By definition, owning a share of stock gives the holder partial ownership of a company. Even though institutions like mutual funds and pensions control the vast majority of investment activity in the United States, that still makes for a whole lot of voices jockeying for sway over the direction of a company. As such, shareholder resolutions have turned into a major flashpoint in corporate governance as activists try to force companies to reckon with social issues such as climate change.
The Securities and Exchange Commission just shifted some of that control back to corporate management. As the result of a split three-to-two vote of its commissioners last week, the SEC proposed a rule that would raise the bar for including shareholder proposals in the firms’ annual proxy materials.
Currently, proposals must receive the support of at least 3% of a company’s shareholders within a year of their introduction to be resubmitted as part of a company’s proxy materials. After that, the threshold rises to 6% of shareholders within two years and 10% within three years. The new rule would require 5% support for the first submission of a proposal, followed by 15% in the second go-round and 25% for the third.
Additionally, the Commission is pushing to raise the stakes for the ability to even file a shareholder resolution. Under the current rule, investors must own either a percent or $2,000 in company stock to put forward a resolution. The SEC’s “tiered” proposal would allow shareholders who have held $2,000 in company stock for three years to submit a shareholder resolution. That threshold would rise for newer shareholders, who would need to hold $15,000 worth of stock for two years or $25,000 worth of stock for a year before they could submit a proposal.
The proposed amendments “recognize the significant changes that have taken place in our markets in the decades since these regulatory requirements were last revised, including, in particular, the types and use of communications, the types and frequency of shareholder-company engagement and the substantial shift to investing through mutual funds and ETFs, rather than directly by Main Street investors, ” according to SEC Chairman Jay Clayton. Moreover, Clayton said the proposed changes would lead to “constructive engagement by long-term shareholders in a manner that would benefit all shareholders and our public capital markets.”
Corporate reformers appeared less sanguine about the amendments. The Council of Institutional Investors (CII), a Washington, D.C.-based governance watchdog, painted the Commission’s decision as an assault of shareholder rights. On top of the recent guidance from the SEC regarding proxy advisory firms, the organization accused the Commission of interfering with the ability of investors to express their opinions on corporate management.
Pendulum swings of this sort are to be expected when a business-friendly administration takes the White House, and proponents of loosening the reins on companies would contend that an overbearing regulatory environment encourages investment capital to flee to foreign markets. With this move, it would appear the SEC is embracing that viewpoint.