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SEC Asked to Review Rules on Renewing Shareholder Resolutions

Tuesday, April 22, 2014

By Yin Wilczek  

April 11 -- Nine business groups have jointly asked the Securities and Exchange Commission to raise the thresholds for when shareholder proposals rejected by shareholders may be resubmitted for inclusion in a company's proxy materials.

In an April 9 rulemaking petition, the groups--including the U.S. Chamber of Commerce, the Financial Services Roundtable and the American Petroleum Institute--pointed to a rise in shareholder proposals on social issues and a corresponding rise in the general costs of dealing with resolutions.

The current thresholds in the SEC's resubmission rule--1934 Securities Exchange Act Rule 14a-8(i)(12)--increase the likelihood of shareholders having to plow through “a profusion of repetitive” resolutions that have little or no relevance for them, the groups said.

Under the current rule, companies may exclude a proposal or a substantially similar version from their proxy materials if it failed to receive the support of:

• 3 percent of the shareholders if voted on once in the last five years;

• 6 percent of the shareholders if voted upon twice within the last five years; or

• 10 percent of the shareholders if voted upon three or more times within the last five years.

 

Substantial Costs

In support of their petition, the business groups cited evidence that between 2005 and 2013, 420 shareholder resolutions were submitted involving environmental issues like climate change, but only one passed--in 2009.

The groups also noted that during the same time period, 237 labor-related resolutions were submitted to companies, of which only three received majority shareholder support. The other 234 on average received less than 20 percent support.

Moreover, the groups said it now costs companies about $87,000 for each shareholder proposal, or a total of about $90 million annually. “But, even these figures understate the potentially more significant and unquantifiable indirect opportunity costs associated with responding to these proposals,” they said.

Divergent Views

Among other requests, the groups asked the SEC to significantly increase the voting thresholds and to require that proposals “must gain the support of a progressively and meaningfully higher proportion of shareholder support each year” that they appear on corporate ballots. Otherwise, corporations should be able to omit the resolutions from their proxy materials for three years, they said.

The groups also asked the SEC to undertake cost-benefit analyses of the current resubmission rule and a 1997 proposal that would have raised the thresholds to 6, 15 and 30 percent, respectively.

SEC spokesman John Nester declined to comment on the petition.

SEC Commissioner Daniel Gallagher, among others, has spoken out against current shareholder resolution rules .

However, Jonas Kron, senior vice president and director of shareholder advocacy at Trillium Asset Management LLC, told Bloomberg BNA that there will be widespread opposition to the business groups' petition by shareholders, and even some corporate directors and senior executives.

Kron said that many directors and corporate managers support vigorous interaction between shareholders and companies.

Proposal Trends

According to the Manhattan Institute's Proxy Monitor winter 2014 report, “social policy” proposals--a majority addressing corporate political spending--constituted 41 percent of all resolutions introduced on proxy ballots in 2013.

None of the social policy proposals received majority shareholder support, the report found; in fact, such resolutions on average garnered just over 20 percent support.

However, research by the Investor Responsibility Research Center Institute also found that environmental and social agenda proposals have steadily gained in shareholder support over the years. According to an IRRCi study issued in 2012, average support for such proposals grew from 10 percent in 2005 to 21 percent in 2011.

Kron also noted that proposal topics that used to garner 5 percent to 10 percent support--such as nondiscrimination policies, say-on-pay and independent directors--are now mainstream accepted practices.

A new IRRCi study released April 10 found that engagement between shareholders and companies is at an all-time high, fueled by say-on-pay discussions.

 

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Richard Cowden at rcowden@bna.com


The petition is available at http://www.sec.gov/rules/petitions/2014/petn4-675.pdf.

The 2014 IRRCi study is available at http://irrcinstitute.org/projects.php?project=68.

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