Activist bank investors run into an SEC roadblock
The Securities and Exchange Commission recently raised the bar for when activist shareholders can force votes on proposals at the annual meetings of public companies.
A new SEC rule governing investor voting could be especially significant to major U.S. banks, which have been under pressure from investors to publish data on racial and gender pay gaps, limit financing of oil and gas companies or take other actions.
The rule doesn't take effect until 2022, but one of its provisions — which set a higher threshold for the resubmission of proposals that shareholders vote down — has added to the urgency of how activist investors approach proxy season in the spring.
Proposals will now have to receive at least 25% approval among shareholders by the third vote (if they get that far) or be banished from the proxy statement for five years; the current threshold is 10%. Activist investors are worried that the new requirement will hurt their strategy of gradually building support for environmental, social, political and governance proposals over time.
Natasha Lamb, managing partner at the investment firm Arjuna Capital, said in an interview that had the new rule been in place before the 2020 proxy season, the activist investment firm would not have been able to bring at Bank of New York Mellon’s annual meeting a proposal that the bank disclose its median pay gaps among employees of different races and genders. Eight percent of shareholders backed the proposal earlier this year, the firm’s second attempt at passing it.
The new requirement would “snuff out” efforts to move these proposals to the point of forcing management to address their concerns at a time when protests over racial injustice and inequality have swept across the country, Lamb said. Arjuna Capital plans to resubmit the proposal at BNY’s next meeting in the spring with the expectation of getting more votes.
“This year, given what’s happened with Black Lives Matter, investors are more concerned, and I would expect increasing support for that proposal,” Lamb said.
The shareholder proposal requirements haven’t been changed since 1998. And since the SEC proposed taking a new look at them in November 2019, activist investors, public companies and their trade groups have been pitched in a battle over how much tougher the rules can be drawn.
Under the final rule issued by the SEC on Sept. 23, shareholder proposals must achieve a 5% approval from investors on their first try in order to be resubmitted the following year, 15% the second time and 25% on the third attempt. That’s up from a progression of 3% on the first submission, followed by 6% and 10%. If a proposal falls short of the new thresholds, it cannot be submitted for another five years.
The SEC is also requiring that shareholders who submit a proposal must demonstrate they’ve held $25,000 in stock in the company for one year or $15,000 of the stock for at least two years. That’s up from the previous requirement of $2,000. The SEC is also making it tougher for investors who submit these proposals en masse across several companies to use representatives at their meetings.
Banks have been largely quiet on the issue, despite the relief financial institutions could get from repeated proposals like the median pay gap disclosures the industry has largely resisted releasing.
The $13.3 billion-asset International Bancshares Corp. in Laredo, Texas, however, submitted a letter to the SEC in favor of the tighter restrictions on shareholder proposals. IBC Chief Executive Dennis Nixon said in the Jan. 23 letter that the higher approval thresholds for repeated proposals in particular would be welcome.
“The appeal of this proposal is that it relieves management and shareholders from having to repeatedly consider, and bear the costs related to, matters for which shareholder interest has declined,” Nixon wrote.
Banks like BNY Mellon and others have argued against reporting median pay gaps among race and gender. The banks claim that a median disclosure would not account for factors like an employees’ role, performance and location. Citigroup is one of the few banks that have, reporting this year a median pay for women at 73% what male employees made. The median pay for Citi’s minority employees in the U.S. was about 94% what white workers made. Both measures improved from when the bank first reported the numbers the year before.
“After the Black Lives Matter protests started, there was an influx of statements of solidarity from companies that opposed transparently reporting their racial pay gap this year,” Lamb said. “That’s frustrating. You can’t just pay lip service to this issue. You have to do the hard part.”
Of the 303 shareholder proposals on environment, social and political issues proposed during the 2020 proxy season, 15 were approved, up from 10 the year before, and almost half received votes, according to the law firm Sullivan & Cromwell. The total number of shareholder proposals submitted each year has been on the decline, which Sullivan & Cromwell researchers attributed to companies becoming more proactive in negotiating deals to address issues raised by investors without bringing matters to a vote. This is a testament to the strategy of repeatedly raising these concerns in proxy votes over time, activists say.
One of the biggest activists is John Chevedden, who accounted for 21% of all shareholder proposals tracked by Sullivan & Cromwell. Chevedden frequently rides the subway to shareholder meetings, according to a Reuters profile in 2013, and has focused many of his proxy measures on corporate governance, altering how some of the biggest companies operate.
For example, Chevedden proposed at Bank of America’s meeting earlier this year a measure to make it easier for shareholders to directly put their own director candidates on the ballot. That proposal failed to get majority support but did receive 26% of the vote.
“I consider the proxy process to be a vitally important tool in communicating with the board, management and other investors on key issues such as governance reforms, executive compensation, climate change, workforce diversity and human rights in overseas factories,” Chevedden wrote in a Jan. 27 letter commenting on the proposed changes.”There is a long history of positive results from shareholder resolutions, demonstrated by companies making specific reforms, changing policies and increasing transparency.”
Along with racial and gender pay gaps, investors have been most concerned with how banks are fueling climate change.
Julie Gorte, senior vice president of sustainable investing at the activist firm Impax Asset Management, said there were seven shareholder proposals at banks this year about climate change, including financing oil sands developments, high-carbon financing and reporting on financed emissions.
One that would have required JPMorgan Chase to make reports on financing high-carbon projects fell just short of a majority approval this year.
“Many of the gender pay proposals would be affected, that is, not refiled,” because of the SEC rule change, Gorte said. “The climate-risk proposals have tended to get much higher votes, so the refiling vote thresholds probably won’t be much of a factor next year.”
Timothy Smith, director of ESG shareowner engagement at Walden Asset Management, a division of Boston Trust & Investment Management Co., has been involved with proxy shareholder filings since the 1970s and has marveled at the evolution of the practice.
“Ironically the SEC is trying to put the genie back in the bottle with these new restrictions at the very time that investor interest has been growing and pressure on companies has been expanding,” Smith said.
Despite the tougher requirements, Smith said, activists will still find a way to get these issues in front of management even if they can’t meet the higher voting thresholds on their formal proxy moves.
“The desire is still there. If anything, there is a tremendous growth in the number of investors who believe in this,” Smith said. “They’re not going to go away.”