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

Thank you, Chairman Clayton. I support today’s amendments to certain procedural requirements and the resubmission thresholds under the shareholder proposal rule. While it can be difficult to discern the signal from the noise around today’s amendments, the reality of the situation is that we are making simple, sensible, and long over-due changes to the shareholder proposal rule.

Shareholder proposals are costly: they require the thoughtful attention of management and the board, procurement of legal advice, engagement with shareholder proponents and SEC staff, the printing and mailing of proposal materials, and vote tabulations. The shareholder-proponent does not bear these costs; the company and—by extension—all of its shareholders shoulder them. Today’s amendments acknowledge this disconnect and recalibrate the ownership thresholds to ensure that a shareholder-proponent has a meaningful economic stake or investment interest in the company before she is able to impose such costs on the company and its shareholders. These changes, in other words, help to ensure that the shareholder-proponent’s interests are aligned with those of her fellow shareholders.

In a typical year, this rule is used by a small club of repeat players—about 170 shareholders out of 65 million—so most shareholders will wake up tomorrow without any new concerns. For the small group of shareholders who are proponents, the amendments will ask for a greater signal of commitment than the current rule requires. To gauge a shareholder’s commitment to the company, the amended rule looks to both the amount of shares a proponent owns and how long she has owned them. Long-term investors who own small sums of a company’s shares will still be able to offer shareholder proposals, as they can do under the current rule. They will simply need to own at least $2,000 worth of shares for three years. The rule also accommodates investors who cannot wait that long to make a proposal. Investors who have $15,000 worth of the company for two years or $25,000 for one year also will be able to make proposals.

The idea of asking for a commitment before giving someone the right to demand change is something that we readily accept in other aspects of life. Take Married at First Sight, a reality TV show in which—as the name suggests—couples, matched by a set of experts, marry at first sight. Then they have a few months, all under the uncomfortable glare of the camera, to decide whether to stay married. Most of the participants seem to go into these marriages with one foot out the door; they do not exhibit an “until death do us part” mindset. If, therefore, one of the new spouses started drawing up plans to remodel the other’s home during the TV show, it would be a step too far. Until the commitment is really there, demands for change are not appropriate. The relationship between a shareholder and her company is admittedly different, but the same principle applies; show you are committed before drawing up plans to change the company.

Today’s amendments also revise the resubmission thresholds of 3, 6, and 10 percent with thresholds of 5, 15, and 25 percent, respectively. It is a pleasant coincidence that a week after the Dwight D. Eisenhower Memorial was opened here in Washington, DC, we are finally getting around to modernizing these thresholds that were last amended during his administration.[1] This piece of the new rule also balances competing interests. It allows shareholder-proponents to build support for proposals over time, while not burdening companies and shareholders to expend resources on considering and voting on matters that are unlikely to be supported by a majority of shareholders.

These steps are reasonable and limited in nature, but I understand that some observers nevertheless have concerns that we are going too far. These concerns lead me to ask, by contrast, whether our amendments go far enough. Would we all be better off without Rule 14a-8 because it draws the SEC and its staff into places we do not belong? Why should the Commission be in the business of adjudicating which shareholder proposals are allowed in proxies?[2] As noted by one commenter, there are legitimate questions as to whether Rule 14a-8 exceeds the statutory authority provided by Congress under Section 14 of the Exchange Act and improperly interjects the Commission into matters of state corporate law.[3] As I have emphasized elsewhere, the securities laws are focused on getting investors the information they need to understand the long-term financial value of companies, not on determining how corporations and their shareholders interact with one another.

Despite the questionable foundation upon which Rule 14a-8 exists, I recognize that wholesale repeal of a rule that has existed since the 1940s is unlikely. One reason that the current system persists is that the relevant parties are generally satisfied with the SEC staff’s involvement in the process. Why wouldn’t they be? The SEC effectively provides them with an efficient and cheap arbitration mechanism. Every year, a dozen or so SEC staff dedicate themselves full-time, and often after business hours, during proxy season to determine whether proposals may be properly excluded under Rule 14a-8. The process does not cost shareholder-proponents much. The companies pay significant fees for legal representation throughout the process, but those fees pale in comparison to costs they would face if these matters were resolved through litigation in the courts.

Nevertheless, the relevant parties complain every year to the SEC staff about a lack of consistency and transparency in their decision making. Those complaints bring me to my second question about Rule 14a-8: many of the issues that we consider under the rule are—as commenters explained—at core about stakeholders. Why should we—or more precisely our staff—be in the business of sorting through these weighty issues? For example, the Chief Mindfulness Officer and founder of an asset manager wrote to explain that the shareholder proposal process is a way for companies to learn of “shareholder priorities and concerns [which] are not limited to the profit of issuers; rather, they are issues that impact all stakeholders, including employees, customers, shareholders, and society.”[4] Many other commenters similarly were focused on constituencies other than shareholders. Stakeholder issues typically come into play under the “ordinary business” exclusion of Rule 14a-8. That provision permits exclusion of a proposal that deals with the company’s ordinary business operations, unless it focuses on a “sufficiently significant social policy issue . . . because the proposal[] would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.”[5] A peculiar feature of Rule 14a-8 is that it requires a company to submit its reasons for excluding a proposal with the Commission,[6] only hints at the informal staff no-action letter process,[7] and allocates no clear role for the Commission’s involvement in the consideration of the exclusion of a proposal. So essentially the rule drops a whole host of very divisive issues on the desks of Commission staffers to sort through. Our staff have better ways to spend their days and evenings, and, frankly, we do too. Stockholder-corporate relations are outside of our jurisdiction, but stakeholder-corporate relations are even farther outside our purview.

However, if the Commission insists on adjudicating the excludability of shareholder proposals, it should relieve the staff of the unreasonable task of making the final determination of which matters rise to the level of a “sufficiently significant social policy issue.”[8] At the very least, the Commission should provide fresh interpretive guidance to the staff and the markets on how this exclusion should be analyzed.[9]

All that said, today’s amendments are welcome investor protection measures, and I look forward to continued discussion of the larger issues that I have raised. Thank you to Chairman Clayton, Commissioner Roisman, Director Bill Hinman, and the staff of the Divisions of Corporation Finance, Economic and Risk Analysis, Investment Management, and the Office of General Counsel for your thoughtful work on this rule.

ENDNOTES

[1] Dwight D. Eisenhower Memorial, https://eisenhowermemorial.gov/.

[2] The Staff makes clear that its no-action letters are not binding on any party and that “[o]nly a court . . . can decide whether a shareholder proposal can be excluded from a company’s proxy materials.”  See Division of Corporation Finance Informal Procedures Regarding Shareholder Proposals, https://www.sec.gov/corpfin/informal-procedures-regarding-shareholder-proposals.  However, litigation in this context is rare, so the Staff’s determinations typically serve as the final word..

[3] Letter from James R. Copland, Senior Fellow and Director, Legal Policy, Manhattan Institute, https://www.sec.gov/comments/s7-23-19/s72319-6741164-207698.pdf.

[4] Letter from Cindy Bohlen, CFA, Chief Mindfulness Officer, and Adam Peck, CFA, Founder, Riverwater Partners, https://www.sec.gov/comments/s7-23-19/s72319-6733878-207517.pdf.

[5] Amendments To Rules On Shareholder Proposals, Release No. 34-40018 (May 21, 1998) [63 FR 29106 (May 28, 1998)], https://www.sec.gov/rules/final/34-40018.htm.

[6] See Rule 14a-8 (“Under a few specific circumstances, the company is permitted to exclude your proposal, but only after submitting its reasons to the Commission”).

[7] See Rule 14a-8(k) (“This way, the Commission staff will have time to consider fully your submission before it issues its response.”).

[8] In 2014, Commissioner Daniel Gallagher similarly argued “that the Commission should be the final arbiter on the types of proposals for which the Staff proposes to deny no-action relief on ‘significant policy issue’ grounds. The Presidential appointees should vote on these often-thorny policy issues and not hide behind the Staff.” https://www.sec.gov/news/speech/2014-spch032714dmg.html.

[9] In 2015, the Third Circuit Court of Appeals lamented the obtuseness of the ordinary business exclusion and social policy exception. The court suggested that the Commission “consider revising its regulation of proxy contests and issue fresh interpretive guidance.” Trinity Wall Street v. Wal-Mart Stores, Inc. 792 F.3d 323 (3rd Cir. 2015).

These remarks were delivered on September 23, 2020, by Hester M. Peirce, commissioner of the U.S. Securities and Exchange Commission.

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