The Securities and Exchange Commission (SEC) is undergoing a radical transformation of its role as a regulator. Defying decades of precedence, Chairman Paul Atkins is driving a profound deregulatory agenda. In doing so, he is eroding the commission’s legal authority to develop procedures and enforce statutes developed over the past 80 years. Natural Investments has opposed these changes at every turn, including the recently-announced proposal to eliminate the requirement that companies produce annual reports for shareholders.
Defending Shareholder Rights
Though we signed a Defend Shareholder Rights petition with 32,000signatures from retirees, pension beneficiaries, and individual and institutional investors to defend and retain Rule 14a-8, also known as the “shareholder proposal rule,” last month the SEC announced its intention to rescind the rule. This would terminate the longstanding federally guaranteed right of shareholders to file material proposals that affect the share value of companies they own and relegate the rules regarding such proposals to each state. While our letter to the SEC in support of the petition warned that such restrictions would harm capital markets and investors, the agency has stated it does not believe that the SEC has the legal authority to maintain this role. The petition concludes, “We urge the commission to honor its mandate to protect investors and maintain fair, efficient markets by keeping this rule intact. Let America’s public companies be guided by their shareholders — not shielded from them.”
For decades, shareholders have identified risks that corporate boards overlook. Shareholder proposals are a critically important way to flag these issues to management through proxy voting. Though shareholder votes are advisory rather than mandatory, Republican SEC appointees believe they are not relevant to financial returns and should be prohibited. The range of risks flagged by shareholder proposals are, however, pecuniary. They raise significant concerns about factors such as supply chain vulnerabilities, climate risks, water scarcity, and the impacts of payments to foreign governments.
In 2022, the commission recognized shareholder proposals as an important mechanism for investors to give feedback, raise issues, and hold management accountable. The fact that companies now have annual director elections and majority vote standards for them is a strong governance protocol that came from shareholders. Helping management to identify material risks that could negatively affect share value is an important function. Removing the right of shareholders to voice such concerns would only harm companies: Litigation against companies would increase, directors would be voted out, and shareholders would take a more adversarial stance against management on many issues. This longstanding access to management develops trust among shareholders, a foundational tenet of making informed investment decisions.
In stating its intentions, the SEC is setting up a framework where there could be 50 separate state regulations for how companies and shareholders interact, which is likely to be confusing, if not chaotic. Expectations are that once the rule is instituted, there will be legal challenges to it.
Rescinding the Climate Change Disclosure Rule
We submitted a comment letter to the SEC in July regarding its proposed recission of the Climate-Related Disclosure Rule. The rule had been established by the previous SEC in 2024, but its implementation was held up by litigation. The current administration chose to not defend the rule in court and recently proposed to formally rescind it. Natural Investments’ comment letter against recission makes the case that climate-related corporate disclosures are seen by investors as financially material; reasonable investors consider climate factors important for making investment and proxy voting decisions. In addition, the lack of mandated disclosure with a universal corporate reporting standard means that investors have inconsistent or no information to guide their investment decision-making process regarding the risks the companies they own may face. The rule is nevertheless expected to be issued in the fall.
Removing Equal Employment Opportunity Disclosures
We co-signed a letter authored by US SIF: The Forum for Sustainable and Responsible Investing, and another letter from the Interfaith Center for Corporate Responsibility to the Equal Employment Opportunity Commission (EOC) opposing its proposal to completely rescind mandatory annual data reporting by corporate employers, unions, state and local governments, and public schools on the race and gender of their workforce.
The commission claims that such reporting, which has been in existence since 1966, is unnecessary for enforcing anti-discrimination statutes and that the reporting burden on employers outweighs its benefits. First introduced in 1966, EEO filings have been standard practice for entities with 100 or more employees and federal contractors with 50 or more employees. Investors and researchers have used this information for meaningful comparison across companies, industries, geographies, and job levels. Such data is also essential to the assessment of company risks, workforce and corporate governance practices, and their impacts on financial performance. For decades, investors have relied on the collection and disclosure of workforce data categorized by job type, sex, race, and ethnicity to ensure employers are complying with equal employment opportunity laws.
A current report, Capturing the Diversity Benefit: Workforce Diversity Linked to Financial Benefit, illustrates that management with a higher level of diversity is associated with positive financial metrics, including income after tax, revenue growth, return on equity, and long-term share price appreciation over five- and 10-year periods. In voting against the proposal, the sole Democratic member of the EOC, Kalpana Kotagal, stated, “Discrimination doesn’t go away just because you erase the data. It just becomes harder to prove. Enforcement gets weaker. It takes more time. It’s costlier. Accountability suffers, and workers get left behind.”
SEC to Ignore Shareholder Proposals
The SEC announced in August that it will discontinue responding to no-action requests entirely, essentially abnegating the commission’s longstanding regulatory responsibility to determine what sorts of shareholder proposals are acceptable on proxy ballots. Historically, companies that sought to exclude shareholder proposals from the ballot appealed to the SEC for its opinion on whether the proposals are material or inappropriately micromanage company leadership. With the SEC bowing out of this role, the companies themselves are left to decide if a shareholder resolution is applicable.
The SEC change has already led to an adversarial dynamic between shareholders and companies that could trigger higher costs for all. After the SEC announced this guidance as a temporary measure in November, some shareholders filed lawsuits to gain access to the ballot. Many companies took notice and opted to not exclude shareholder proposals, while others did so anyway. Ultimately, only highly resourced shareholders can sue companies that fail to include their proposals. Individual investors will be unable to finance lawsuits or give productive input to the companies they own. Some investors will also vote against company directors who prevent resolutions from appearing on ballots and may use the media to shame companies for ignoring shareholder concerns and threatening share value. The SEC is fostering a regulatory failure that is a “lose-lose” scenario for companies and shareholders.
Michael Kramer, a financial advisor with Natural Investments for 26 years, has been co-managing the firm since 2007. A former partner, he is currently one of its Trust Steward and leads its shareholder engagement, public policy advocacy, social research, and investment committee.