Battles over proxy access have taken center stage over the past few years in the form of activist shareholder proposals and proposed SEC rulemaking. (See this Doug’s Note.) Now Business Roundtable is suggesting that the entire Rule 14a-8 shareholder proposal process is flawed and has offered solutions to fix it.
Business Roundtable, an association of CEOs of leading U.S. companies established to promote sound public policy, recently issued a white paper entitled “Responsible Shareholder Engagement & Long-Term Value Creation: Modernizing the Shareholder Proposal Process.” Its premise is that the shareholder proposal process has “fallen out of step” with today’s corporate decision making and capital markets. As a result, a small number of individuals with a small stake in companies are able to file many common proposals that distract business leaders from doing their jobs.
The paper identifies the key problems as follows:
- The threshold for submitting a proposal is too low. For example, to be eligible, a proposing shareholder need own only $2,000 in market value of the company. The paper notes also that only three shareholders and their families were responsible for almost 22% of all nonmanagement shareholder proposals submitted to Fortune 250 companies in 2016.
- Excluding proposals relating to general social issues is difficult for companies. Business Roundtable believes that “most social, environmental and political proposals…have only an attenuated connection to shareholder value and are generally not issues material to a company’s business.”
By way of solutions, Business Roundtable proposes, among other things (which I quote verbatim):
- Updating the eligibility requirements for submitting a proposal based on a sliding scale related to company size;
- Increasing the length of the holding requirement to three years, which would mirror the standard frequently used for proxy access;
- Requiring proponents of shareholder proposals to provide increased disclosure, such as indicating their intentions, economic interests and holdings in the target company; and
- Raising the resubmission threshold for proposals that have been rejected in previous years.
Given the recent focus on increasing shareholder engagement and proxy access, including recent related litigation and SEC rulemaking efforts, it is questionable whether Business Roundtable’s proposals will gain much traction. Furthermore, a lot of people would take issue with the premise that social and sustainability issues are mostly immaterial to a company’s business.
Nevertheless, it is true that the Rule 14a-8 shareholder proposal process is long overdue for a comprehensive review to ensure that it works efficiently and effectively for everyone concerned. It will be interesting to see if this concept gains traction with the SEC’s new commissioners and chairperson.