The frontline battle over the limits of corporate power is turning into a full-fledged war, as the legislative and executive branches of the US government accelerate their push to deregulate companies and curb shareholder influence.
Shareholders like the ones we work with, of course, want companies to act responsibly and profit without exploiting employees, communities, and the environment. But we are up against corporations with an entirely different agenda— and with hefty lobbying budgets. In response to the sea change in Washington, socially responsible investors (SRI), including Natural Investments, formed the Shareholder Rights Group in 2016. Our mission is to defend the right of shareholders to engage with public companies on governance and long-term value creation. We hired attorney Sanford Lewis to help craft a united response from leading SRI firms to significant changes underway at the Securities and Exchange Commission (SEC), some of which would present major obstacles to shareholders seeking to advocate for social and environmental responsibility in corporate management. These include:
• Legislation to raise the “yes” vote threshold that a shareholder proposal must attain in order to be allowed on the subsequent year’s ballot. Certain sector companies in manufacturing and extractive industries want to define low-vote proposals as nuisances by special interest groups. While the raised threshold legislation doesn’t appear to have any traction in the Senate, the SEC is asking stakeholders what the appropriate thresholds are and may issue guidance anyway.
Why it’s a problem: Low-threshold shareholder proposals are critically important tools for raising awareness about pertinent issues and can serve as trigger points to pressure management to negotiate.
• The SEC made several decisions during the 2018 proxy season to exclude shareholder proposals on environmental, social, and governance (ESG) issues—characterizing them as “micromanagement.” These decisions marked a stark departure to SEC opinions during previous administrations, which were more accepting of proposals that addressed issues of scope, scale, and time.
Why it’s a problem: Many companies, including those we work with, appreciate the tenor of shareholder engagement and are often willing to embrace ESG-based changes. The exclusion of these shareholder proposals would mean the loss of helpful guidance, such as greenhouse gas emissions reduction targets and timelines.
• Companies are substituting shareholder accountability measures with company proposals that ratify the status quo. If a company’s management believes that a proposal does not meet the criteria articulated in the SEC’s new rule for acceptable proposals, it can write to the SEC staff and request that it “take no action” if the company omits the proposal from the proxy statement.
Why it’s a problem: This no-action letter process determines the fate of many proposals each year. The current SEC has responded to these company no-action requests by asking their boards to weigh in on whether proposals received are “relevant” or address “significant issues for the company.”
• The Financial Choice Act, passed by the House last year, eviscerates the shareholder participatory process by confining the filing of shareholder proposals to only the largest institutional investors. The bill has not yet been taken up by the Senate, but if it were to pass, it would deliver a devastating blow to shareholder democracy.
Why it’s a problem: Under current rules, investors who hold more than $2000 in shares for more than a year are eligible to file proposals to be considered by fellow investors through public companies’ annual corporate proxy statements. This legislation would eliminate a critical tool shareholders use to engage with one another—and the companies they invest in—to monitor and assess risks, reform corporate governance, and provide feedback to companies on critical issues.
Natural Investments has met with the commission to relay our concerns about the SEC’s new direction, including a meeting I attended with Chair Jay Clayton in May. Corporate lobbyists, for their part, have brought complaints about activist shareholders and proxy service firms that provide advice to (and sometimes vote on behalf of) member wealth managers. Our response is that many firms engage these firms precisely because they are in alignment with their own views and votes.