Shareholder Resolutions and IPOs

Jonas Kron is Senior Vice President and Director of Shareholder Advocacy at Trillium Asset Management, LLC. This post is based on a Trillium memorandum by Mr. Kron.

One of Jay Clayton’s primary objectives as Chairman of the U.S. Securities and Exchange Commission (SEC) is to ensure that every day retail investors—“Mr. and Mrs. 401K”—as he often refers to them, are able to invest in young, innovative companies through the public markets. He, along with his appointed Director of Corporation Finance, Bill Hinman, laments the sharp decline in initial public offerings (IPOs) over the last several decades, and point to that trend as evidence of a lack of opportunities for everyday investors to benefit from investments in growth-stage companies.

As a result, Mr. Hinman and Chair Clayton have been examining how the SEC can help to encourage IPOs while still maintaining the proper oversight necessary to protect investors—both elements of the SEC’s multiple responsibilities.

Last month I joined several other investors that make up the Ceres Investor Network on Climate Risk and Sustainability for an SEC roundtable on the proxy process to discuss shareholder engagement through the shareholder proposal process. This is the process by which investors can propose and vote on non-binding resolutions for companies to consider. During the discussion, opponents of shareholder resolutions, including the U.S. Chamber of Commerce, tried to use Chair Clayton’s desire to promote IPOs as an excuse for undermining the existing shareholder resolution process.

However, as I and others on the panel explained, it would be a mistake to justify the restriction or elimination of non-binding shareholder resolutions on such grounds. Efforts that focus on restricting shareholder rights in the name of expanded public markets are a distraction from the much larger forces at work in the economy that continue to discourage IPOs.

Start-ups today have much easier access to private funding, which has reduced their reliance on IPOs to raise capital. Since 1992, private capital investment in startups four or more years past their first financing round has increased by a factor of 20. Venture capital funds have provided 40 percent of the increased capital, with private funds, hedge funds, mutual funds, and other private investors providing the rest. From 2006 to 2015, annual venture capital investment more than doubled in size to $77.3 billion, and the number of companies with VC-backing increased by 47 percent in the same period. This shift was facilitated in part through regulatory changes such as the National Securities Markets Improvement Act of 1996 and the Jumpstart Our Business Startups Act of 2012.

In addition, more growth-stage companies are choosing to be acquired instead of pursuing an IPO. According to a recent report by Ernst & Young, more than 4,800 private companies were acquired in 2016, compared with about 1,950 during the IPO peak in 1996. Acquisitions are also not limited to small companies—in 2016 there were 387 acquisitions of firms with a valuation of more than $100 million. In the first half of this year alone large mergers totaled $2.5 trillion according to Thomson Reuters—that’s trillion with a ‘t.’

On the other hand, there is no evidence to think shareholder proposals have any impact on companies’ decisions to launch an IPO. On average, between 2004 and 2017, just 13 percent of Russell 3000 companies received a shareholder proposal in a particular year. In 2016, there were fewer than 1,000 total shareholder proposals filed at all reporting companies. Fewer than 9 percent of Russell 3000 companies that have had an IPO since 2004 have received a shareholder proposal.

Opponents of shareholder proposals argue they are abused by so-called activist investors, and that this concern is what is holding back the number of IPOs. But there is little evidence of “abuse” by investors. Since 2010, shareholders re-submitted proposals on environmental and social issues only 35 times after receiving under 20 percent of votes for two or more consecutive years. This affected only 26 companies. From 2004 to 2017, the Chevedden, Steiner, and McRitchie families, some of the most prominent activist investors, submitted 14.5 percent of 11,706 proposals. On average, 40 percent of shareholders voted in support of these shareholders’ proposals when they went to a vote, hardly indicative of frivolous or fringe proposals.

In fact, shareholder proposals can often strengthen companies. Corporate managers benefit from investor input on environmental, social, and governance (ESG) issues. Major investors like BlackRock and State Street recognize the importance of ESGs, and today more than 25 percent of assets under management in U.S. markets are managed with some form of ESG strategy according the U.S. Social Investment Forum. In some cases shareholders identified systemic risks facing companies long before senior management or boards did. Shareholder proposals provide a mechanism through which the ultimate providers of capital can meaningfully and democratically promote material input to management and boards.

There is no one single reason why the number of IPOs has decreased from the height of the dot-com boom, but the decline simply cannot be attributed to shareholder proposals. If the SEC is determined to increase the number of growth-stage IPOs, there are any number of ways it can advance those goals. Changes to investor rights and shareholder proposals should not be one of them.

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