U.S. Chamber Calls Again for Shareholder Proposal Reform

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By Che Odom

Nov. 19 — The U.S. Chamber of Commerce reiterated its calls for comprehensive changes to the SEC's shareholder proposal process, saying that companies spend too much time and money on issues that have no effect on the bottom line.

“The shareholder proposal process needs reform,” Thomas Quaadman, senior vice president of the Chamber's Center for Markets Competitiveness, said Nov. 19 during a conference in Washington organized by the trade group.

Researchers and business leaders at the Chamber discussion, including former Securities and Exchange Commissioner Troy Paredes and Jim Copland, director of the Manhattan Institute's Center for Legal Policy, said environmental and social issues, as well as the SEC's conflict minerals rule, divert the attentions of senior management and directors from more important work.

However, others in the investment community, such as Matt Orsagh, a corporate governance expert with CFA Institute, disagree.

“I am wary of the SEC singling out one type of shareowner proposal that is acceptable and one that is not,” Orsagh told Bloomberg BNA in an interview Nov. 19. “We prefer to let investors decide for themselves whether a proposal is worthy of their time.”

Proposals Up

This year, the average Fortune 250 company received 1.34 shareholder proposals, the highest level since 2010, according to a Manhattan Institute Proxy Monitor report. Most of the shareholder proposals in 2015 dealt with governance issues, such as proxy access or executive compensation, the report found.

The Chamber has long been a critic of the SEC's shareholder proposal process. In 2014, it and eight other business groups asked the agency to raise the thresholds for when resolutions rejected by shareholders may be resubmitted for inclusion in a company's proxy materials.

Pressing the SEC

At the conference, Copland said many proposals don't make it to a shareholder vote because they are either excluded by the company or withdrawn by the shareholder, sometimes after reaching a compromise with management.

A considerable number of these concern social and environmental issues, he added. “When you have a lot of these issues to deal with, things get messy.”

Copland suggested that the SEC “wipe out” proposals that deal with social issues or consider amending its shareholder proposal rule—1934 Securities Exchange Act Rule 14a-8—to require losers to pay for a company responding to an unsuccessful shareholder resolution.

Social Causes 

Meanwhile, Paredes suggested that the social issues raised in shareholder proposals and disclosure requirements, such as those required by the SEC's conflict minerals rule, increase the “risk of corporate and securities law becoming politicized.”

“There are many socially valuable causes, but the SEC and corporate law are not the places for dealing with social causes,” he said.

Paredes offered a hypothetical to demonstrate the problem with environment, social and governance shareholder campaigns at public companies, which he says inhibits initial public offerings and hurts the economy as a whole.

“You can imagine 100 shareholders. And you can imagine 90 of them want laser-like focus on strategy, execution and increasing value,” he said. “You also can imagine another 10 who are motivated by ESG or social goals and they are willing to sacrifice the economic growth, the competitiveness and the like, willing to give up returns in order to advance their view of what social rules ought to be.”

To the extent the SEC makes it easier or, at least, not harder for those 10 to advance their interests, “we are in effect forcing the 90 to subsidize the interests of the 10,” Paredes said. “Is that looking out for investor interests?”

Speaking Up for Proponents 

While CFA Institute's Orsagh was sympathetic to the frustration expressed by corporations, he stressed that engagement between companies and shareholders, including through the proxy process, should be preserved.

“Some environmental and social proposals may indeed lack popularity now, but many governance issues started with low support as well, such as majority voting for directors and say-on-pay,” Orsagh told Bloomberg BNA. “These governance issues had low support in early years, but built up support over the years until they became realized as best governance practices. Some environmental and social proposals may be on the same track.”

The CFA, which Nov. 19 released guidance on environmental, social and governance (ESG) issues in investments, found in a recent survey that 73 percent of its members incorporate these subject areas into their investing process, Orsagh said.

“We believe engagement between issuers and shareowners is the best way for issuers to deal with the environmental and social issues of concern to investors,” he said. “Engagement between shareowners and issuers has increased in recent years resulting in record numbers of withdrawn shareowner proposals as issuers and investors often reach a compromise before a proposal reaches the proxy statement.”

The SEC's shareholder proposal rule already limits what can be proposed on a corporate proxy, and singling out a specific type of proposal does not serve the best interests of stockholders, Orsagh added.

To contact the reporter on this story: Che Odom at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com