Boards Could Play Bigger Role in Blocking Shareholder Proposals

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By Andrea Vittorio

Corporate boards could play a bigger role in getting rid of shareholder proposals under new guidance from the Securities and Exchange Commission.

Dealing with proposals submitted by investors has usually been the responsibility of company management, not directors, so getting boards more involved could represent a change for some companies.

Less than half of all proposals filed on topics ranging from climate change to corporate governance actually make it to a vote at companies’ annual meetings, according to data from Institutional Shareholder Services Inc. Sometimes it’s because companies and investors come to an agreement. Companies that think a proposal’s topic is irrelevant or insignificant can also ask the SEC staff to keep it off their ballot.

“We end up having to make a lot of judgments as to whether something is significant to a company,” William Hinman, who directs the commission’s Division of Corporation Finance, told Bloomberg Law Nov. 3. A company’s board of directors is “generally better positioned than the staff” to make that call, he said. So the division has told companies to help it decide whether to exclude a proposal by explaining their directors’ point of view.

Its Nov. 1 advice on blocking proposals doesn’t go as far as hoped by business groups, which have been pushing regulators to add restrictions to a system that they see as out of control. Investors argue that their concerns are overblown, since companies that receive proposals tend to get just one per year.

But, unlike a potentially lengthy SEC rulemaking or a legislative effort that’s considered a dead-end, the division’s comments came in time for this proxy season.

‘Big Deal’ for Boards

“This will be a very big deal if board involvement is a requirement for a company to exclude a shareholder proposal,” said Keir Gumbs, a former SEC attorney who’s now a Washington-based partner at Covington & Burling LLP. Boards are typically briefed on proposals, since they are the ones who make recommendations to shareholders for how to vote on them. But Gumbs said the board’s take isn’t always sought before trying to exclude a resolution.

Leah Malone, who is part of consultant PwC’s Governance Insights Center, said usually that responsibility rests with management. “So it’s interesting to me that the SEC is shifting more of the burden onto the board,” Malone told Bloomberg Law. Only about one-fifth of directors told PwC in a recent survey that their board has directly communicated with shareholders on proposals.

Hinman said the SEC staff’s guidance could end up encouraging “more meaningful” interaction between directors and investors.

For some companies, “it could be a shift,” Brian O’Shea, senior director of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, said. He said others may already involve their boards in decisions about proposals.

The SEC’s Division of Corporation Finance also addressed another one of the Chamber’s complaints: proposals submitted on behalf of a shareholder. This is oftentimes done by so-called corporate gadflies who, according to ISS, account for about one-third of all proposals that go to a vote. The SEC staff asked for more documentation on the individuals or firms behind these proposals, or else they might get blocked, too.

James McRitchie, one of the gadflies, said it was “troublesome” that the staff would give companies a “road map” for exclusions. McRitchie said he expects more companies to ask for, and get, permission to block proposals, especially on environmental and social issues.

To contact the reporter on this story: Andrea Vittorio in Washington at

To contact the editor responsible for this story: Yin Wilczek at

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