By Bartlett Naylor and Rachel Curley
There’s an iconic New Yorker cartoon that pictures a CEO at his annual shareholder meeting, and he’s listening to an apparently unhappy, bepearled, matronly investor. At the dais, one senior executive mutters to another: “This the part of capitalism I hate.”
If Chair Jay Clayton and his fellow pro-corporate commissioners at the Securities and Exchange Commission (SEC) have their way, this part of capitalism will disappear.
On November 5, 2019, the SEC advanced a rule that would sharply limit the ability of shareholders to raise issues they see with the companies they invest in at annual meetings. Under current rules, if a shareholder owns at least $2,000 worth of a company’s stock for at least one year continuously, they may propose a resolution that appears on the company’s annual ballot, known as the proxy statement. Some of the more popular resolutions call for disclosures of what the firm is doing to address climate change, or transparency for where the firm spends on politics. Others address governance, such as those resolutions that request that the CEO isn’t also the chairman of the board, in effect, serving as his own boss.
Shareholder resolutions serve as one of the many governors that help keep corporations honest, along with auditors, whistleblowers, investor analysts and regulators. In this way, the shareholder proposal process is critical not only for investors but for the integrity of the economy. For example, ever since the Supreme Court’s 2010 Citizens United v FEC decision allowed CEOs to spend investor money in secret on politics, shareholders have filed hundreds of proposals at major corporations asking for disclosure of their political influence. Those proposals are among the most popular filed every year and have resulted in more than 300 corporations disclosing some or all of their political spending.
That’s really the part of capitalism that CEO’s hate.
In the last few years, CEOs have deployed their various trade associations such as the Business Roundtable and the U.S. Chamber of Commerce to lobby to contest shareholder activism. They even formed a fake front group called the Main Street Investors Coalition, claiming to represent the interests of average investors. These CEO-led organizations want the submission thresholds raised. Legislation sponsored by Jeb Hensarling, then the Chair of the House Financial Services Committee, said the threshold should be 1 percent of the firm’s value. That would mean that individual shareholders would never be able to file a resolution. No individual owns $11 billion, or 1% of Apple stock.
These groups also want the resubmission threshold raised. If a resolution fails to pass one year, the proponent might introduce it again. Currently, if fails to win at least 10 percent of the vote on the third try, the proponent may not submit it again for several years. The fact is, that many resolutions require several years of public discussion before institutional investors, who are the controlling owners of any company, begin to see their value. For example, shareholder resolutions asking for political spending disclosure once received less than 5 percent of the vote. Today, such resolutions often win a near majority.
CEOs also fret when professional voting advisory firms occasional support a shareholder proposal. So, while business leaders often rail against regulation, these CEOs want to increase regulation for the advisory firms.
The fact is, it’s not easy to submit a shareholder proposal. Let’s say you think an airplane manufacturer might be a good investment if they’d change the management that oversaw the recent horrendous crashes. But you can’t buy a share of stock today and file a resolution. You must buy at least $2,000 worth. And you must hold this level continuously for a year. You might buy $2,000 worth today, but what if the stock declines in value. If it trades one day below this $2,000 level, the one-year clock starts over. In fact, many stock prices swing by as much as double in a year. Realistically, you’d need to buy $5,000 to be safe. In other words, for many stocks, the threshold already is not $2,000, but much more than that. But let’s say you do meet the ownership threshold. What’s your resolution? Fire management? You can’t file such a request since that’s the prerogative of the board. Require new quality testing? Can’t do that either under another SEC prohibition. What you could do is ask for a study about the firm’s response to the crashes. You can’t demand that they do a study, you can only “urge” them to do a study. Even with this milquetoast resolution, the company might hire a major law firm to contest your resolution with the SEC, writing a lengthy letter. Your resolution might be excluded. Each year, the SEC allows hundreds of companies to exclude proposals. But let’s say your resolution survives this contest. It then goes on to the ballot. Then the company may begin writing letters to shareholders urging them to vote against your proposal. Who funds this campaign against your proposal? You do; the company is using shareholder (your) money. But let’s say, against all odds, that your resolution secures a majority vote. You get the study? Not necessarily. Recall, current SEC policy requires that resolutions can only “urge” board action. The board can ignore that majority vote.
In short, it’s currently difficult to file a shareholder resolution, difficult to fashion a resolution that actually achieves what’s important to shareholders, difficult to overcome the company’s lawyers and vote solicitors, and even difficult to get any results after a winning a majority.
These difficulties mean that most publicly traded companies don’t receive shareholder resolutions–ever.
And the SEC now wants to make this process harder still for investors.
Under the newly proposed rule, the resubmission threshold will be 5 percent the first try, 15 percent the second, and 25 percent the third try. If these thresholds prevailed when the political spending resolutions were first advanced, they would not have matured into mandates.
The SEC’s newly proposed submission threshold requires the shareholder to hold $25,000 worth of stock, more than 12 times greater. It’s not clear how many would-be proponents this will sideline. But it’s clear that this SEC doesn’t want average investors raising questions.
Advisory firms will need to run their advice by corporations first before they offer it to investors in that company.
CEOs aren’t Neanderthals. Recently, the Business Roundtable issued a letter from 181 CEOs declaring that the purpose of a corporation is no longer simply to maximize shareholder value, but to consider all stakeholders. As heads of the nation’s largest corporations such as JPMorgan Chase, Amazon, Apple, and Exxon, these CEOs won public praise for this commitment to workers, the environments, and our communities into consideration when advancing their business goals. But, just two months before that announcement, the Business Roundtable sent a letter to the SEC laying out exactly what we now see in the newly proposed rules. The SEC’s move to crush dissent and cut off avenues for holding corporate CEOs accountable was written by the same CEOs claiming they want to be better. No, they’re not Neanderthals, but they are unembarrassed at hypocrisy.
The SEC exists to protect investors who trust their savings to entrepreneurs and company managers. Legally, an investor of a publicly traded company is the ultimate boss and should be allowed to direct changes. But under Trump’s regulators, the SEC has become an extension of the Business Roundtable and the U.S. Chamber of Commerce. Under their rubric, capitalism has become a one-way street where corporations welcome the investment, then throw up a road block to accountability.
We urge the public to comment on this proposed rule, by emailing email@example.com.