BY AMANDA PANCHERY August 23, 2019
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The Securities and Exchange Commission is considering amending some of its regulations relating to shareholder proposals, which have not been amended in over a decade. In May, the SEC released its spring 2019 rule-making agenda, which outlines 40 possible rule changes, with two that could reshape how shareholders and businesses communicate. If the rules are amended, it would save shareholder resources from being continuously used to battle politically, socially and environmentally motivated proposals that do not benefit long-term shareholder value.
The SEC’s agenda indicates the Commission is interested in amending Rules 14a-8 and 14a-2(b) under the Securities Exchange Act of 1934. Rule 14a-8 defines the minimum threshold a shareholder must meet prior to submitting a shareholder proposal as continually holding $2,000 market value or 1 percent of the company stock for one continuous year. The SEC may also amend Rule 14a-2(b), which provides exemptions from the SEC’s proxy solicitation rules that proxy advisory firms currently rely upon.
Shareholders have been critical of the $2,000 threshold for submitting shareholder proposals under Rule 14a-8 when compared to the alternative of holding 1 percent market value in a company. For example, 1 percent of Apple’s market capitalization is $10 billion. The substantial gap between the two thresholds has allowed shareholders with a relatively modest stake in the company to submit proposals that can alter the direction of the company. Concerningly, the low-dollar threshold in place since 1998, which was not based on a cost-benefit analysis, has allowed the proposal process to be hijacked by asking businesses to take a position on issues counter to its core business operations.
For example, the Sisters of the Holy Names of Jesus and Mary repeatedly submit shareholder proposals that are political in nature and harm long-term shareholder value. The Sisters submitted a proposallast year that was adopted by shareholders of American Outdoor Brands Corporation (formerly Smith & Wesson), compelling the company to produce a safety report. This year, the Sisters notified AOBC of their intent to submit another politically motivated proposal, this time asking AOBC to adopt a human rights policy. Although these proposals sound innocent, they will force AOBC to ultimately bear responsibility when its products are illegally obtained or illegally used, unduly exposing the company and its shareholders in future litigation.
The continual submission of similar proposals harm long-term shareholder value by pursuing an alternative agenda that does not represent the best interests of Main Street investors, harming everyone with money in a 401(k), pension or other managed investments.
The SEC may also be considering changes to exemptions under Rule 14a-2(b) of the Exchange Act. Under the current rule, shareholders are required to report proxy filing and disclosure procedures to the SEC when they communicate with other shareholders on a range of issues, such as board elections to asking shareholders how they voted. Shareholders can become eligible for an exemption, allowing them to freely solicit support for their cause. Changing this rule could make it more difficult for shareholders to escape these procedures, reducing their exceedingly influential role in the outcome of shareholder proposals.
Another avenue ripe for change is how proxy advisory firms make voting recommendations to shareholders. There are numerous examples of proxy advisory firms presenting inaccurate information in their recommendations, hurting companies and shareholders who often feel duped when recommendations are made, votes have been cast and there isn’t enough time to correct mistakes during the voting window.
In 2011, ISS recommended shareholders vote against Disney’s compensation plan. Their recommendations relied on a practice Disney no longer used and mischaracterized how often Disney tests employee performance. Although the information in the report was not factually sound, Disney took precautions and changed the provisions under scrutiny, filed additional materials, and submitted a letter to shareholders clarifying errors made by ISS. ISS acknowledged its mistakes, but its updated recommendation relied on the same flawed conclusions. Disney’s shareholders ultimately rejected the recommendation by ISS and voted in favor of Disney’s compensation plan, likely because Disney took preemptive actions to clear up concerns. It is critical that proxy advisory firms be required to present draft recommendations to shareholders in a timely manner, allowing businesses sufficient time to respond to inaccuracies that can affect how shareholders vote, and correct inaccurate information.
The revisions of rules 14a-8 and 14a-2(b) will allow businesses to preserve capital and reinvest into their business, rather than fighting politically, environmentally or socially motivated proposals from a minority of shareholders. Main Street investors with capital invested in public companies succeed when businesses act in the best interest of all shareholders, rather than only a select few. An even greater victory is a more prosperous economy that results from maximizing shareholder value.
Amanda Panchery is a Federal Affairs Associate with the Shareholder Advocacy Forum, a project of Americans for Tax Reform.