are voluntary and advisory in nature. But many companies recognize that shareholders are advocating to preserve share value by helping companies acknowledge numerous business supply chain, climate, human rights, pollution, and toxicity risks—as well as governance risks related to pay disparity, board diversity, Internet privacy, and product safety (e.g. opioids).

Shareholder advocacy encourages companies to develop vigorous programs to ensure that their manufacturers and suppliers operate in the least exploitive manner possible. Not only is this paradigm grounded in a sense of social and environmental responsibility, operating according to these principles fosters long-term profitability, better share value, and a more solid economy. The existing process provides a well-established, well-understood, and reasonably predictable vehicle for investor input and corporate accountability.”

This article in Climate Liability News outlines some recent shareholder advocacy efforts impacting Exxon and Chevron. From my perspective shareholder advocacy must be effective because:

1. according to this Greenbiz article  by Sara E. Murphy the oil and gas industry is behind the SEC’s current push to weaken it;
2. the extremely pro-business U.S. Chamber of Commerce supports the SEC’s efforts on this;
3. According to this article in the L.A. Times, “the National Assn. of Manufacturers, the board of which bristles with executives from corporations such as Exxon Mobil, General Electric, General Motors and Koch Industries”, was behind the creation of Main Street Investors Coalition. This coalition “launched an aggressive and markedly sleazy campaign” promoting these changes to SEC rules; and
4. that same L.A. Times article reveals that another organization supportive of these changes is the 60 Plus Association, which “has been associated with the Koch brothers’ network and has promoted pharmaceutical industry interests and advocated against the Affordable Care Act.”

How Does Shareholder Advocacy Work Now and What Would Change?

There are 3 major components to shareholder advocacy as it exists today that the SEC is proposing to change. First are the eligibility requirements for shareholders to submit proposals.

Sustainableinvest.com informs us that currently:

“Shareholders holding at least $2,000 worth of stock in a publicly-traded company for at least 1-year prior to a filing deadline can introduce a resolution to company management to be voted on at the next annual

shareholder’s meeting. This has become an effective way of influencing company decision making and bring about corporate policy actions. The submission of a resolution creates an opportunity for a formal communication channel between shareholders and management that often results in the withdrawal of the resolution through a negotiated dialogue intended to addresses the concerns raised in the resolution. If an agreement is not reached, the resolution is placed on the company’s proxy statement and voted on by all shareholders. While the vast majority of shareholder proposals are non-binding, resolutions that attract a positive vote in excess of 10% are difficult for companies to ignore.”

These proposed revisions, would eliminate the 1% threshold and replace this $2,000 threshold with the following three alternatives:

*Continuous ownership of at least $2,000 of the 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.

Secondly, the number of proposals submitted by shareholders would be limited. According to Bass Berry Simms SEC Law Exchange, the changes to the rule would mean that

“a shareholder-proponent would not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a separate proposal on another shareholder’s behalf. Nor would a representative be permitted to submit more than one proposal to be considered at a meeting, even if the representative were to submit the proposal on behalf of different shareholders.”

This would significantly hinder the efforts on behalf of stakeholders of proxy consulting firms such as Institutional Shareholder Services and Glass, Lewis & Co as well as non-profits like As You Sow. In a press release issued when the changes were announced back in November the Council of Institutional Investors (CII) stated that the structure proposed by the SEC would be especially cumbersome

“for proxy advisory firms that provide institutional investors with independent research on the fairness of CEO compensation and other matters on company ballots at annual shareholder meetings. If adopted, the proposed rules would pressure proxy advisory firms to take a more management-friendly approach in their reports and vote recommendations, and could even jeopardize the viability of their business.”

Thirdly, dramatic changes would be made to the thresholds for resubmitting proposals. As Hazel Bradford points out in his November 11, article Shareholders, proxy advisers roiled by SEC on the Pensions & Investments website,

“Currently, proposals must get 3% of shareholder support in the first year, 6% in the second year and 10% in the third year. Now, a first-time proposal would need 5% support to be eligible for resubmission in the following three years, while those submitted two and three times in the previous five years would need 15% and 25% support, respectively. Companies also gain the right to exclude a proposal if the most recent vote captured less than 50% and there was a decline in votes.”

If You Are Still Not Convinced….

In a formal statement Thomas P. DiNapoli, the state comptroller and sole trustee of the $216.2 billion New York State Common Retirement Fund, Albany said

“The SEC’s proposals are two of the most significant actions to restrict shareholder rights in the SEC’s history. There is no credible evidence to support the need for these proposals, and if adopted, they would undermine corporate accountability, entrench managements’ opposition to shareholder proposals and increase costs for investors.”

As You Sow cautioned in an email that

“The SEC’s proposed rules will sabotage investors’ rights to express their views to companies through shareholder resolutions. The new rules will dramatically limit who is allowed to filenresolutions. They will make it difficult to refile innovative resolutions. They could severely restrict resolutions filed by shareholders’ representatives, such as As You Sow and others.

This is a blatant attempt to insulate companies from accountability to their own shareholders. We cannot allow the SEC to silence shareholders. We cannot allow the SEC to cripple a process that has worked well for half a century.”

And lastly, check out this great in-depth not too legalese article on these proposed changes in the LA Times by Michael Hiltzik.

The Time To Act Is Now

I learned about these proposed changes back in November or early December, but did not realize how quickly these proposed changes were moving along. I regret that I didn’t write this post sooner, but I’ve done it now as well as signing this petition. I hope you will consider signing it as well or take other steps to make your concerns known to the SEC before this 60 day comment period concludes on February 3, 2020.

(If like me you are looking for ethical investing alternatives outside of the stock market please read my last blog post in which I outline all of the investments I’ve made to date through my self-directed IRA. You can also check out the personal finance resources page of this blog for more ideas.)

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