Proposed Bill in Congress Would Silence Activist Investors

A new bill proposed in the U.S. House of Representatives could eliminate one of the favorite tactics of shareholders who want companies to change how they conduct business.

Supporters of the Financial Choice Act 2.0, including Jeb Hensarling, Chair of the House Financial Services Committee, claim that this legislation will hold Wall Street accountable by empowering ordinary Americans instead of Washington, D.C. bureaucrats.

But critics of this legislation, which promises to overhaul the Dodd-Frank Act, say that if this bill becomes law, it will do more than end the “too big to fail era” and end the banking bailouts, which in part fueled the rise of the Tea Party earlier this decade. They argue that the legislation throws the baby out with the bathwater, as it would phase out the mechanism by which activist shareholders have been able to nudge companies to become more environmentally and socially responsible.

Current U.S. Securities and Exchange Commission (SEC) rules require investors to own either 1 percent or $2,000 worth of a publicly-traded companies stock for a continuous year in order to allow them to file shareholder resolutions to be voted on at a company’s annual shareholders meeting. The rule has allowed non-profits such as PETA, the Humane Society and Philadelphia-based Sisters of St. Francis to attempt to influence corporate policies by forcing shareholders to vote on a wide variety of issues on annual proxy statements. While these shareholder proposals were generally non-binding, and have overall been voted down by an overwhelming margin over the years, the public relations fallout has often convinced companies to enact such changes eventually. The Humane Society, for example, has taken credit for companies such as Tysons and Smithfield to push their suppliers to improve their animal welfare standards due to their wielding of shareholder proposals.

But this proposed legislation would end the $2,000 minimum threshold and keep the one percent mandate intact, and prohibit the filing of shareholder proposals on the behalf of other investors. Walmart's market cap currently is over $227 billion; one only has to imagine the hurdles imposed on shareholders who want to pursue change at a company of even one-tenth of Walmart's size. The effect would serve to muzzle the vast majority of shareholders, who in the past have pushed for reforms related to executive compensation, lobbying activities, climate change and campaign finance.

Earlier this year, investors urged the Trump Administration to keep rule 14a-8, the SEC directive that allows such proposals to come to a vote at annual shareholder meetings. While the sheer number of these resolutions have increased in recent years, as a percentage, this is still a rare tactic; the 172 resolutions that made ballots during last year’s proxy season affected less than 5 percent of the publicly traded firms selling shares within the U.S. Market.

As the New York Times pointed out yesterday, this legislation would create sweeping changes that go beyond proxy ballots. Instead of allowing the SEC to continue file administrative cases before its own internal judges, those cases would be tried in front of a federal district court, which in recent years have ruled more favorably to companies. In addition, the SEC would no longer be able to bar someone guilty of violating federal securities laws from serving as an executive or director of a publicly owned company. And while the SEC could still impose multi-million dollar fines for securities violations, the agency would also have to determine whether such penalties would harm shareholders, which in the end would discourage such punishment in the first place.

“Change is certainly in the air for the S.E.C,” wrote Peter J. Henning in the Times. “The question is whether it will be hamstrung by the Financial Choice Act 2.0 if it is adopted in its current form, and how effective it will be in policing corporate America.”

Considering that the White House prefers a neutered SEC that will ditch enforcement for unfettered business expansion, watch for yet another reform from the previous decade to disappear in the coming months.

Image credit: Daniel Foster/Flickr