Ostensibly designed to remove some of the more onerous regulations of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Financial Choice Act now working its way through Congress could also introduce much stricter rules for shareholders wanting to submit proposals for annual meetings, and in turn may hamper efforts to get environmental, social, and governance (ESG) issues on the agenda.
The High Stakes of the Financial Choice Act
The Act, approved by the House of Representatives in June and undergoing consideration in the Senate as of December 2017, involves a drastic revision of the Securities Exchange Act of 1934’s Section 14a-8 on shareholder proposals and proxy access. This revision would require shareholders who want to put a proposal on a company’s annual meeting ballot to own at least 1% of the company’s shares for at least three years. The current minimum is set at one year’s ownership of $2,000 worth of stock.
According to the Council of Institutional Investors (CII), the proposed new limit would be particularly hard to meet at large-cap companies. For example, as the CII’s executive director Ken Bertsch argued in his testimony before the Committee on Financial Services, a shareholder would have to own $7.5 billion worth of Apple stock, $3.4 billion of ExxonMobil, or $2.6 billion of Wells Fargo to put a proposal on the ballot at those companies. Not even pension funds tend to own this much of a single corporation.
The Financial Choice Act, in other words, means “eviscerating the ability of most shareholders to file resolutions,” said Lisa Woll, CEO of US SIF: Forum for Sustainable and Responsible Investment.
In its statement on the House approval of the Act, US SIF noted that the Section 14a-8 shareholder proposal rule has been responsible for “extraordinary progress” in corporate governance issues and said that dismantling it would be “inconsistent with the clear preferences of companies and investors.”
The Active Investor Social Update also decried the changes to the proposal rules. “We believe this exclusion of shareholder voice is a loss in terms of risk management and return creation,” it said. “A vibrant marketplace of questions and ideas helps businesses improve. Many such queries come from small, minority stakeholders who are also important stakeholders.”
Some of these questions and ideas revolve around the issue of diversity, which featured in several shareholder proposals in 2017. Shareholders put proposals on the agenda of annual meetings of such financial companies as Citigroup, Wells Fargo, and Bank of America that asked management to report on the gender pay gap at their firms. Just by asking the question, shareholders have spurred companies to begin responding to the concerns raised on this issue.
The Importance of Shareholder Proposals
In fact over the last eight years, noted the Active Investor, shareholder proposals have forced more than 100 companies to produce sustainability reports for investors. Other shareholder proposals have brought about changes in governance issues like implementing a majority vote on boards of directors and broadening employment practices to include more minorities and women.
Shareholders at ExxonMobil, for example, approved a proposal last year to allow minority shareholders to nominate outside experts to the board of directors, meaning that a climate specialist might one day sit on the board.
Sanford Lewis, director of Shareholder Rights Group, noted that proposals are usually not legally binding on companies but function to provide input and advice to boards and management and encourage dialogue among diverse groups of investors.
“These reform efforts fail to recognize and account for the high value of the services that the proposal process provides to corporations and investors in risk oversight, conflict resolution, and governance,” Lewis said. “These services require that investors of all sizes, with diverse investment strategies, are able to bring forth issues relevant to the success of the corporation through the shareholder proposal process.”
In addition to making it harder to submit an initial proposal, the Financial Choice Act would set a much higher bar for resubmitting proposals that have fallen short of winning a majority. The new rule would exclude submitting proposals that in the last five years received less than 6% of favorable support—15% if it had been proposed twice and failed and 30% if proposed three times in the past. The current limits are 3%, 6%, and 10%.
“The fact that a proposal has achieved the established . . . benchmarks, and may appear on the proxy in a subsequent year, often inspires the board or management of companies to engage in dialogue and implement actions responsive to the proposals,” Lewis said.