SEC Adopts Rules Change to Proxy Advisor Process

On September 23, the Securities and Exchange Commission approved an amendment to modify the proxy voting process for public corporations.

SAF supports the Commission’s update to Rule 14a-8, which strengthens requirements shareholders must meet to submit proposals to the board of directors:

  • Shareholders must own $25,000 worth of shares for one year to be eligible to submit a proposal before the business’s board of directors and at the annual shareholder meeting, and $15,000 for two years to be eligible.
  • The former $2,000 worth of shares threshold or 1% of the business’s shares outstanding will apply to investors holding shares for three or more years.
  • The support level needed to resubmit a shareholder proposal within five years after it has previously failed to meet the majority threshold of support the first time has now been increased to 5% of shareholder support needed for resubmission up from the previous 3% threshold if submitted once; 15% from 6% to submit the same proposal for a second time; and 25% from 9% to submit the same proposal for a third time or more.

The reforms were designed to modernize issues that burdened businesses and shareholders who are forced to use company resources to oppose shareholder proposals that are more virtue-signaling than beneficial to the long-term growth of the business. Bloomberg reports the previous thresholds imposed many burdens on companies and have even dissuaded firms from going public. The U.S. Department of Treasury published a study quoting the Business Roundtable’s findings that the costs of negotiating shareholder proposals costs companies tens of millions of dollars and significant management time. This is the second time the SEC has increased the thresholds shareholders must meet to be eligible to submit and resubmit proposals which were previously updated in 1998 and originally set in 1954.

In doing so, it has encouraged public investment in American business, ensuring “that a shareholder who submits a proposal to a public company has interests that are more likely to be aligned with the other shareholders who bear the expense,” as Commissioner Roisman explained in his statement.

With these rules in place, companies will face fewer costs associated with defending management’s policies from shareholder proposals that may be opposed to the company’s financial well-being, as management has a fiduciary responsibility to act in the best interests of all shareholders. Proposals often fail to be adopted and gain the support of a majority of shareholders. In 2016, only one of 154 social policy-related proposals won a majority support among 231 publicly traded companies.

Businesses have experienced a growing trend amongst shareholders activists who have submitted proposals related to environmental, social, and governance issues that detract from long-term growth opportunities and expensive to oppose that only garner limited investor support. General Motors’ Assistant General Counsel told the Wall Street Journal it takes staff 75 hours of review per proposal that ultimately is not supported by a majority of shareholders.

SAF submitted comments to the SEC in February supporting the SEC’s amendments to Rule 14a-8 and we are pleased to see Commissioner Roisman’s leadership on this issue.