Shareholder Advocacy Tool Shut Down in Republican Plan

Stay current on changes and developments in corporate law with a wide variety of resources and tools.

By Andrea Vittorio

A shareholder tool used to advocate for changes in corporate behavior would be effectively shut down under the latest Republican plan to roll back the Dodd-Frank Act.

House Financial Services Chairman Jeb Hensarling (R-Texas) wants to require anyone seeking to put a proposal on the corporate ballot to hold a minimum of 1 percent of a company’s outstanding stock for three years. Currently, shareholders with as little as $2,000 in shares for a year or more can do so.

The higher threshold would block “corporate gadflies,” faith- and values-based investors and even the nation’s biggest public pension funds from trying to put an idea up for a vote of their peers at a company like Exxon Mobil Corp., where 1 percent of stock would be billions of dollars.

Only the likes of Vanguard, BlackRock and State Street would be able to propose ideas for a shareholder vote at the largest companies. Asset managers have shown little interest in wielding their voting power on proposals, much less submitting their own.

“It would shut down the shareholder proposal process completely,” said Anne Sheehan, director of corporate governance at the California State Teachers’ Retirement System (CalSTRS), the second largest U.S. public pension fund.

‘Billion Dollar Club’

Hensarling’s provision, outlined in an April 11 committee memo, wasn’t included in the version of the Financial Choice Act that stalled after being approved by the House Financial Services Committee last year. He plans to unveil a new version this month, but it is likely to face long odds of getting enacted as introduced.

New York State Comptroller Thomas P. DiNapoli, who manages the state’s retirement fund, said the legislative proposal would “diminish corporate accountability” and “put investors and corporations at risk.”

Shareholder proposals have been used to push for practices, such as electing directors by majority vote, that have become standard elements of corporate governance. Investors have also used proposals to advocate on issues such as diversity and climate change.

Business leaders, including JPMorgan Chase & Co. chief executive Jamie Dimon, complain the process has been taken over by a handful of investors who own small stakes and are pursuing “special interests” that don’t relate to shareholder value.

“It would turn into the billion dollar club,” Anne Simpson, investment director of sustainability at the more than $300 billion California Public Employees’ Retirement System (CalPERS), told Bloomberg BNA.

Could it Backfire?

The Business Roundtable, a Washington-based lobbying group for chief executive officers, raised the idea of reworking the shareholder proposal process in October. What the roundtable suggested wouldn’t limit proposals as drastically as what Hensarling is considering.

Dimon, who took over in January as chairman of the roundtable, has cited “self-serving shareholder activity and proposals not intended to benefit the company” as one of the reasons for the drop in the number of public companies in the U.S. In his annual letter to JPMorgan Chase shareholders, he also blamed “shareholder meetings that are hijacked by special interest groups and become a complete farce,” among other things.

Curtailing shareholder proposals could have unintended consequences for companies.

“I think it could backfire,” said David Webber, a professor at the Boston University School of Law who researches shareholder activism and corporate governance. If the reform effort succeeds, he said many shareholders who might otherwise have filed proposals “will find other ways to confront management,” by voting against directors, for example.

To contact the reporter on this story: Andrea Vittorio in Washington at avittorio@bna.com

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

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.