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

Change is difficult.  Especially when something has been a certain way for as long as you can remember.  Twenty-two years have passed since the Commission last updated Rule 14a-8.  In particular, the submission threshold was last substantively reviewed and amended in 1998, and the resubmission thresholds have not been updated since 1954.  Yet, over the last several decades, not only has the composition of public company ownership changed drastically, but the ways in which shareholders communicate with companies, and with each other, have evolved with the times as well.  I believe that the only constant in our markets is the fact that they will change.  It is a regulator’s job to adjust rules to respond to, if not to anticipate, such dynamics.  It is our responsibility to adjust these rules to reflect our current markets, and the time is now.

The thresholds in Rule 14a-8 were always intended to strike a balance.  On the one hand the rule offers a powerful tool for a shareholder to bring attention to his or her particular proposal.  But, on the other hand, each proposal comes at a cost, since other shareholders bear the expense associated with including a proposal in a company’s proxy statement and they must devote time and attention to considering each proposal.  The amendments we consider today aim to strike a better balance by 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.

While we all have a right to get on our soapboxes, we have no right to force others to pay for them.  But because so much time has passed since the Commission has taken any substantive action, that is what the rule has come to enable.  Between 2003 and 2014, only five people accounted for the vast majority of all the proposals submitted by individual shareholders.[1]  Many have recycled the same proposals across different companies, regardless of the particular company whose shareholders were funding the ballot.

An analogy demonstrates how low the bar is currently set for someone to submit a proposal.  For our largest companies, $2,000 represents less than .0000002 percent—or two billionths—of their stock value.  If we apply that same percentage to the U.S. population, it amounts to less than one person.  Imagine if one person could demand the attention of the President and both houses of Congress for a pet issue, and then require their proposal be printed up and voted on in a nationwide referendum, funded by every taxpayer.

Consideration of each proposal costs real money to shareholders.  Based on the average number of proposals companies receive and their estimated costs, this adds up to tens of millions of dollars (or more) of shareholder money each year.  What’s more, when put to a vote, these proposals most often get rejected, with the vast majority of other shareholders voting “NO,” deciding that the proposal would not add value to their investment.  But, SEC rules currently provide that even if 90–97 percent of a company’s shareholders vote “NO,” a person can resubmit the same proposal every…single…year (again, all at the expense of other shareholders).

I do believe that the ability of a shareholder to communicate with a company and the other shareholders fosters good corporate governance.  Each shareholder, as the owner of a company, is certainly entitled to his or her opinions about how that company should be managed.  Each shareholder is also entitled to share his or her opinions through the many avenues available to all of us in this social media age.  However, the ability for a single shareholder—and even, as some advocate for, a non-shareholder—to require a company to include his or her own proposal in the company’s proxy statement is not a fundamental right.

I’ll repeat the statement made by former Commissioner McCormick in 1950 that I quoted at the proposing stage because there are many who, at best, are not aware of the history of this rule, and, at worst, choose to ignore it:

When our proxy rules were amended to permit stockholders to make and justify proposals within the sphere of proper stockholder action a bomb exploded.  We were branded as wild-eyed radicals, a Congressional investigation was touched off, and it was confidently predicted that the proxy solicitation would be converted into a forum for crackpots, and hare-brained reformers.[2]

That dire prediction never came true, but only because this rule, from its inception, placed limits on shareholders’ ability to wield company resources.  And, thus, this rule has been amended many times since its initial adoption for the same reasons we are considering amending it today—to curb potential misuse or abuse by some at the expense of the majority of shareholders.

This history is important to inform our obligations as a Commission as we consider the recommendation to further amend Rule 14a-8 today.  Earlier Commissions were vigilant about reviewing and updating the rule’s requirements to make sure they were appropriately calibrated to the rule’s objectives.[3]  Over two decades have now passed since the Commission last reviewed and amended Rule 14a-8, and we can no longer abdicate our regulatory obligations.  The Commission has the responsibility to reassess Rule 14a-8 to ensure that shareholder-proponents demonstrate a sufficient economic stake or investment interest in a company before they are able to submit proposals.  We owe that to the 99.9997 percent of shareholders in our public companies who do not submit shareholder proposals but who bear the costs of voting on them.

Thank you, Chairman Clayton, for making this rulemaking a priority on behalf of investors, and thank you for allowing me to take a leading role in the process.  I am proud of the recommendation, and I am incredibly grateful to the staff in the Division of Corporation Finance, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their hard work and thoughtful approach in drafting this release.  Commenters really threw the kitchen sink at you in arguing against the proposal, and you did a tremendous job thoughtfully considering and responding to each point.  The work product that you have presented us with today is truly outstanding and gives me the utmost confidence that adopting these amendments is the right thing to do.  I am pleased to support the recommendation.

ENDNOTES

[1] Nickolay Gantchev & Mariassunta Giannetti, The Costs and Benefits of Shareholder Democracy 8–9, 37 (European Corporate Governance Institute, Working Paper No. 586/2018, 2018).

[2] See Commissioner Edward T. McCormick, “The Corporate Secretary and the Proxy Rules” (May 13, 1950), available at https://www.sec.gov/news/speech/1950/051350mccormick.pdf.

[3] In 1948, the Commission adopted three new bases for exclusion to “relieve the management of harassment in cases where [shareholder] proposals are submitted for the purpose of achieving personal ends rather than for the common good of the issuer and its security holders.”  See Notice of Proposal to Amend Proxy Rules, Release No. 34-4114 (July 6, 1948) [13 FR 3973 (Jul. 14, 1948)], at 3974.  In 1953, the Commission amended the shareholder-proposal rule to allow companies to omit the name and address of the shareholder-proponent to “discourage the use of this rule by persons who are motivated by a desire for publicity rather than the interests of the company and its security holders.”  See Notice of Proposed Amendments to Proxy Rules, Release No. 34-4950 (Oct. 9, 1953) [18 FR 6646 (Oct. 20, 1953)], at 6647.  In addressing the personal-grievance basis for exclusion in 1982, the Commission noted that “[t]here has been an increase in the number of proposals used to harass issuers into giving the proponent some particular benefit or to accomplish objectives particular to the proponent.”  See Proposed Amendments to Rule 14a-8, Release No. 34-19135 (Oct. 14, 1982) [47 FR 47420 (Oct. 26, 1982)], at 47427.  In amending the resubmission basis for exclusion in 1983, the Commission noted that commenters “felt that it was an appropriate response to counter the abuse of the security holder proposal process by certain proponents who make minor changes in proposals each year so that they can keep raising the same issue despite the fact that other shareholders have indicated by their votes that they are not interested in that issue.”  See Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Release No. 34-20091 (Aug. 16, 1983) [48 FR 38218 (Aug. 23, 1983)], at 38221.

These remarks were delivered on September 23, 2020, by Elad L. Roisman, commissioner of the U.S. Securities and Exchange Commission.

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