Investors Urge Trump Administration to Keep Hands off SEC Shareholder Resolution Process

Last week the CEOs and executive directors of several investment organizations urged the White House to support current rules governing shareholder resolutions. The execs voiced their opinion in a letter to Gary Cohn, director of the Donald Trump administration’s National Economic Council.

Of debate is Security and Exchange Commission (SEC) rule 14a-8, which requires companies to include within their annual shareholder meeting materials any shareholder proposals that are up for a vote. Any individual or investment fund that owns equity in a fund can propose a resolution which, if passed, recommends a course of action to a company and its executive team.

And shareholder activism is on the rise. In recent years, activist investors proposed resolutions to make energy companies more transparent about potential climate change risks. Other examples include a proposal urging Yum! Brands, the owner of fast-food brands Taco Bell and KFC, to ditch antibiotics within its supply chain. The Humane Society has also used its stock ownership in Tyson Foods to pressure the company to turn away from gestation crates to house pigs raised for pork production.

But Donald Trump’s administration is mulling a loosening or elimination of rule 14a-8, and it appears the SEC is already moving in that direction.

Earlier this month, the SEC informed several major pharmaceutical companies that they could block shareholder resolutions related to price transparency from their proxy statements. Similar action was also taken by the SEC when it informed the healthcare company Anthem that it could prevent a shareholder resolution from coming to a vote at its annual meeting.

Many shareholder resolutions fail. And by sheer numbers, they often fail overwhelmingly – though that depends on the topic. A Harvard Law School study, for example, found say-on-pay resolutions were a big winner.

Environmental and social proposals face a steeper climb to passage, though 2016 was a relatively banner year for activist investors in this space, with eight of 172 such resolutions passing last year.

Despite the obstacles, activists such as the Sisters of St. Francis of Philadelphia have employed rule 14a-8 for years to raise awareness of a wide range of social, environmental and labor issues. Activist investors make the case that even if a resolution does not pass, they can still have impact by nudging a company to conduct its operations more responsibly and sustainably. And most of these proposals are non-binding – but, of course, they can score a company negative press.

The letter came in response to another penned by Mark Costa, CEO of Eastman Chemical and chair of the Business Roundtable’s Smart Regulation committee. In a February letter to the White House, Costa described rule 14a-8 as burdensome, saying it allows “activist investors with insignificant stakes in public companies make shareholder proposals that pursue social or political agendas unrelated to the interests of shareholders as a whole.”

Costa also complained about SEC rules covering CEO pay rate disclosures and the conflict minerals rule tucked within the Dodd-Frank Act, as well as margin requirements for uncleared swaps. The letter -- which also targeted the Environmental Protection Agency, the Affordable Care Act, the FCC’s open Internet order and overtime rules -- included a laundry list of federal regulations the Business Roundtable and its allies wish to see relaxed or eliminated.

Costa argued that rule 14a-8 allows anyone with shares in a company to proposed rules “unrelated” to a company’s business. This came as news to organizations including Ceres, the Principles for Responsible Investment, the Council of Institutional Investors and the Interfaith Center on Corporate Responsibility.

In last week’s letter, these organizations’ leaders said that, if anything, SEC rules related to shareholder proposals actually strengthen corporate governance and can enhance shareholder value in the long run.

The investors also pointed out that shareholder resolutions are only one step in a long dialogue between a company and its stakeholders. As is often the case with litigation, many floated resolutions are pulled after an understanding is reached between a group of shareholders and a firm’s executives and board.

In the end, these activist investor groups -- which together claim to represent $65 trillion in assets -- insist resolutions are just one tool in their kit to find ways to increase transparency, boost economic growth, create jobs, and improve corporate environmental and social performance.

And it's worth mentioning that, in the broad scheme of things, shareholder proposals are hardly running amok during annual shareholder meetings. Proposals related to sustainability are surging at a year-to-year percentage rate, but those 172 resolutions that made proxy ballots last year affected less than 5 percent of the 3,700 or so firms publicly traded on NASDAQ or the New York Stock Exchange.

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