SEC Rule 14a-8 Shareholder Proposals: No-Action Requests, Determinants, and the Role of SEC Staff

Background

Since 1947, no-action letters under Securities and Exchange Commission (SEC) Rule 14a-8 have allowed SEC staff members to regulate shareholder voice upon management’s request, acting as intermediaries between shareholders and management on matters related to shareholder proposals. Specifically, no-action relief under 14a-8 allows management to exclude shareholder proposals from the annual proxy with SEC staff approval. The literature notes that management seeks SEC staff support to exclude nearly 40% of all shareholder proposals and that the staff concurs 73% of the time, suggesting nearly 30% of all proposals are excluded through this process.

Scholars and practitioners have debated the merits of the SEC staff’s role as the arbiter of shareholder proposals. Supporters of the no-action process argue the SEC staff identify and exclude value destroying proposals. Opponents contend managers often seek to exclude proposals widely supported by shareholders, constraining shareholder power and thereby limiting shareholder value. Moreover, even the SEC has debated whether its involvement in this process adds value. The former director of the SEC Division of Corporation Finance, Bill Hinman, suggested engagement between shareholders and management might improve if the SEC could “get out of the way.”

My Findings

Despite these competing views on the efficacy of the no-action process, little is known about what determines SEC no-action decisions. My paper empirically establishes the determinants of the SEC staff’s decision to grant 14a-8 no-action relief and provides a descriptive analysis of these factors. Using a sample of 3,040 no-action responses from the Intelligize dataset between January 2008 and August 2019, I find legal characteristics, pressure on the SEC staff, and proposal attributes are statistically significant determinants of the SEC staff’s decision to grant no-action relief. Among legal characteristics, I find the most controversial and frequently cited exclusion, ordinary business, is also one of the strongest predictors of no-action relief, increasing the probability of exclusion by 25%. In terms of pressures on the SEC staff, proposals sponsored by individuals (unions) are the most (least) likely proponent to face exclusion, with a 15% higher likelihood of exclusion, relative to proposals sponsored by unions. Within proposal attributes, proposals related to environmental topics are the least likely to be excluded.

As my final category, I consider how individual SEC staff members influence no-action decisions. On the one hand, regulators can interpret and enforce the same regulation differently. Specifically in the 14a-8 no-action setting, SEC staff members must use professional judgment to determine the excludability of proposals. On the other hand, the role of individual SEC staff members may be limited, due to the collaborative nature of their work and multiple levels of review. Using SEC staff fixed effects, I find that, as a group, SEC staff members are incrementally associated with no-action relief beyond the previously established determinant categories. An incremental R² analysis reveals legal characteristics explain approximately 76% of the explained variation in the SEC staff’s decisions, followed by staff characteristics (12%), pressure on the staff (8%), and proposal attributes (4%). This analysis suggests individual staff members play a relatively important role in determining no-action relief.

To assess whether SEC staff add value to the no-action process, I examine market responses to decisions made by those staff who individually exhibit a statistically significant association with no-action decisions. I find that decisions by SEC staff who tend to concur with management (i.e. “positive” staff) enhance firm value, while SEC staff with a tendency to deny management’s request (i.e. “negative” staff) do not. Decisions by negative staff are not value increasing because favorable market reactions to concur decisions are offset by negative responses to unable to concur decisions. Since the members of my sample of negative staff are relatively less experienced than positive staff, these findings are consistent with inexperienced staffers only concurring when decision uncertainty is sufficiently low. My results are robust to a battery of sensitivity tests, including industry and year fixed effects, nonparametric estimation, various clustering of standard errors, controlling for selection effects, and tests to attenuate concerns related to nonrandom staff assignment.

Concluding Remarks

Scholars in law, finance, economics, and accounting, have long been interested in shareholder proposals and their role in shareholder activism. Given evidence that shareholders pay a premium for the right to vote on the annual proxy and increasing investor attention on CSR and ESG issues, understanding how SEC staff members impact the contents of the annual proxy is growing in importance.

While the existing literature primarily addresses the value implications of the 14a-8 SEC no-action process, my investigation focuses on how the SEC staff makes these decisions by providing the first empirical analysis of no-action determinants. Perhaps my most interesting finding suggests individual SEC staff members influence which proposals are voted on and which never appear on the proxy statement. As the no-action process gains increased attention in practice, my results can improve our understanding of a controversial process that empowers management to dismiss shareholder proposals with the support of the SEC.

Note: This post relies substantially on the text written within the related article.