For over 40 years, some shareholders have been protecting the environment, improving working standards and increasing corporate accountability using a little-known but effective tool called a shareholder proposal. But now this tool is threatened by the legislative push to reform financial regulation.
Shareholder proposals allow investors to put questions related to a company’s environmental, social and governance (ESG) policies to a vote of all shareholders. But this right would be stripped away from most shareholders by Section 844 of Financial Choice Act, the bill authored by House Financial Services Committee Chairman Jeb Hensarling, R-Texas, to unwind much of the post-crisis regulatory regime.
As an advocate for corporate governance and sustainability, I strongly oppose this provision.
Shareholder proposals have long been an effective tool for promoting the interests of long-term investors. While most proposals do not receive majority support or result in immediate policy changes, the primary purpose of a shareholder proposal is to initiate a dialogue between companies and shareholders regarding long-term issues that may escape attention in a financial market primarily driven by quarter-by-quarter performance.
Shareholder dialogue does not coerce companies into action, but does offer corporate leadership the benefit of an independent and objective perspective of a group that, like the corporation itself, is focused on creating long-term value. These discussions may center on traditional corporate governance issues such as executive compensation or board structure and composition, or on material sustainability issues such as fair treatment of labor, climate change or equal employment opportunity.
Over the years, policies related to many of these issues have become a routine part of business planning for many companies, with benefits both for society as a whole and for the long-term performance of companies.
Today, many corporate dialogues proceed without shareholder proposals because companies seek out investor views on these issues. However, the right to file a shareholder proposal remains critical, particularly when companies prove reluctant to pay sufficient attention to issues of shareholder concern.
Section 844 arises from a white paper published earlier this year by the Business Roundtable, which represents corporate CEOs. The Business Roundtable professes that its proposal would improve the process for shareholder proposals but in fact it would stifle this important shareholder right.
The key provision would establish a minimum threshold of 1% ownership to file a shareholder proposal, replacing the current threshold, which is a nominal $2,000 worth of shares. Only the very largest institutional investors, such as my former employer, TIAA, would be able to meet this new proposed threshold. These shareholders typically already have access to management and rarely need to file resolutions.
By contrast, current law gives a voice to all of a company’s owners, even the smallest. These shareholders may not own a large percentage of a company, but their investment may be important to their own financial future. Their shareholder rights are part of the value of their share ownership.
Despite the openness of the shareholder proposal process, only about 25% of companies receive a proposal each year, and companies have incorporated shareholder proposals smoothly into annual meetings for many years. This contradicts the Business Roundtable’s claims that the current process is burdened by too many filings.
In the absence of this relatively collegial process, shareholders would be left only with more adversarial tools such as rejecting director nominees, opposing executive compensation plans, shareholder lawsuits, and books and records requests.
Regardless of what Section 844 is intended to achieve, it represents short-term thinking in corporate governance reform. Far from any visible benefits, all this provision would result in is less corporate accountability and more conflict between shareholders and companies.