The Shareholder Rights Group has written a lengthy rebuttal to proposals from the US Securities and Exchange Commission (SEC) that would “unravel long embedded investor protections”.
The letter, dated 6 January 2020, is the first in what the group describes as a “series of substantive comments on the rulemaking proposals on proxy advisers and shareholder proposals”.
SEC proposes higher thresholds for shareholder resolutions
Under the proposals put forward by the SEC, proxy adviser recommendations would be treated as ”solicitations”, subjecting them to increased liability exposure and allowing issuers, but not shareholder proponents, the right to review and comment on final proxy adviser recommendations prior to publication.
Currently, shareholders have to hold at least $2,000 (£1,540) worth of shares to submit a proposal. This threshold would remain in place, but a proposal could only be submitted after they have held the shares for three years.
If the shareholder wanted to submit a proposal in their first year, the threshold rises to $25,000, dropping to $15,000 in the second year.
Additionally, if a proposal fails to garner enough support – the levels at which it can be resubmitted in subsequent years would rise sharply.
The SEC, which described the changes as a “modernisation”, said that they could save around $70m and reduce submissions across the entire range of Russell 3000 companies by 37%.
A claim the Shareholder Rights Group describes as “illusory”.
Politically motivated
“Diluting the existing shareholder proposal process further erodes investors rights and protections to engage on material ESG issues, which may pose significant risks to investors and companies alike,” says Lauren Compere, managing director and director of share owner engagement at Boston Common Asset Management, which is one of the Shareholder Rights Group’s 15 member firms.
Speaking to Portfolio Adviser sister publication Expert Investor, she says the proposals from the SEC are “in line with other moves the current administration has taken to unravel long-embedded investor protections”.
She describes the motivation behind them as “strictly political in nature”.
“Investor engagement with issuers on ESG matters through the shareholder proposal and proxy voting process are critical components of ESG integration.
“Integrating ESG factors has become a necessary part of investment. In the context of market volatility, climate changes and regulatory intervention; ESG factors offer an expanded set of tools to address unmet investment industry needs in accordance with fiduciary duties.”
In 2018, when the SEC first outlined its review of proxy advisers, Morningstar complained a group of corporate lobbyists were shaping the debate while posing as a grassroots campaign representing retail investors.
SEC accused of discouraging engagement
Compere described the SEC as “neither ESG nor investor friendly”.
“Its oversight responsibility is to protect investors, especially minority shareholder rights.”
She said the current requirements, as outlined above, “are set at the appropriate levels and should not be changed”.
“Increases would exclude many shareholders from engaging with companies on material issues. Shareholder proposals serve as an important tool that allows investors to engage with issues on material environmental, social and governance matters.”
Changing the resubmission threshold “would limit shareholder engagement with companies on emerging material risks”, Compere added.
She explained that Boston Common AM files shareholder proposals “judiciously” and only does so “when a company has stalled on progress or is unable to come to the table”.
The issues the firm has raised include racial and gender board diversity, climate risk, human rights due diligence and lobbying for disclosures.
“This has led to companies changing processes and policies.”
The role of proxy advisers in fiduciary duty
With regard to the proxy adviser changes, Compere explained that shareholders use their recommendations “to supplement their own research and understanding of multiple, detailed and sometimes dense proxies for their portfolio”.
“Without proxy advisory firms, most shareholders would lack the capacity required to synthesise information to vote proxies; and, therefore, would have difficulty performing their fiduciary duty to their clients.”
Forcing proxy advisory firms to share their recommendations with companies in advance, “would allow corporations to intercept recommendations critical of the corporation or its management”.
“This would undermine the checks and balances necessary for functioning markets,” Compere added.
Proof in the pudding
The Shareholder Rights Group letter, signed by director Sanford Lewis, outlined three examples of where the existing thresholds and processes resulted in significant changes by corporations.
Example 1 – Chevron
Efforts to force the energy company to reduce its methane emissions and address climate risks would have failed if the “modernised” rules had been in force.
Despite initially garnering 40% of shareholder votes in 2011, support waned after Chevron “took modest action on the issues”, Lewis wrote.
By 2014, shareholder backing of the proposal had dropped to a low of 26.6%.
Under the new rules this would mean it had ‘lost momentum’, as support had fallen by more than 10% from the previous year when it was 30.2%.
“Despite still representing a significant portion of shareholders votes, this level would have triggered the new proposed momentum exclusion.”
Just two years later, support rebounded to over 30% before jumping to 45% in 2018, “illustrating the ebb and flow of shareholder voting patterns”, he added.
Example 2 – Wells Fargo & Co
There is a long history of shareholder engagement with Wells Fargo; which has, according to the Shareholder Rights Group, paid over $17bn in fines since 2000.
“Before Wells Fargo gained notoriety for a corporate culture and incentive system that drove pervasive fraud targeting its retail customers, shareholder proponents had been aggressively raising concerns […] through the shareholder proposal process,” Lewis wrote.
Had the new resubmission rules been in effect, however, several relevant proposals would have been thwarted.
In 2011, a bid to force a review of predatory lending practices secured 22.8% of the votes, but only 6.4% when it was resubmitted the following year.
This means it would have been excluded in 2013 under the new rules.
But under the existing regime, it managed to garner 24.8% of shareholder votes that year.
The Wells Fargo scandal broke in 2016, after which 5,300 employees were fired when it was revealed that over two million fake bank accounts and credit cards had been set up without clients’ knowledge.
This generated fees for the bank and allowed employees to boost their sales figures.
It was hit with a $185m fine and ordered to repay $5m to customers.
One pending proposal for 2020, which would have been excluded under the new rules, includes a review on employee incentives.
Example 3 – Boeing
The Boeing 737-Max aircraft has been grounded since March 2019 after 346 people were killed in two crashes in 2018 and 2019.
In 2014, shareholders had been seeking enhanced disclosures from the aircraft manufacturer about its “notoriously aggressive lobbying policies and practices”.
“Analysis and media coverage in the aftermath of the two crashes […] indicate that an underlying reason for the failure of regulators to intervene early and intercept the related safety hazards was the degree to which Boeing’s lobbying practices led to regulatory capture – to such an extent that the government had largely allowed the company to regulate itself,” Lewis wrote.
Again, under the proposed changes, attempts by shareholders to secure better disclosure of Boeing’s lobbying policies and expenditures would have been dropped after failing to secure enough support in the third year.
This is despite consistently garnering support from at least a fifth of shareholders.
ESG risks could go unchecked at US companies
Lewis described the proposed increases to the resubmission threshold as “arbitrary”.
“Unfortunately, Commission members seem to be undervaluing the importance of persistence by subgroups of investors with specific concerns.”
In conclusion, Lewis wrote: “The combined rulemaking proposals would not only undermine our rights and interests as shareholder proponents; they would deprive all investors of the opportunity to weigh in on the proposals that they would support on governance, risk management and corporate responsibility issues.
“The impact of reduced risk management, diversity, environmental responsibility or climate change responsiveness from excluding hundreds of proposals every year would exceed the ostensible savings by many orders of magnitude in potential bankruptcies, environmental liabilities, stranded assets, reputational damage and harm to the global economy.”
He called on the SEC to “fully reject, and take no action on, the proposed rules”.
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