Open Letter to Corporate America’s Executives and Investors About Shareholder Proposals

Executives and shareholders:

Since the maturation of the industrial age, our nation’s economic success has rested on a delicate balance of power between the investors who fund and own large companies and the executives who run them. That balance is now at risk, as government officials are substantially remaking the rules that govern the relationship between shareholders and corporations. Most imminently, on August 28, the US Securities and Exchange Commission (the SEC) sent the White House a proposal to rescind Rule 14a-8, the right of shareholders to have their proposals presented to fellow shareholders, a right that has been in place in some form for more than seventy years. If this right is eliminated, state law and private ordering will have to fill the gap.

This letter asks that corporate executives and investors come together on a private ordering solution. The alternative is brinksmanship that likely leads to a risky cycle of destabilizing extremes. While simply eliminating Rule 14a-8–reducing shareholder rights–could be seen as an unambiguous win for executives, a sudden shift of power away from capital providers may well have unintended impacts on a market for capital that has generated great wealth for our nation.

For some context, note that one hundred dollars invested in the S&P 500 (a good proxy for the US public markets) ten, twenty, and forty years ago (adjusted for inflation) is now worth, respectively, $334, $868, and $ $2781. The stock traded on public markets is worth an astonishing $75T today. During this period of wealth generation, the proposal right was used by investors to influence significant changes in corporate governance and policies, so we should be wary of claims that the proposal process harms the public markets; if anything, the process is correlated with success.

That said, investors should be open to the possibility that executives have legitimate concerns about misuse of the proposal process; if investors resist reasonable modifications designed in good faith to reduce management distraction, corporate executives may feel justified in exercising political power to upend basic shareholder rights.

Both camps have reason to seek a reasonable compromise that will preserve the conditions for value creation that have fueled our economy over the last forty years. This isn’t naivete: shared interest in value creation does not mean that the interests of investors and executives (or other Americans) are always a complete match: time frames can differ; value must be parceled out among a variety of stakeholders; and corporate externalities inevitably create impacts on investors and others to an extent not shared by executives. These are real differences that require reasonable trade-offs among different stakeholders.

For more than a century, a mixture of federal and state (mostly Delaware) rules has made these trade-offs (even if imperfectly) in defining the relationship between executives and shareholders. Changes to the rules have been incremental, allowing for trial and error, as courts and regulators addressed the imperfections, changed conditions, and emerging political priorities. Markets and the economy were able to accommodate a gradually altered landscape. Our market rules are as much a product of evolution as design, and I suspect that is a critical component of their astounding success.

But that careful, evolutionary approach is at risk, and the rescission of Rule 14a-8 is merely one example. The potential for radical change also includes the loss by shareholders of their right to seek relief in court for fiduciary breaches and to effectively vote on directors and other matters. The cost of such changes could be enormous. Markets may miss useful information traditionally used in allocating capital. Proponents may resort to costlier methods to get their points across. When political winds shift, there may be a countermove to federalize many aspects of corporate law that have traditionally been left to the states. Companies may experience a delegitimization of their power as executives appear less accountable to owners. We seem to be making major changes to an engine that has underpinned decades of growth with no real sense of the consequences.

Today we are on the cusp of one such change. The White House will certainly support the rescission of Rule 14a-8. This sudden change will leave it up to the states to create or authorize a similar right for companies under their jurisdiction. That means Delaware for most publicly-traded corporations. But because the federal government is no longer setting a floor for these rights, states like Texas and Nevada may establish or permit very restrictive rights to tempt corporate management to reincorporate. This dynamic may leave Delaware caught between shareholders demanding a strong right that replicates the old federal rule and companies demanding an extremely watered-down version.

Let me pause here to say that I have been on all sides of this debate. For the first 26 years of my legal career, I was a lawyer in private practice and represented many companies receiving (and resisting) shareholder proposals. But later in my career, I worked with investors to bring scores of proposals. I have lived both sides of the argument. Moreover, I am also very familiar with being in the middle, having spent more than three decades helping draft annual recommendations to amend Delaware’s corporation law.

In the past, when issues like this came to a head, investors and companies found compromises, which Delaware was able to accommodate through modest statutory changes. This happened when shareholders pushed for director elections that required a majority of votes and when they sought a limited right to include their own nominees in company proxy materials. In both cases, Delaware was able to accommodate emerging market practices that represented just this type of compromise.

This time feels different: each side of the debate on shareholder proposals may feel the urge to dig in. Shareholders might want whatever was in the federal rule, even if the companies have legitimate questions about its breadth. On the other hand, companies might see an opportunity to virtually end the proposal process.

The reality is that if the market cannot find a compromise, executives may win this round, either by convincing Delaware to create a weak right, or by leading an exodus out of the state. Such a win may be Pyrrhic at best because the change will be destabilizing and could lead to catastrophe, as the cycle of reaction accelerates.

I am writing this letter to urge the two camps to come together as they have in the past to find a more incremental solution that all can accept, even if they don’t love it. That might be just the thing to show your constituencies—and perhaps the American people—that compromises that work to preserve our common interests are both possible and preferable.

Thank you for your time.

The views expressed in the post are solely those of the author and do not represent the views of any institution with which the author is affiliated.