Statement of Commissioner Allison Herren Lee on Shareholder Rights

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement, available here. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

There is a common theme that unites the two proposals before us today[Nov. 5, 2019]: they both would operate to suppress the exercise of shareholder rights.

The proposed changes to our current proxy regime would make it more costly and more difficult for shareholders to cast their votes or even to get their issues onto corporate ballots. There is a stark divide between issuers and shareholders on the policies reflected here. [1] The bottom line is that these policy choices, if adopted, would shift power away from shareholders and toward management.

There is nothing inherently wrong in making such a choice, particularly if data suggests the need to correct some imbalance. But what does the data show about proxy voting? That the vote recommended by management carries the day some 90 percent of the time. [2] Management’s views nearly always prevail. That is the context in which we consider these two proposals that would tilt the scales even further against shareholders.

I want to be clear—my concern does not lie with the staff and its work. We are lucky to have talented and experienced staff in the Division of Corporation Finance, the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel who have worked diligently on these proposals, and I thank each of you for your expertise and dedication. My concern here is that these proposals reflect policy choices with which I respectfully disagree.

* * *

The first proposal related to proxy advisors potentially impairs, and may even preclude, shareholders’ ability to vote in reliance on independent voting recommendations. Proxy advisors provide critical research to inform shareholders, and those who manage their investments, as they cast their votes. Institutional investors and asset managers representing tens of trillions of dollars of shareholders’ money have been very clear that the services of these proxy advisors are critical to their ability to meet their fiduciary duties in casting informed votes.

I agree with the stated goal in the proposal that proxy advice should be based on the “most accurate information reasonably available.” [3] What is missing in this proposal, however, are two critical underpinnings for the policy choices it reflects. First, it is missing data demonstrating an error rate in proxy advice sufficient to warrant a rulemaking. In fact, as the comment file shows, assertions of widespread factual errors have been methodically analyzed and largely disproven. [4]

Second, there is no basis for assuming that greater issuer involvement would improve proxy voting advice. As I have stated before, issuers bring deep expertise and insight, but also have a clear stake in the outcome. Their views are helpful and necessary, but already easily accessible. They should not be allowed to influence the independent recommendations of proxy advisors. Indeed, we take this precise approach in other contexts, such as with issuer involvement in research provided to investors by analysts. [5] FINRA Rule 2241 promotes objective and reliable research by, among other things, seeking to limit any prepublication review by issuers to a verification of facts.

By contrast, today’s proposal isn’t limited to a review of just the facts, and it doesn’t just permit issuer review of proxy advisors’ recommendations; it requires it. Issuers are given not one, but two opportunities to review each recommendation. [6] We do this without even addressing the concerns expressed by investment advisers that greater issuer involvement would undermine the reliability and independence of voting recommendations. [7]

In addition, and quite importantly, these two mandated review periods will delay the recommendation by at least five business days. Proxy advisors have explained that a delay of this magnitude could actually make it impossible for them to get recommendations to their clients in time. In fact, under the timeframes in this proposal—and given that these reports must sometimes be provided to proxy advisory clients two weeks prior to a meeting—if an issuer files 25 days before its annual meeting, that issuer could actually wind up with more time to review the proxy advisor’s recommendation than the proxy advisor itself would have to write it. [8] How can this possibly result in improved quality or even be workable?

What’s more, the proposal declines to provide shareholder proponents the same opportunities to review the recommendations that it would require for issuers. While I am skeptical as to the value of the review periods, I cannot see the reason for denying it to shareholders while providing it to issuers. [9]

This one-sided approach taken throughout the proposal appears to me, at best, to increase costs and reduce quality, and at worst, to make voting for shareholders not viable.

* * *

The second proposal will also have the effect of suppressing the exercise of shareholders rights—in this case, uniquely those of the smallest retail investors—by raising eligibility and resubmission thresholds for the shareholder proposal process.

This process has long provided a vital mechanism for shareholders to communicate their views to, and engage with, management. For decades, shareholders have succeeded in effecting significant improvements in corporate governance, including majority vote rules for the election of directors, staggered board terms, limits on poison pills that serve to entrench management, and increased adoption of proxy access bylaws. Shareholder proposals often highlight the need for important corporate reforms that are later adopted. This was the case, for example, with proposals requesting the expensing of stock options before this was required by GAAP. [10]

Significantly, shareholders have taken a leading role in seeking much needed improvements to climate risk disclosures. [11] Improved transparency in these disclosures is critical in accurately pricing risk and supporting informed, efficient capital allocation. [12] Shareholders are helping to pave the way toward better climate risk disclosures; this rule will significantly impede that progress. [13]

In fact, this proposal would create substantial new barriers to shareholder proposals in two key respects: a complete overhaul of the eligibility criteria and a doubling of the re-submission thresholds. The eligibility changes would build structural advantages for wealthier investors into the rule, increasing the required one-year ownership amount to $25,000—an increase of more than 1000%. An investor who holds only $2000 worth of stock must now wait three years to submit a proposal. For context, an analysis of retail investor portfolios indicates that the median portfolio value is approximately $27,700. [14] Thus, Main Street investors would generally have to invest virtually their entire portfolio into one company (something we strongly discourage) to enjoy the same rights as Wall Street investors, or they would have to wait three years to catch up to them.

Even more troubling is the lack of data to predict the effects of this proposed change. The proposal looks at limited subsets of shareholder proposal data from 2018. It then concludes that, had this rule been in effect last year, it would have blocked anywhere from zero to 56% of shareholder proposals. Thus we cannot say whether this proposal would do nothing or would block more than half of shareholder proposals. [15]

The dramatically increased resubmission thresholds are similarly stifling to shareholders. And, the new “momentum” requirement would block resubmissions when there is a 10% drop in support even if these significantly higher thresholds are met. This is presumably because a 10% change in support is considered significant. But, under the proposal, that change is only significant when it shows a drop, not an increase, in support. Let’s look at the numbers: For shareholders to get from the first to the second resubmission threshold, they must show a 200% increase in support. [16] A 199% increase? Not enough to move forward. A 10% decrease? Sufficient to block resubmission.

Finally, I add that the Commission voted yesterday to propose substantial changes to the investment adviser advertising rules. [17] Although I have concerns about certain aspects of that proposal, such as permitting testimonials, I voted to support it at the proposal stage because I think the proposal reflected a more balanced approach to protecting investors while providing flexibility to investment advisers.

In contrast, with each aspect of today’s two proposals, the odds are stacked against shareholders, and that is why I cannot support them.

I hope that commenters will weigh in to help us strike a better balance between the needs and views of shareholders and issuers going forward.

Endnotes

1See Amendments to Exemptions from Proxy Rules for Proxy Voting Advice, Proposed Rule, Rel. No. 34-87457; (Nov. 5, 2019) [hereinafter Proxy Voting Proposal], at 27 n.70 (identifying issuers who have expressed concerns about the role of proxy advisory firms, and shareholders who have disputed the need for regulatory reforms in this space). See also Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, Proposed Rule, Rel. No. 34-87458 (Nov. 5, 2019) [hereinafter Shareholder Proposal], at 10 n.13 (identifying issuers at the 2018 Roundtable on the Proxy Process who recommended revising ownership and/or resubmission thresholds), and id. at 10 n.14 (identifying investors at the 2018 Roundtable on the Proxy Process who opposed changes to the thresholds). Issuers have expressed concerns about errors in proxy advisor voting recommendations, while shareholders have pointed out the lack of evidence in this regard and the existing controls in place to mitigate errors. See Proxy Voting Proposal at 41 n.94. Issuers have advocated for mandatory review periods, while shareholders and others have expressed concerns that such mandatory reviews could increase costs, impair independence, and compromise the ability of proxy advisors to deliver timely advice. See Proxy Voting Proposal at 45 n.109, 54 nn.134-35. The Commission received 20 comment letters in response to the Roundtable favoring increases to the eligibility and/or resubmission thresholds, nearly all from issuers or their representatives. See Shareholder Proposal at 11 n.19. The Commission received 54 comment letters in response to the Roundtable (excluding 19 anonymous letters) supportive of the current eligibility and resubmission thresholds, nearly all from shareholders or their representatives. See id. at 11 n.20. Issuers have expressed concerns about the costs of shareholder proposals, while shareholders think the costs are nominal. See id. at 12 nn.21-25. Issuers have advocated increasing the amount of securities a shareholder must own to submit a proposal, while shareholders have expressed concerns that such an increase would disenfranchise investors. See id. at 16-17 nn.43-48. Issuers have urged increases to the resubmission thresholds, while shareholders are concerned that such increases would exclude proposals that take time to garner support. See id. at 44 nn.86-89. In each case, the Commission has opted for policy choices generally opposed by shareholders.(go back)

2See Council of Institutional Investors, Investor Group Responds to Wall Street Journal Editorial (Aug. 13, 2018) (noting that ISS data indicates shareholders voted in favor of management’s position on shareholder proposals 90.5% of the time); see also Letter from Glass Lewis (Nov. 14, 2018) (“[D]uring the 2017 proxy season Glass Lewis recommended voting FOR 92% of the proposals it analyzed from the U.S. issuer meetings it covers (the board and management of these companies recommended voting FOR 98% of the same) and yet, directors received majority FOR votes 99.9% of the time.”); Letter from Institutional Shareholder Services, Inc. (Aug 16, 2019) (“As it stands today, the vast majority of proxy votes are cast in favor of management. Indeed, in the past 10 years, ExxonMobil’s management has secured shareholder agreement with its recommendations on 98.6% of the items on the company’s proxy ballots.”).(go back)

3See Proxy Voting Proposal, supra note 1, at 10. I also agree with the objective of enhanced transparency through disclosure of conflicts of interest.(go back)

4See Letter from Council of Institutional Investors (Oct. 24, 2019); Letter from Ohio Public Employees Retirement System (Dec. 13, 2018). Further, the proposal relies in large part not on specific instances of material factual inaccuracies, but on generalized, unsubstantiated allegations of inaccuracies. For example, footnote 94 in today’s proposal describes a letter from Business Roundtable as “discussing examples of errors in voting advice and registrants’ interactions with proxy advisory firms to address perceived errors” (emphasis added). But a review of the letter shows that, in fact, it provides no such examples and contains only generalized allegations. See Letter from Maria Ghazal, Senior Vice President and Counsel, Business Roundtable (Nov. 9, 2018) at 11. Business Roundtable’s only source for those allegations appears to be a 2013 survey of its own members, to which they received only 20 responses. See id. at fn. 37 (citing to Business Roundtable’s own 2013 letter to Chair Mary Jo White).(go back)

5For example, as noted by our Investor Advocate, the Commission has been “reluctant to allow companies to influence the research provided to investors” by analysts. See Rick Fleming, SEC Investor Advocate, Remarks at SEC Speaks: Important Issues for Investors in 2019 (Apr. 8, 2019) at n.18.For example, as noted by our Investor Advocate, the Commission has been “reluctant to allow companies to influence the research provided to investors” by analysts. See Rick Fleming, SEC Investor Advocate, Remarks at SEC Speaks: Important Issues for Investors in 2019 (Apr. 8, 2019) at n.18.(go back)

6There are two levels of review. The second one is called a “final notice” but it will function in the same way as the first review.(go back)

7These concerns, which are not discussed in the release, have been reduced to a series of four questions in Request for Comment 26 at pages 63-64 of the Proxy Voting Proposal. I urge commenters to provide fulsome answers and data on this issue for the Commission’s consideration.(go back)

8An issuer could file its proxy statement 25 calendar days (3 weeks and 4 days) before its annual meeting. It could then take 5 business days of that time with its two reviews. That’s one week down. The largest proxy advisor has stated that in some cases it must deliver its recommendation to the client two weeks before the meeting. That’s three weeks down, leaving a total of four days (or at most six counting the weekend) for the proxy advisor to do the actual work of researching and compiling the recommendation.(go back)

9The reason given is that shareholder proponents do not file mandated disclosures upon which proxy advisors would likely base an analysis. See Proxy Voting Proposal, supra note 1, at 52-53. But I note that the issuer feedback anticipated by this proposal is not limited in any way to issues that appear in mandated disclosures.(go back)

10Kosmas Papadopoulos, The Long View: The Role of Shareholder Proposals in Shaping U.S. Corporate Governance (2000-2018) (Feb. 6, 2019), https://corpgov.law.harvard.edu/2019/02/06/the-long-view-the-role-of-shareholder-proposals-in-shaping-u-s-corporate-governance-2000-2018/.(go back)

11Indeed, we’ve seen increasing rates of voluntary adoption of such disclosures by issuers and demands for standardized disclosure from large institutional investors. See Gabriel T. Rubin, Show Us Your Climate Risks, Investors Tell Companies, Wall St. J. (Feb. 28, 2019).(go back)

12See Financial Stability Board, Task Force on Climate-Related Financial Disclosures, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures, at 1 (2017) (“In general, inadequate information about risks can lead to a mispricing of assets and misallocation of capital and can potentially give rise to concerns about financial stability since markets can be vulnerable to abrupt corrections.”).(go back)

13With proposals related to environmental and social issues making up more than half of shareholder proposals in the 2017 and 2018 proxy seasons, shareholder efforts to improve climate-related disclosure would be among those most affected by the proposed rule. See Maximilian Horster and Kosmas Papadopoulos, Climate Change and Proxy Voting in the U.S. and Europe (Jan. 7, 2019), https://corpgov.law.harvard.edu/2019/01/07/climate-change-and-proxy-voting-in-the-u-s-and-europe/.(go back)

14Based on staff’s review of the data discussed in the Shareholder Proposal, supra note 1, at 68 n.139, retail investors’ stock portfolios has a median value of $27,699.14. The data discussed in footnote 139 is “data provided by a proxy services provider” and includes 22.2 million retail accounts that held shares of U.S. public companies in 2017. I note that the data reviewed in the economic analysis to determine the effect of the proposed changes to the eligibility thresholds was limited to (1) ownership information in proxy statements from 2018 and (2) ownership information from proof-of-ownership letters submitted in connection with the Commission staff’s no-action process under Rule 14a-8 in 2018. These are incomplete data sets that produced a small sample size and included no information on holding periods. The vast amount of data on retail investor accounts discussed in footnote 139 would have been useful in analyzing the effect of the proposed eligibility thresholds on retail investors, but no such analysis is included in the release. I urge commenters to weigh in by providing data on retail investor holdings, or pointing to available data sets, so that we may better assess the effects of the proposed new eligibility thresholds.(go back)

15See Shareholder Proposal, supra note 1, at 120-21. I also question, if the concern is ensuring sufficient economic interest behind any given shareholder proposal, what purpose is served by preventing aggregation of shareholders’ holdings for the purposes of meeting eligibility requirements—a policy that has been in place for decades. The economic stake behind the proposal is the same whether it be composed of one, two, three or more shareholders.(go back)

16Under the proposed rule, a shareholder proposal must garner at least 5% of votes cast on the first vote to be eligible for resubmission. It must then move from 5% to at least 15% of votes cast on the second vote. This is a 200% increase in support from the first vote to the second vote.(go back)

17See Investment Adviser Advertisements; Compensation for Solicitations, Proposed Rule, Rel. No. IA-5407 (Nov. 4, 2019).(go back)

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