Society for Corporate Governance Comment Letter on Proposed Amendments to Rule 14a-8

Darla Stuckey is President and CEO of the Society for Corporate Governance. This post is based on a Society for Corporate Governance comment letter to the SEC in response to request for comments on the proposed rule regarding the submission and resubmission of shareholder proposals (discussed in posts here and here).

The Society for Corporate Governance (the “Society”) appreciates the opportunity to provide comments to the U.S. Securities and Exchange Commission (“SEC” or “Commission”) on the Procedural Requirements and Resubmission Thresholds under Exchange Act 14a-8 (the “Proposed Rule”).

Founded in 1946, the Society is a professional membership association of more than 3,700 corporate and assistant secretaries, in-house counsel, outside counsel and other governance professionals who serve approximately 1,700 entities, including 1,000 public companies of almost every size and industry. Society members are responsible for supporting the work of corporate boards of directors and the executive managements of their companies on corporate governance and disclosure matters.

I. Introduction

The Society recognizes the significance of the shareholder proposal process as an important means for shareholders to engage with the companies in which they invest. However, since 1954, when the last major amendments to Rule 14a-8 were enacted, there have been dramatic changes in the public markets, the manner in which shares are held and voted and the ways in which companies and their shareholders engage. The fundamental changes in the relationship between issuers and shareholders (including with respect to shareholder engagement and the shareholder proposal process) are not adequately addressed by the current Rule 14a-8 regime.

As has been broadly reported, the number of shareholder proposals has increased significantly. Meanwhile, the current concentration of ownership in institutional hands has reached levels that could never have been foreseen in 1954. When this concentration is coupled with the influence that proxy advisors wield with institutional investors, many of these proposals are virtually guaranteed a baseline level of support—both when originally submitted and then resubmitted. The automatic baseline level of support that flows from proxy advisor recommendations quite often exceeds the SEC’s current (and even proposed increased) shareholder proposal resubmission thresholds.

Finally, in contrast to 1954 when the shareholder proposal process was virtually the only way for shareholders to convey their message to companies and to other shareholders, we now have the internet and social media as means by which shareholders can speak out. In addition, the SEC has dramatically relaxed its rules relating to communication between and among shareholders.

Moreover, issuers now provide their shareholders with more options for communicating and are engaging and addressing shareholder matters on a regular basis. As SEC Chairman Clayton has observed, “72% of S&P 500 companies report[ed] engagement with shareholders in 2017, compared to just 6% in 2010.” Given the significance of all of these changes, the Society supports the SEC’s proposal to modernize Rule 14a-8 in ways that preserve the best of the shareholder proposal process, while curtailing its undesirable aspects.

II. Estimated Issuer Costs of Managing Shareholder Proposals

An issuer’s financial and non-financial costs of addressing shareholder proposals are significant and an appropriate consideration in the SEC’s efforts to modernize Rule 14a-8. An issuer’s costs of dealing with shareholder proposals upon initial and subsequent submissions vary based on various factors. These factors include: (1) whether no-action relief is sought from the Staff, (2) the nature of the proposal, (3) the governance position of the issuer, and any changes thereto, over the course of the years of submission, (4) the importance of the issue at hand to the company and the proponent, and (5) the need to seek outside legal advice, proxy solicitation services, consulting services, or other advisory services to respond to the proposal.

In a recent Society survey of public company members, 41% estimate their company’s monetary costs of addressing shareholder proposals is between $10,000 to more than $200,000 in any given year. The disparate range is due to differing company practices about how they resource responding to shareholder proposals and whether they track the costs of internally resourced strategies. A 2019 study by the Center for Capital Markets Competitiveness found that such costs average $87,000 per proposal, which is consistent with Society member experience.

For example, an individual Society member provided the costs of a single shareholder proposal in each of 2018 and 2019. In 2018, the member’s company spent $109,792, which included seeking no-action relief and ultimately concluding with withdrawal of the proposal. In 2019, the same company spent $133,587 on a proposal that was ultimately included in the proxy.

In addition to the direct financial costs, there are significant additional costs incurred by issuers when addressing shareholder proposals, including time dedicated by internal legal, corporate governance, communications and investor relations staff, subject matter experts, executive management, and the board of directors on evaluating each proposal, creating and implementing an engagement strategy and preparing a response. Since the opportunity cost imposed by shareholder proposals is significant, the Society believes that a shareholder’s access to an issuer’s proxy statement should be balanced against the obligations of boards and management to deliver value to all shareholders, not just proposal proponents.

III. Proposed Increase to Eligibility Requirements – Rule 14a-8(b)

The Society appreciates the Commission’s interest in examining and proposing changes to the initial stock ownership eligibility thresholds for including a shareholder’s proposal in an issuer’s proxy statement. The Society is supportive of the proposal to establish more meaningful ownership thresholds with respect to the value of shares owned and the length of time those securities have been held, including a tiered approach that recognizes the importance of having a longer-term ownership interest. The SEC is to be commended for seeking the correct balance between a shareholder’s economic stake or investment interest in the issuer and all the costs of the inclusion of a proposal in the company’s proxy statement mentioned above. We believe the cost-shifting of the proxy solicitation from the proponent to the company’s other shareholders needs to be considered.

The Society believes that targeted modifications to the Proposed Rule are appropriate to reflect inflation and/or stock market performance. Considering the changes in the value of shares since 1954, the Society recommends increasing the lowest tier threshold from $2,000 to $3,000 to reflect Consumer Price Index (CPI) and stock market changes, as highlighted by the Staff in the Proposed Rule. In addition, the Society suggests instituting an automatic periodic indexing mechanism. This system could be based on CPI or stock market changes, although, admittedly, using CPI changes would be easier to administer. The Society suggests adjusting the threshold at three-year intervals if changes wrought by inflation or the stock market would cause an increase of more than $500 to any of the ownership levels.

IV. Proposed Changes to the Resubmission Thresholds – Rule 14a-8(i)(12)

The Society appreciates the Commission’s interest in reexamining and proposing changes to the shareholder proposal resubmission thresholds set out in Rule 14a-8(i)(12). Repetitive (and unsuccessful) proposals are one of the most frustrating 14a-8 issues confronting Society members.

We believe the resubmission test should include a “positive” momentum requirement such that a proposal which has “stalled” in shareholder support would not be eligible for resubmission without a cooling off period. In addition, the Society is generally supportive of the Staff’s proposal to increase the thresholds. However, we believe that the Proposed Rule’s “5/15/25%” thresholds do not go far enough. For the reasons set out in more detail below, the Society believes that the Proposed Rule should include resubmission thresholds proposed by the Commission in its 1997 Proposing Release of 6% favorable vote on the proposal’s first submission, 15% on the second submission, and 30% on the third. These thresholds are even more appropriate today than they were in 1997, and they would still appropriately balance the interests of the issuer community and shareholder proponents.

A. Momentum Requirement

The Society is supportive of the proposal to impose a momentum requirement on the ability to resubmit a proposal after its third year of consideration. Society survey results found that approximately 24% (28 companies of 116 respondents) of the companies represented had included a substantially similar proposal for more than three consecutive years (and in some cases, ten years or more). Of those 28 companies, three reported proposals passing in the most recent vote, but the majority experienced a vote outcome in the ~20% to mid-30% range even after a three (or more) consecutive year run. The Society believes that, in lieu of a requirement that support for a proposal decline at least 10% in any year after year three in order to be excludable, a positive momentum requirement should be imposed. Positive momentum would require that proposals with stagnant support at a level that is above the three-year threshold but below majority support must show an increase in support in order to be eligible for resubmission without a cooling-off period. In other words, if, after three attempts, the vote support for a shareholder proposal does not increase year-on-year, the issuer (and, ultimately, other shareholders) should not be required to incur the costs of inclusion in perpetuity and, therefore, the proposal should be excludable, at least for a period of time.

B. Resubmission Thresholds

As stated in the 1997 Proposing Release and supported by current Staff analyses and the results of the Society’s member survey, the Society believes that a proposal that has not achieved these higher levels of support over the designated timeframe has been fairly tested and likely stands no significant chance of obtaining the level of voting support required for approval. As such, companies should not be obligated to dedicate their and their other shareholders’ resources on the proposal. We believe, however, that a failure to obtain a 30% favorable vote after three attempts is a more appropriate threshold to reflect that inability to obtain majority support. This threshold also reflects recent significant changes to the voting process over time, as discussed above.

V. One Proposal Per Company Limit

Currently, Rule 14a-8(c) provides that each shareholder may only submit one proposal to a company for a vote at an annual meeting. The Commission’s proposed revision to this rule would apply the one-proposal limit to “each person” rather than “each shareholder”, thus preventing a shareholder from submitting one proposal in its own name while at the same time submitting additional proposals as a representative of other shareholders, who may have no interest in the issue.

The Society agrees that the proposed clarification of the one proposal limit is appropriate, and we appreciate the efforts of the Commission to reduce the chances for abuse by adhering to the intent of the one-proposal limitation. Under the current rules, the one-proposal limit has been abused. In fact, in 2019, a single proponent submitted 23% of all the shareholder proposals received by companies. This type of abuse occurs when representatives seek out multiple shareholders simply to be able to submit more than one proposal to a particular company. More broadly, Society survey results found that 49% of respondent Society members had received a shareholder proposal submitted by a representative on behalf of a shareholder in the last three years. Moreover, the Society survey shows that more than 39% of respondent companies have received more than one shareholder proposal from the same person or representative in the last three years.

The Society believes that the rule as proposed would greatly reduce the chances for abuse, and we have included below an additional modification designed to further clarify and enhance the proposed updates. The Society suggests that the SEC require shareholders to provide a certification that they are submitting the proposal of their own accord and are not doing so at the request or solicitation of a representative that already has submitted (or is considering submitting) a proposal to the same company. Such a certification would provide greater assurance that representatives are not actively soliciting multiple proposals and reduce the chances for abuse.

Question 36 in the Proposed Rule asks whether companies should be required to disclose in the proxy statement the number of proposals withdrawn or excluded pursuant to a no-action request. We believe the answer is no. As part of the shareholder proposal process, we believe that engagement is helpful, particularly for the parties to understand each other’s priorities and sensitivities. Proposals are often withdrawn or negotiated as part of that engagement, with both the shareholder proponent and the company coming away with a better appreciation of the issues raised. Accordingly, we do not believe that it would be helpful information for investors if companies were required to disclose the number of proposals that have been withdrawn or excluded pursuant to a no-action request. A proponent is free to make public his or her proposal, as well as the outcome of the proposal, and they often do. We believe this information is not necessary to investors making a voting decision and, more importantly, is already available by other means, namely the SEC’s public website that lists Rule 14a-8 determinations. Furthermore, we believe that such a requirement could serve as a deterrent to such engagement.

VI. Support Requiring the Designation of a Lead Filer

The Society appreciates the Commission’s statements in the release setting forth the Proposed Rule that the best practice for co-filed proposals is to clearly state in the initial submittal letter that the proposal is being co-filed and to identify the lead filer. We support revising the rules to require these practices, including a requirement that co-filers identify a lead filer who is empowered to negotiate with the company and has the authority to withdraw the proposal on behalf of each co-filer. The Commission did not propose such changes but requested comment on whether it should revise the rules in this way. We believe that these changes, if required by the final rule, would ease the administrative burden of companies and the Commission by reducing confusion created by some duplicative proposals and allowing companies to negotiate with one party with the assurance that such party speaks for all co-filers.

In some instances where a proposal is co-filed, companies have experienced significant burdens in engaging with proponents. For example, a company may enter into discussions with one co-filer, believing that a satisfactory resolution will result in all co-filers withdrawing the proposal. If the co-filer engaging with the company does not have authority to negotiate and withdraw the proposal on behalf of all co-filers, the company may come to terms with one filer only to learn later that other co-filers will not withdraw. In such cases, the company would then be subject to the burden of further negotiations with the objecting co-filer(s) or seeking no-action relief to exclude the proposal.

The Society supports including a requirement that the transmittal communication of a shareholder proposal must clearly state when a proposal is being co-filed. As the Commission noted in footnote 61 to the Proposed Rule, the current rules can lead to situations in which companies receiving duplicative proposals from multiple shareholders are unable to ascertain whether a proposal is co-filed. A proposal that is substantially duplicative of a previously received shareholder proposal that the company includes in its proxy statement may be excluded under Rule 14a-8. In light of the excludability of such duplicative shareholder proposals, the Society further suggests that the Proposed Rule be modified to allow a company to presume that a proposal which is duplicative of a previously received proposal that has been included in a company’s proxy is, in fact, excludable without seeking no-action relief. Although the practice of the Staff is generally to concur with a company decision to exclude a duplicative proposal where the co-filer relationship was not clear, requiring proponents to include co-filing status and allowing companies to presume that a proposal is duplicative would likely reduce the frequency of these types of no-action requests.

For example, NextEra Energy, Inc. (” NextEra”) submitted such a no-action request to exclude a proposal under Rule 14a-8(i)(11) with respect to the 2019 proxy season. In its no-action request , NextEra stated that it had received two proposals that had ” the same form and substance , and the text of the proposals differ[ed] by only a few words.” Neither proposal indicated that it was co-filed. NextEra fi led a no-action request to exclude the later -submitted of these proposals; in response, the proponents revealed that the proposals were intended to be co-filed. Although the Staff concurred with NextEra’s decision to exclude the duplicative proposal, the no-action letter process wasted time and resources for both the company and the Staff: as it included multiple letters submitted to the Staff by NextEra and the proponents.

Imposing a requirement that shareholder proponents clearly state in the initial submittal letter that the proposal is being co-filed and identifies the lead filer is a simple and low-cost way to improve the 14a-8 shareholder proposal process.

VII. A Proponent Should Provide Availability and Contact Information

The Proposed Rule seeks to amend Rule 14a-8 to require a statement from the shareholder proponent that he/she is able to engage with the company no less than 10 days nor more than 30 days after the submission of the proposal. The Proposed Rule also requires the proponent to include contact information, as well as specific business days and times that the proponent is available to engage with the issuer. In light of the fact that some frequent shareholder proponents effectively refuse to engage with issuers, the Society supports these process improvements and recommends minor clarifications described below.

The Society suggests the SEC clarify that the times proposed for engagement by the proponent be during “normal business hours.” In addition, we suggest that, in cases where the shareholder proponent is different from the lead filer, the lead filer be required to participate in the engagement. While seemingly prosaic, we believe these clarifications will have a significant impact and substantially improve the shareholder proposal process.

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We appreciate the opportunity to provide comments on the SEC’s proposal to modernize Rule 14a-8. We would be happy to provide you with further information to the extent you would find it useful.

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The complete publication, including footnotes and appendix, is available here.

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