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Background Paper on Both SEC Proposals

Background Paper on Both SEC Proposals

BACKGROUND: 

The SEC’S Proposals on Shareholder Resolutions

 

Background

Shareholder resolutions have been filed for over 60 years by individuals and over the past 35 plus years institutional investors have also become involved in filing.  Resolution topics range from reforms in governance, to climate change, diversity, codes of conduct on sweatshops or urging disclosure of a company’s corporate responsibility record.

These resolutions have been very effective in prompting change in company policies and practices.  Annually, one quarter to one third of resolutions are withdrawn because of constructive dialogue with the company resulting in WIN-WIN agreements.

On pages 50-58 of the SEC’s proposed rule 34-56160, there are a series of proposals (posed both as concepts for comment and as general questions), virtually all of which could destroy or cripple our rights to file shareholder resolutions, thus eradicating a time honored tool to hold companies accountable.

It is not rhetorical flourish to describe this set of proposals as a dangerous threat to our shareholder rights.  SEC Commissioner Paul Atkins said “advisory resolutions detract from operating companies” primary business.  Such proxies present “competing goals of collective action versus the tyranny of the minority.”  Further, he adds this minority uses their “nominal economic interest to hijack the agenda of all investors.”

Commissioner Atkins argues that the SEC staff is burdened with responding to these resolutions and that in this new electronic age advisory resolutions are not necessary since investors and companies can communicate using other methods.  His clear intention is to take away our rights or at least limit them significantly.

Below we have detailed some of the ways in which the SEC proposals and questions work to cripple shareholder rights regarding filing resolutions:

 

1. THE OPT-OUT OPTION

The SEC asks for comments on the right of a company to “opt-out” of the shareholder resolution process either by seeking a vote of the shareholders to give them that authority OR, if empowered under State law, to have the Board vote to opt-out of receiving advisory resolutions.

Either option would have disastrous consequences:

 

  • The most unresponsive companies would likely rush to opt-out because resolutions act as one important means of holding them accountable.  Companies with poor records of investor communications would thus be empowered to isolate themselves further.  Consider a company with a poor governance record or with a history of controversy with investors, one which had received a number of resolutions in the past which received a strong vote or even a 70% vote.  The company would be free to “opt-out,” thus disenfranchising its shareowners by removing a right they had been successfully utilizing.
  • Allowing companies to opt-out would result in an uneven playing field with some companies allowing resolutions and others prohibiting them.
  • The result would be shareholder chaos with investors wondering about whether a company allowed resolutions or not.
  • Investors without the ability to raise issues through resolutions would often be forced to turn to more confrontational public methods to raise an issue with a company.
  • Finally, a company that chooses to opt-out is unlikely to return to allowing resolutions, resulting in permanently disenfranchised shareowners.

In short, socially responsible investors would be opposed to any opportunities for companies to opt-out.

 

2.  THE ELECTRONIC PETITION MODEL

Page 57 of release 34-56160 asks “Should the Commission adopt a provision to enable companies to follow an electronic petition model for non-binding shareholder proposals in lieu of 14a-8?”

This question builds on the SEC Roundtable discussion of “electronic chat rooms.”

The proposal suggests an electronic forum or chat room process should be a substitute for the right to file shareholder resolutions.

This proposal ignores the ongoing importance of the shareholder resolution process and attempts to create an untested option to substitute for an approach that has already proved successful.  The proposal is fraught with difficulties and unanswered questions.

The resolution process presently assures that management and the Board focus on the issue in the resolution since it is included in the proxy and debated at the annual stockholder meeting (which is hopefully attended by Board members who have the opportunity to hear input from investors).

In addition, each and every investor receiving a proxy has the opportunity to study the issue in the proxy and cast a ballot.

The responsibility of voting is deemed to be a fiduciary duty by many investors who understand the proxy is an asset to be dealt with respectfully.

To substitute a chat room or forms of electronic petition for the valuable fiduciary duty allowed by the current proxy process is irresponsible.

However, if the concept of an electronic forum was instead proposed as an additional way of enhancing shareholder communication rather than a way of eliminating 14a-8, we would consider it to potentially be a positive.  The concept could be tested and allowed to mature and expand over years to broaden means of communication.  If an investor felt that the process worked to move an issue forward with the Board and management, they may decide not to file a resolution.

However, chat rooms and electronic forums must be additional tools of communication, combined with the existing right to file a resolution through the proxy process.  We cannot support a substitution of one for the other.  

 

3.  RESUBMISSION THRESHOLDS

In release 34-56160, the Commission asks for comments on the resubmission thresholds for shareholder resolutions which presently stand at 3%, 6% and 10% vote levels for resubmitting resolutions.  The SEC asks if a new threshold should be raised to a 10%, 15% and 20% level.

Raising the resubmitting threshold makes it harder for investors to present proposals for a vote, thus further insulating company management from a reasonable tool of accountability.

In fact, over the last 40 years, many issues started with proposals that received very modest levels of support. This support increased over time while shareholders became more educated about the issue and reflected on what their votes should be. 

In 2007, there were under 1,400 resolutions, and a number of companies received multiple resolutions, meaning that far less than 1,400 companies received resolutions.  The market is hardly “burdened” by the resolution process.

Finally, in any given year, one-quarter to one-third of the resolutions are withdrawn in light of agreements between investors and the company.

Adding higher restrictive thresholds on resubmitting resolutions simply makes it more difficult for investors seeking to engage companies on significant issues.  We oppose changes in the resubmission thresholds.

 

PROPOSALS ON ACCESS

The two proposals that the SEC has put out for public comment remarkably present contradictory positions on the  right of investors to nominate candidates for corporate boards of directors through putting candidates on the annual proxy statement and allowing them to be voted on along with the slate prepared by the company.

During the July 25 SEC meeting before issuing these proposals, Commissioner Cox provided the swing vote in each of these contradictory positions.  The first proposal, in release 34-56161, prohibits such a nominating process and would reverse a 2006 Federal Court decision. This court decision reversed an SEC ruling which omitted the AFSCME resolution from AIG asking for a vote on access to nominate directors.  In short, this proposal prohibits the right of investors to nominate Directors for a vote on the company proxy.

This position was strongly supported by Commissioners Atkins and Casey both Republicans.  They were joined by Commissioner Cox.  However, Commissioner Cox also voted for the second access proposal.

This second proposal would allow shareholders to nominate on the proxy, BUT only if investors with 5% of the shares of the company banded together to present the nomination.  This 5% level of shares required to nominate a Director is so enormous that one Commissioner called it a “non-access proposal” –it theoretically gives shareholders the right to present a Board nominee for a vote, then makes it virtually impossible to do so, rendering the right meaningless.

As a result, both of these proposals mean that directors will only be nominated by the Board rather than by shareowners they are elected to represent.

Recently, resolutions to Hewlett Packard and United Health asking for the right to nominate directors came close to 50% votes.  Investors strongly want this right that the SEC is refusing to provide.  However, many business groups oppose all forms of access to nominate Directors. 

We oppose the prohibition on nominations of directors in the first proposal, and oppose the 5% threshold in the second proposal. 

 

 

 


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