Shareholders say the new rules would make it particularly tough for investors to raise issues at companies with dual-class share structures, or firms where insiders hold particularly large stakes, because a majority of shares aren’t even able to be voted. A proposal at Boeing Co. to require an independent chairman would have been excluded after its low performance in 2018, but the proposal received 35% this year after the airplane maker’s safety issues. The company acceded to the request and created an independent chairmanship.
Investors who submit proposals — often faith-based investors like Nash, environmentally focused funds, and public pension plans — say they’re often able to use the process to raise issues that are not yet on the radar of big investors or management. It’s common not to garner large support in the first year.
SEC Chairman Jay Clayton, a political independent who sided with the agencies’ two Republicans in voting to propose the rule, said in a statement this month that the process needs to be brought up to date: “Modernization and retrospective review of the commission’s rules in these areas of our shareholder engagement ecosystem are clearly overdue,” he said.
“Our proposed changes are content neutral and designed to enhance the accuracy, transparency and efficiency of our proxy voting system,” Bill Hinman, who leads the SEC unit whose staff drafted the proposed rule changes, said in a statement this week. “While back-testing has its limitations, our analysis shows that virtually all proposals that eventually receive majority support would not be adversely affected by our proposals.”
Investors say the process isn’t antiquated. Holly Testa, director of shareowner engagement at First Affirmative Financial Network, an adviser focusing on sustainable investing, said the SEC’s plans will have a “chilling effect” on the ability of smaller investors to get meetings with companies.
“I don’t think it’s modernization; I think it’s marginalization of smaller investors in favor of large institutional investors and corporations,” she said. “The playing field is already titled toward corporations, and this is going to tilt it even further.”
The process is relatively undemocratic. Proposals are typically not binding on the company, and votes on environmental and social issues rarely get majority support. Even when a company decides to address a proposal, it can take up to a year to change bylaws or issue a report. But as a growing number of socially conscious investors have pressed management and boards to address these issues, they’ve demanded more meetings, and often companies have been willing to settle by offering to produce a report rather than send a proposal to a vote.
Companies say the cost of proposals is high, because they co-opt the attention of management. But investors say conversations around proposals are often productive, and the cost is really a function of how much a firm chooses to fight the proposal with lawyers, regulators and the public. As companies have engaged more with smaller shareholders, the number of proposals going to votes has already started to decline.
“If the system isn’t broke, why are we trying to fix it?” said Mindy Lubber, CEO of Ceres, a Boston-based advocacy group that advises investment funds on climate issues. “When you have resolutions asking companies to disclose material risk information for investors to make proper decisions, that’s a good thing.”
This article was provided by Bloomberg News.