Proposed SEC rule changes could impede investor activism
The modifications, proposed in November and now out for public comment, seem to have been advocated by a network of oil and gas interests.
The Securities and Exchange Commission (SEC) is considering rule changes that could undermine investors’ ability to push for better environmental performance at publicly traded companies by creating new restrictions on who is eligible to file shareholder proposals and how much support they need to make it onto the proxy statement.
A network of corporate oil and gas interests appears to be behind the new proposals, partly by manipulative means, according to an extensive Bloomberg investigation.
To understand why you should be watching what would seem at first blush to be mundane, technocratic tinkering with wonkish regulation, it helps to understand the mechanisms at play.
Shareholders in publicly traded companies have the right to vote on certain corporate matters. As most people cannot attend companies’ annual meetings, corporations offer shareholders the option to cast a proxy vote by mail or electronic means. While most proposals originate with company management, a growing investor movement uses shareholder proposals or resolutions to promote more sustainable business practices. This is becoming increasingly difficult for corporate boards to ignore.
This process is codified under SEC Rule 14a-8, and investors with an interest in environmental protection consider it a useful way to proactively and constructively engage with the companies in their portfolio. Sustainability-minded investors have made unprecedented headway with shareholder resolutions in the last few years, achieving increasingly high votes in favor of their proposals and, for the first time in 2017, receiving a majority of votes in favor. These developments came about in no small part because major institutional investors, including BlackRock, Vanguard and Fidelity, threw their support and weight behind some proposals.We see this unjustified action by the SEC as part of a broader move across this Administration to realign the regulatory landscape in favor of corporate interests at the expense of the public interest.
Indeed, it is acknowledged in the investment community that environmental and social issues have a significant bearing on financial outcomes, according to the Sustainable Investments Institute (Si2). The biggest mutual funds, which control large swaths of the financial markets, are paying closer attention to engagement on these issues with their portfolio companies. Their support for many ideas expressed in shareholder resolutions has both driven support higher and made companies more likely to reach agreements with shareholder proponents.
Not everyone is happy with the increasing success of shareholder resolutions, and the SEC appears to be responding to calls to constrain the process.
The proposed revisions to Rule 14a-8 (PDF), which the SEC published Nov. 5, would place new restrictions on who may file proposals, increase the amount of support a proposal must earn to qualify for resubmission the following year, and impose new requirements on proxy advisory firms.
These ideas are the long-held aspirations of business groups such as the Business Roundtable and the National Association of Manufacturers (NAM), according to Si2. The SEC is accepting public comments on the proposed changes.
Bloomberg reporters Zachary Mider and Ben Elgin published an investigation Nov. 19 that bolstered claims of a clandestine campaign by oil and gas interests to promote the proposed changes at the SEC. The investigation found evidence that a coalition of industry groups including NAM — of which Exxon Mobil and Chevron are members — sought to manipulate the public comment process to create the impression that droves of ordinary Americans passionately support the rule revisions.
SEC Chairman Jay Clayton even held up some letters from "long-term Main Street investors" at a meeting in Washington, D.C., as a source of support for the changes. But according to Mider and Elgin, "a close look at the seven letters Clayton highlighted, and about two dozen others submitted to the SEC by supposedly regular people, shows they are the product of a misleading — and laughably clumsy — public relations campaign by corporate interests."
NAM, the Main Street Investor Coalition it founded, the U.S. Chamber of Commerce and the Business Roundtable argue that the investment process has become politicized, and that corporate management teams and boards should focus on maximizing profits. Further, some suggest that individual investors are being subsumed by the shareholder resolution process.
However, individual investors almost never vote their proxies, and the Bloomberg investigation revealed that those few who appeared to take the trouble to comment on the SEC proposal lent their names to the letter-writing process after being persuaded to do so by a public relations firm. The PR firm wrote the letters, and the people whose names were signed acknowledged after the fact that they were entirely unfamiliar with the topic of proxy voting.
On the other side of the fence, Ceres — a coalition of investors and companies working to solve sustainability challenges — cautions that the proposed rule change would "restrict an important avenue that investors use to manage risks and respond to emerging trends."Why would less information about complex matters be better? The SEC doesn’t provide a good answer for that.
Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility, echoed the position of many investors who oppose the revisions: "For over 75 years, the shareholder proposal process has served as a cost-effective way for corporate management and boards to gain a better understanding of shareholder priorities and concerns, particularly those of longer-term shareholders concerned about the impact of environmental, social and governance issues on the long-term value of the companies that they own. We see this unjustified action by the SEC as part of a broader move across this Administration to realign the regulatory landscape in favor of corporate interests at the expense of the public interest."
The proposed rule changes would:
- Increase the value of stock shareholders need to own before they can submit proposals if they haven’t been invested for three years;
- Raise the level of support shareholders need to resubmit a proposal that previously had failed;
- Eliminate investors’ longstanding practice of pooling their shares to meet filing thresholds; and
- Place substantial new requirements on proxy advisory firms to share their recommendations with corporate management before shareholders could see them, and to allow companies time to review and comment on the firms’ advice.
Ceres contends that the additional requirements of proxy advisory firms will undermine their independence, objectivity and effectiveness.
Si2 conducted a backtest analysis of previous shareholder resolutions and found that more than 14 percent of them would have been excluded under the proposed resubmission requirements. It also found that the new rules disproportionately would have disqualified shareholder resolutions seeking greater transparency and disclosure on corporate political spending and lobbying. The SEC did not evaluate the nature of the resolutions that would be affected in its economic analysis.
"The SEC’s economic analysis appears very thin and lopsided, and does not even attempt to evaluate the benefits of the shareholder resolution process," said Heidi Welsh, Si2’s executive director. "Shareholder proposals provide an early warning signal of risks and opportunities for management and boards. It allows them to test the waters with their broader investor base on issues identified by smaller investors, and to get more information about their shareholders’ views. Why would less information about complex matters be better? The SEC doesn’t provide a good answer for that."
Consider the case of Boeing. Under Si2’s analysis, a shareholder resolution requesting more disclosure from the company on its lobbying activities would not have been allowed to proceed past 2016, despite that proposal’s generally upward trend in support. In the past year, we have seen the tragic cost in human lives of poor regulatory oversight of Boeing’s safety procedures. Of course, a complex set of factors contributed to the Boeing 737 Max crashes, but a case could be made that some of the company’s shareholders had detected a problem well in advance of the crisis.
While no database exists that would allow similar backtesting of the proposed changes in stock ownership thresholds and pooling elimination, investor groups who have been active in submitting proposals say their ability to do so under the new requirements would be significantly hampered.
The proponents of the rule changes declined to comment further beyond their existing public statements. High-level managers at several energy and oil and gas companies allowed, off the record, that shareholder resolutions had been instrumental in driving support for important environmental innovations within their organizations, and expressed concern that any weakening of that signal could stymie important progress.
The public comment period is open to all until Feb. 3. Thereafter, the SEC will have to hold another vote to finalize the rules. It has not yet announced the timing of that process.
Editor's note: At GreenBiz 20, we’ll host the second annual GreenFin Summit, bringing together 200 or so companies, institutional investors and ratings organizations for two half-day sessions to identify opportunities to align corporate reporting with investor needs.