Shareholder Resolutions Challenged by SEC
On July 25, 2007, the Securities and Exchange Commission (SEC) created deep concern among investors, when they presented for comment potential changes to rules governing investors’ ability to sponsor shareholder resolutions. It is not rhetorical flourish to describe the SEC’s proposed solutions as perilous for shareholder rights for a number of reasons, on which I will elaborate further in this post.
Investors concerned about good corporate governance and social issues, have used the shareholder resolution process for over forty years to encourage positive corporate change on environmental, social and governance issues. Resolutions have been a vitally important tool in communicating with directors, management and other investors on key issues such as climate change, workforce diversity, executive compensation, human rights in overseas factories and governance reforms.
There is a long history of positive results stemming from the use of shareholder resolutions, demonstrated by companies making specific reforms, changing policies and increasing transparency. Annually, approximately one-quarter to one-third of shareholder resolutions are withdrawn because constructive dialogue with companies leads to win-win agreements.
BACKGROUND TO SEC ACTION
Three suggested changes to the existing rules governing shareholder resolutions would eliminate or severely undermine the shareholder resolution process: the introduction of an opt-out process, the electronic petition model as the sole mechanism for shareholder concerns, and the increase of resubmission thresholds.
SEC Commissioner Paul Atkins, who supports the changes, argues that advisory resolutions (most shareholder resolutions) detract management from primary business operations and represent “the tyranny of the minority… [using their] nominal economic interest to hijack the agenda of all investors.” (Money Management Executive, July 30, 2007). Clearly, if you read Mr. Atkins comments , you aren’t always paranoid if you say they “are out to get you.”
THE THREE PROPOSED CHANGES AND THEIR AFFECT ON SHAREHOLDER RIGHTS
1. THE OPT-OUT OPTION
The SEC asks for comments on the right of a company to “opt-out” of the shareholder resolution process, either by obtaining approval from shareholders through a proxy vote, or, if sanctioned under state law, by having a Board vote authorizing the company to opt-out.
An opt-out option would have significant negative consequences. Unresponsive companies would be more likely to opt-out because resolutions are an important mechanism to strengthen corporate accountability.
Consider, for example, a company with an inferior governance record which had received a number of resolutions garnering strong shareholder votes. If the company opts-out of shareholder resolutions, it disenfranchises its shareowners by removing a right they had been successfully utilizing.
Far from an appropriate democratic process, this more accurately reflects the anti-democratic notion of one person, one vote, one time. Future shareholders would have no such voice.
2. THE ELECTRONIC PETITION MODEL OR “CHAT ROOM”
The release also asks, “Should the Commission adopt a provision to enable companies to follow an electronic petition model for non-binding shareholder proposals in lieu of 14a-8?” This question builds on the SEC Roundtable discussion of “electronic chat rooms” and suggests that such a forum could substitute for the right to file shareholder resolutions.
This proposal ignores the ongoing success of the shareholder resolution process and attempts to create an untested option as a substitute. It is also fraught with logistical difficulties and unanswered questions. Presently, shareholder resolutions assure that management and the Board focus on the issue at hand since it is included in the proxy and debated at the annual stockholder meeting. Additionally, each and every investor receiving a proxy has the opportunity to consider the proxy item and cast a vote.
Chat rooms and electronic forums are welcome approaches for enhancing communication with investors. They are not a substitute for a shareholder’s right to file resolutions.
3. RESUBMISSION THRESHOLDS
In its release, the Commission also asks for comments on increasing the votes required for resubmitting resolutions to 10% after the first year, 15% after year two and 20% thereafter, compared to current thresholds of 3%, 6% and 10%, respectively.
Raising the thresholds as proposed would make it much more difficult for investors to resubmit resolutions for a vote, further insulating management from shareholder accountability. Over the last 40 years, many proxy topics initially received very modest levels of support. Yet support increased over time as shareholder awareness and knowledge increased.
In 2007, there were fewer than 1,400 shareholder resolutions at less than 1,000 companies, representing well under 20% of publicly traded companies in the United States. Overall, companies are not burdened by the resolution process. Adding more restrictive thresholds on resubmitting resolutions simply makes it more difficult for investors seeking constructive engagement with companies.
THE RESPONSE
The public has until October 2 to comment then the SEC states it will “study the comments for a month” and issue final rules.
Shareholders have been organizing urgently to challenge these new SEC test proposals. Letters are being sent to the SEC, appropriate Members of Congress contacted, companies urged to respect shareowner rights in their SEC comment letters. And major pension funds are taking the lead in the campaign as well.
Individual investors, as well as institutions, are urged to visit a new web site www.saveshareholderrights.org to learn more about the issues and to send an electronic message to the SEC and Members of Congress.
---------
TIMOTHY SMITH, serves as Director of Socially Responsive Investing and Senior Vice President at Walden Asset Management.
Tim joined Walden in October 2000. His primary responsibilities include overseeing shareholder advocacy, public policy, client services and acting as the spokesperson for Walden on social issues. Walden Asset Management manages approximately $1.5 billion for individual and institutional clients. Walden has been a national leader in social investing for 35 years working on dozens of issues like the environment, sweatshops, Apartheid in South Africa, equal employment opportunity in the U.S., among others. Walden also provides professional social screening and a community investing service for clients who have invested $8 million in empowering poorer communities.
Tim is Chair of the Board of Social Investment Forum, the trade association for socially concerned investors and serves on the boards of Shared Interest, a South Africa Development Fund, World Neighbors, an international development organization.
Previously Tim served as Executive Director of the Interfaith Center on Corporate Responsibility (ICCR) for 24 years, and served on the Boards of Domini Social Equity Fund for 10 years and the Calvert New Africa Fund and chaired the Advisory Council for the Calvert Group’s social investment funds.
Tim has a Masters in Divinity from Union Theological Seminary and a BA from the University of Toronto.
