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SEC Commissioner Crenshaw on Shareholder Proposals under Exchange Act Rule 14a-8

Today [September 23] the majority of the Commission is approving amendments to the procedures governing shareholder proposals. The amendments are described as a “modernization,”[1] designed to reduce costs for corporations. Even if I agreed that was necessary, I cannot agree with the method.

Before today, a shareholder needed to hold only $2,000 worth of a company’s securities for one year in order to submit a proposal for voting. This threshold allowed a broad array of investors to “speak” with a company and its shareholders. After today’s change, shareholders must own $25,000 worth of securities to have that same say.[2] This is a high threshold for the right to put to a vote something as anodyne as a proposal to require a majority vote to elect board members.[3] In addition to raising the price in the first instance, the rule also raises the bar for resubmitting proposals, making it significantly harder for those proposals to gain any traction.[4]

To be clear, I am not suggesting that every individual investor’s idea is a good one. What I am suggesting is that there are benefits, and not just costs, to giving corporate boards the opportunity to engage with shareholders. Shareholder proposals provide a proven, effective pathway for sending good ideas to management, while allowing bad ideas to fall away.[5] After today, fewer of those ideas will surface and those conversations will not occur. This is because we have shut them down. This is problematic for multiple reasons.

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First, I cannot support shifting the costs of the shareholder proposal process to investors.[6] For the wealthy, $25,000 may not be a significant stake in a single equity. But a recent survey revealed that the mean value of stock ownership for 90% of Americans is less than $150,000.[7] For the average American’s retirement account, $25,000 is an outsized concentration at odds with modern portfolio theory.[8]

Today’s rules, of course, contemplate this and allow smaller investors to submit proposals if they hold $2,000 worth of securities for at least three years.[9] But it is unreasonable to expect an investor who identifies an existing problem, but cannot afford to invest $25,000, to wait three years to suggest a solution. In addition to charging more up front, by more than doubling the resubmission thresholds we make it harder for those ideas to be heard. It hardly seems worth the investment, even if you can make it. The rule thus puts the great majority of investors to a harsh choice: maintain a diversified and well-balanced portfolio as experts recommend[10] but be shut out from corporate discourse, or participate in the conversation but take on the greater risk that investing $25,000 of retirement savings in a single stock will pay off.

And for what? The release claims that the changes will save nearly $70 million per year across the companies in the Russell 3000 index.[11] That is, on average, about $23,000 per company – less than the individual has to invest.[12] But the data shows that in most years, companies do not receive even one proposal.[13] We are raising the bar for retail shareholder proposals to save corporate costs that the Commission’s own analysis acknowledges are minimal.[14]

Second, I do not agree with the decision to eliminate the nearly 40 year practice of allowing shareholders to take collective action to express a shared position. Now, not only are we requiring retail investors to increase their investments by over 1000% to help improve those companies, we are mandating they take on greater relative risk to do so. Who benefits from this misalignment of incentives? Per the staff’s analysis, a limited number of S&P 500 companies will receive some marginal cost savings. But this comes at a significant cost to investors.[15] The staff’s analysis suggests that after today’s rule, roughly three quarters of retail accounts for most S&P 500 companies could not file a proposal.[16] The release attempts to justify this policy choice by stating, without support, that the investment interests of individuals and shareholder groups are not equivalent.[17] I cannot agree.

Finally, the costs of today’s policy choices will result in a reduction of proposals and a corresponding loss in value. Annual and majority votes for director elections are just two critical governance practices that have come out of investor-led proposals.[18] But today’s rule blocks the resubmission of similar proposals voted on in 2020, such as proposals that would require independent board chairs, and reporting on incentive-based compensation.[19] Many proposals related to the COVID-19 pandemic and climate risk will no longer make the ballot.[20] Such proposals saw more support in the 2020 proxy season than ever before.[21] And these issues are material to performance[22] and shareholders are increasingly using their vote to hold companies accountable for addressing these issues.[23] Today’s rule amendments unnecessarily interfere with, and may chill, the live debate over these issues. And, in light of other recently adopted rules that will effectively curtail shareholders’ rights to express their views, I cannot support adopting yet another rule with such consequences.[24]

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Recently, the Commission has focused on increasing the participation of everyday Americans in our markets. The basis for expanding the “Accredited Investor” definition was the idea that the ability to participate in private capital markets should not be limited to those with high income and wealth.[25] And the SEC’s Investor Advisory Committee has been looking for ways to increase the rate of proxy voting by retail shareholders.[26] Yet today, I am concerned that we are sending the message that the ideas of retail investors are not worth hearing.

To avoid that, I believe my colleagues and I could have taken a different approach to promote more meaningful shareholder engagement – an approach I think we would all agree would not be at the expense of retail investors. There is a consensus that we should be improving accuracy and transparency in the proxy voting system.[27] Under the current system, it is too challenging to count votes and to ensure the count’s accuracy.[28] Similarly, the Commission has been asked to reconsider share lending and other policies that may be disincentivizing shareholder participation in the proxy process.[29] These are issues that we could have addressed.

Unfortunately, the Commission has chosen to pursue a different path, and regardless of its stated purpose, the implication of today’s rulemaking is that the wealthy are more likely to possess ideas worthy of corporate consideration.[30] That is one way to reduce the burden on corporations, but I believe that that is a bad result.

Though I disagree with the majority, I want to thank the Chairman and my fellow commissioners and their staff for their hard work on this proposal. I appreciate hearing your views today. I also want to thank the agency’s staff for its hard work on this rulemaking.[31] Although I am new to this role, I have long experience with the Commission, and great respect for the dedication and high-quality work the staff produces. My comments today are not a reflection on your work product. I am dissenting because I disagree with the policy choices that underlie the amendments to the rule.

ENDNOTES

[1] The approach a majority of the Commission is adopting today appears to be based on an unsupported “modernization” proposal made by the Business Roundtable in 2016. See Business Roundtable, Responsible Shareholder Engagement & Long-Term Value Creation (Oct. 2016). It asserted, without citation, that there was too much concentration in who was submitting proposals, and that there were more than 400 proposals on environmental, social, and political issues that year. It further claimed that “[m]ost social, environmental and political proposals, such as those related to corporate political spending, climate change and human rights, have only an attenuated connection to shareholder value and are generally not issues material to a company’s business.” A 2019 analysis contradicts these claims, however, revealing that in 2018, a record number of 130 investors engaged in activism, with the number of first time activists having doubled from the year before. See Gail Weinstein et al., The Road Ahead for Shareholder Activism, Harvard Law School Forum on Corporate Governance (Feb. 13, 2019).  In 2018, there were about 250 shareholder activist campaigns launched, which was well below the 400 the Business Roundtable claimed had occurred part way through 2016. Id. In addition, some of the most respected investors and financial institutions have cited data demonstrating that environmental, social and governance (“ESG”) proposals deliver positive financial benefits to the corporations that adopt them. See Blackrock, Our Approach to Sustainability, (July 2020) (“[W]e are making sustainability central to the way we invest, manage risk, and execute our stewardship responsibilities. This commitment is based on our conviction that climate risk is investment risk and that sustainability-integrated portfolios, and climate-integrated portfolios in particular, can produce better long-term, risk-adjusted returns.”).

[2] Alternatively, a shareholder must continuously hold $15,000 of a company’s securities for two years or $2,000 of a company’s securities for three years. See Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, Release No. 34-[ ] (Sept. 23, 2020) (“Adopting Release”).

[3] A summary of shareholder proposals voted on year to date shows that shareholder proposals to require a majority vote for board of director elections received majority support at multiple public companies. See, e.g. Hannah Orowitz, et al., “An Early Look at the 2020 Proxy Season,” Harvard Law School Forum on Corporate Governance (June 10, 2020).

[4] The existing resubmission thresholds of 3, 6, and 10 percent are now increased to 5, 15, and 25 percent, respectively. See Adopting Release at 65-76.

[5] Individual investors have been a key driving force behind successful shareholder proposals for decades. See Kosmas Papadopoulos, “The Long View: The Role of Shareholder Proposals in Shaping U.S. Corporate Governance,” Harvard Law School Forum on Corporate Governance (Feb. 6, 2019) (noting that the roots of modern day governance activism trace back to individual investors who filed numerous proposals in the 1960s and 1970s on issues like the repeal of classified boards and the adoption of cumulative voting, with institutional investors following in the 1980s). Smaller institutional investors are also among those who will be shut out or forced to make suboptimal investment decisions by today’s amendments. See, e.g. Comment Letter from Benedictine Sisters of Chicago (Jan. 23, 2020) (“Making the eligibility requirements for making resolutions more restrictive will make it more difficult for small shareholders like us to communicate effectively with the leaders of corporations and with other shareholders, even though resolutions submitted from small shareholders have often been a source of good ideas and changes that have benefitted the corporations, their customers, and their workers, as well as society as a whole.”); Comment Letter from Christian Brothers Investment Services, Inc. (Jan. 21, 2020) (“The proposed increase in ownership thresholds to file proposals would make it difficult for smaller investors (including those that we partner with) to raise concerns at the companies we jointly own.”).

[6] The Adopting Release states that the costs of shareholder proposals are likely a “small percentage” of costs for a public company, id. at 130, but it also suggests that amending the ownership proposals are likely to affect a significant percentage of retail investors, id. at 145. It states that investors can mitigate the rule’s impact on them by adjusting their holdings, id. at 143, but this again imposes even more costs on retail investors.

[7] See Federal Reserve Bulletin, Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances, Vol. 103, No. 3 (Sept. 2017) at 20.

[8] Modern Portfolio Theory is an economic theory introduced by the economist Harry Markowitz in 1952, which posits that investors can maximize returns within a given level of risk by diversifying assets and asset allocation. See Terin Miller, “What is Modern Portfolio Theory (MPT) and Why is it Important?”, TheStreet (Mar. 22, 2019).

[9] The Adopting Release states this ensures that those who want to propose corporate changes will have “a more appropriate demonstrated ‘economic stake or investment interest’ in a company” before they draw on corporate resources. Adopting Release at 24. But what makes an investment interest “appropriate”? There is no analysis in the Adopting Release that shows that the dollar amount or time period of a shareholder’s investment in a company is indicative of how much that shareholder cares about the company. Indeed, for a small individual investor, a smaller dollar amount may nonetheless represent a much more significant commitment than a larger amount for a very wealthy investor. Nor is there any analysis showing that proposals from shareholders with a smaller or shorter-term investment are less likely to be beneficial to the company.

[10] “One of [sic] way of diversifying your investments within an asset category is to identify and invest in a wide range of companies and industry sectors. But the stock portion of your investment portfolio won’t be diversified, for example, if you only invest in only four or five individual stocks. You’ll need at least a dozen carefully selected individual stocks to be truly diversified.” SEC Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing (Aug. 28, 2009) (emphasis added).

[11] See Adopting Release at 22-23. The Russell 3000 index represents approximately 98% of the investable U.S. equity market.  See Russell 3000 Index factsheet.

[12] Further, the total market capitalization for the Russell 3000 stands at approximately $31.4 trillion, Press Release, FTSE Russell, “FTSE Russell begins 32nd annual Russell US Indexes Reconstitution” (June 5, 2020). This means this rule would save 0.00000223% of the relative value of the Russell 3000. That’s multiple decimal places shy of even a rounding error.

[13] See Comment Letter from Council of Institutional Investors at 2-3 (May 19, 2020) (“Most public companies do not receive shareholder resolutions and therefore would not receive any portion of the savings that the Commission estimates, which may explain why most companies did not submit comments advocating for the change. Only 13 percent of Russell 3000 companies received a shareholder proposal, on average, in the period 2004 to 2017. In other words, the average Russell 3000 company can expect to receive a proposal once every 7.7 years. For companies that receive a proposal, the median number of proposals is one per year. ”); Recommendation of the SEC Investor Advisory Committee Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals at 11 (Jan. 24, 2020) (highlighting trends in shareholder proposals, including a decline in the number of proposals voted, coupled with proposals garnering more support over time).

[14] The Adopting Release acknowledges that the purported cost savings achieved by the rule are likely to be “minimal” to public companies and are likely a “small percentage” of the costs associated with being a public company. Adopting Release at 129. It further notes that the median number of shareholder proposals received by Russell 3000 companies between 1997 and 2018 was one per year, Adopting Release at 13, n.357, and that only 0.0003% of investors submitted proposals that appeared in 2018 proxy statements, id. at 108-09. I cannot agree with increasing the threshold for all investors given the relatively small number of proposals at issue.

[15] After the comment period closed, the Division of Economic and Risk Analysis added a memorandum to the comment file revealing that the SEC had data and analysis since at least August 2019 that suggests the new thresholds will have a devastating impact on the ability of shareholders’ to submit proposals. See Memorandum from S.P. Kothari, Chief Economist, Securities and Exchange Committee, to File No. S7-23-19, Analysis of Data Provided by Broadridge Financial Solutions, Inc. (Aug. 14, 2020). The basis for not publishing the analysis, according to the Chief Economist, was that it “was not relevant,” that the data “had limitations that reduced its potential value to analyzing the proposal,” and that the data set had limitations that raised concerns about its reliability. Id. at 3. Commenters have raised serious concerns about the SEC’s decision not to publish this data earlier, despite reliability concerns, so that the public could consider it and incorporate the information into their comments. See Comment Letter from Council of Institutional Investors, et al., (Sept. 4, 2020). I would have supported giving commenters the additional time they sought.

[16] Comment Letter from Council of Institutional Investors, et al., (Sept. 4, 2020) at 2 (“The August 14 DERA Memo, at pages 8-9, acknowledges that, based on the data, DERA staff were able to form an estimate that, in up to 55 percent of all companies, less than 5 percent of investor accounts would be eligible to file a shareholder proposal under the proposed amendments. That is an extreme cut to investor rights, which the Release did not disclose. Also, based on the staff’s estimate, up to 99 percent of all companies (and 99 percent of S&P 500 companies), the proposed rules could deprive three-quarters of accounts the rights and ability to file a shareholder proposal.”).

[17] Adopting Release at 35.

[18] Kosmas Papadopoulos, “The Long View: The Role of Shareholder Proposals in Shaping U.S. Corporate Governance,” Harvard Law School Forum on Corporate Governance (Feb. 6, 2019) (“Annual director elections, majority vote rules for director elections, shareholder approval for poison pills, and proxy access bylaws are some of the critical governance practices that have become common practice thanks to investor support for shareholder proposal campaigns led by a wide variety of investors—some large; others small.”).

[19] See Comment Letter from the Council of Institutional Investors, et al., (Jul. 29, 2020) at 5. Requests for disclosure of political contributions and lobbying expenditures, which account for one-third of all environmental, social and governance proposals voted since 2010, will be reduced by over 20 percent. Id. at 3.

[20] See Id. at 7 (“The proposed amendments would have blocked many proposals related to economic risks, including risks related to Covid-19 and human capital management; social media platforms’ handling of hate speech; and corporate whistleblower and anti-retaliation policies.”).

[21] As of June 2020, there were at least five proposals focused on climate risk reporting that received majority support, which was an increase compared to 2019. This included proposals voted by shareholders of B. Hunt Transportation Services, Inc., Ovintiv, Inc., Phillips 66, Chevron, and Enphase Energy. See Hannah Orowitz, et al, “An Early Look at the 2020 Proxy Season,” Harvard Law School Forum on Corporate Governance (June 10, 2020).

[22] Institutional investors are increasingly stating that ESG risks are material and demanding that corporations disclose and address such risks. See BlackRock, “A Fundamental Reshaping of Finance,” (Jan. 14, 2020) (open letter to CEOs declaring “that all investors, along with regulators, insurers, and the public, need a clearer picture of how companies are managing sustainability-related questions.”); Letter from Cyrus Taraporevala, State Street Global Advisors, to Corporate Board Members (Jan. 28, 2020) (hereinafter “State Street Letter”) (“[w]e believe that addressing material ESG issues is good business practice and essential to a company’s long-term financial performance—a matter of value, not values.”). Sustainability Accounting Standards Board (SASB), which focuses on improving the effectiveness of corporate issuer reporting, highlighted in a 2017 report several large institutional investors, among others, that found sustainability factors to be important to their investment strategies. See The State of Disclosure 2017, SASB at 2 (Dec. 2007).  In addition, in June 2017, a Bank of America Merrill Lynch report concluded that ESG investing would help investors avoid bankruptcies and that ESG attributes “have been a better signal of future earnings volatility than any other measure [it has] found.” Bank of America Merrill Lynch, “Equity Strategy Focus Point ESG Part II: a deeper dive,” (June 15, 2017). Thus, it is no longer the case that ESG proposals are widely viewed as having “only an attenuated connection to shareholder value and generally not issues material to a company’s business.” Cf. Business Roundtable, Responsible Shareholder Engagement & Long-Term Value Creation, (Oct. 2016).

[23] In a recent publication BlackRock reported that it is using its shareholder vote to hold companies, and directors, that fail to address ESG risks accountable. See BlackRock, Our Approach to Sustainability (July 2020) at 9-10. The CEO of State Street Global Advisors issued a letter to board members stating the firm would use its “proxy vote to press companies that are falling behind and failing to engage” on issues that affect long-term performance, including ESG issues. See State Street Letter.

[24] See, e.g., SEC Final Rule, Exemptions from the Proxy Rules for Proxy Voting Advice, Release No. 34-89372; File No. S7-22-19, (July 22, 2020).

[25] See Press Release, SEC, SEC Modernizes the Accredited Investor Definition,” No. 2020-191, (Aug. 26, 2020).

[26] See Recommendation of the SEC Investor Advisory Committee Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals, (Jan. 24, 2020) (“Despite inclusion in the SEC’s overall proxy system agenda, despite our previous recommendations, no formal guidance or rulemaking regarding proxy plumbing yet have been published by the SEC, and the SEC has not moved to finalize its good 2016 proposal on universal proxies.”); Recommendation from the Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee (IAC) Proposal for a Proxy Plumbing Recommendation (Aug. 15, 2019).

[27] See Recommendation of the SEC Investor Advisory Committee Concerning SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals (Jan. 31, 2020); Anne Sheehan and John Coates, On Proxy Plumbing Recommendation (Sept. 10, 2019) n.5-6 (describing concerns raised at the SEC’s November 15, 2018 roundtable on “proxy plumbing” and at a September 13, 2018 Investor Advisory Committee Meeting).

[28] See, e.g., Matt Levine, “T. Rowe Price Voted for the Dell Buyout by Accident,” Bloomberg, May 13, 2016 (describing how a complex share voting process resulted in asset manager’s shares being voted in favor of a buyout instead of in opposition).

[29] See Anne Sheehan and John Coates, On Proxy Plumbing Recommendation (Sept. 10, 2019).

[30] I know that is not what my fellow Commissioners believe, and so we should reject this rule and advance a better, more democratic, process.

[31] Thank you to the staff of the Division of Corporation Finance, the Division of Economic and Risk Analysis and the Office of the General Counsel for your hard work on this rulemaking.

These remarks were delivered on September 23, 2020, by Caroline A. Crenshaw, commissioner of the U.S. Securities and Exchange Commission.

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