Zevin Asset Management criticizes shareholder proposal reform plan

Zevin Asset Management has complained to the SEC about its plans to raise thresholds for submitting shareholder proposals, while other institutional investors are calling for more time to study the proposal.

The Boston-based firm, which integrates ESG issues into its financial analysis, ‘strongly oppose[s]’ the agency’s proposal, arguing that it would ‘severely limit the rights of shareholders to engage with corporations using the shareholder resolution process over issues with a distinct impact on long-term value.’

The SEC last month voted to propose amendments to Rule 14a-8, which governs the process for determining which shareholder proposals make it onto a company’s proxy statement, thereby highlighting the differing views companies and investors have on the process.

At present, a proponent must hold at least $2,000 or 1 percent of a company’s shares for at least one year to be eligible to submit a proposal. The proposal would get rid of the 1 percent threshold and create three alternative ownership/tenure thresholds:

• Continuous ownership of at least $2,000 of the company’s securities for at least three years
• Continuous ownership of at least $15,000 of the company’s securities for at least two years
• Continuous ownership of at least $25,000 of the company’s securities for at least one year.

Among other things, the proposed amendments would change the existing resubmission thresholds of 3 percent, 6 percent and 10 percent for matters voted on once, twice or three or more times in the last five years, respectively, to thresholds of 5 percent, 15 percent and 25 percent, respectively.

The SEC is also seeking to add a new provision that would allow companies to exclude a proposal that has been previously voted on three or more times in the last five years – notwithstanding having received at least 25 percent of the votes cast on its most recent submission – if the proposal received less than 50 percent of the votes cast and saw a decline in shareholder support of 10 percent or more compared with the preceding vote.

In a recent letter to the SEC, Zevin Asset Management’s director of socially responsible investing Pat Tomaino writes that the shareholder proposal process has been a cost-effective way for company management and boards to learn about the priorities and concerns of shareholders, particularly those concerned about the long-term value of the companies they own.

‘This efficient system has led to the widespread adoption of many constructive corporate governance practices that have become standard in the field, such as independent directors, declassifying boards, say-on-pay vote requirements and many others,’ Tomaino states. ‘There are literally hundreds of examples of companies changing their policies and practices in light of productive engagement with shareowners.’

Such reforms have led to the production of more valuable information about the material risks and opportunities facing public companies, he argues, adding: ‘The proposed rule changes will reverse these benefits for both investors and issuers and make companies far less accountable to shareholders, stakeholders and the public at large.’ 

In addition, the proposed increase in ownership thresholds would make it difficult for smaller investors to raise concerns and risk issues. Tomaino cites data from the Sustainable Investments Institute that 187 resolutions on social and environmental topics came to a vote at US companies in spring 2019, many of which were filed by investors with relatively small stakes consistent with the existing thresholds. These proposals received an average support of 25.6 percent, he adds.

‘The numbers above demonstrate that proposals of interest to a large portion of a company’s shareholder base can and do originate with smaller individual and institutional investors,’ Tomaino writes. ‘Excluding this group of shareholders until they have held for three continuous years raises serious questions about the equity of the proposal process and leaves smaller investors who can make valuable contributions without access to the proxy.’

The proposed increase in resubmission thresholds also risks excluding important proposals that gain traction over time, and would stifle key reforms, he adds. ‘There are… many examples through the years of resolutions that initially received low votes, but went on to receive significant support or have led to productive engagement, as shareholders came to appreciate the serious risks they presented to companies,’ Tomaino notes. He points to the issue of declassified boards, on which proposals in 1987 received less than 10 percent support – a figure that increased to 81 percent in 2012.

The proposal has sparked opposition within and outside the commission. ‘To understand the effects of that rule on the balance of power between insiders and investors, we should examine the kinds of proposals that will be taken off the ballot and their effect on company value,’ said SEC member Robert Jackson in a dissenting statement on the proposal.

‘[The rulemaking] release does not even attempt to do that. Instead, the proposal simply assumes that high levels of support indicate a good proposal, and lower levels of support suggest a proposal is bad. That has not been the SEC’s historical approach to shareholder proposals – and for good reason.’

The Council of Institutional Investors has also criticized the proposed increases in ownership and resubmission thresholds, saying they would curb the ability of retail investors to submit shareholder proposals and would impede future new social and environmental proposals, which generally take time to gain traction.

Others have welcomed the proposal. The US Chamber of Commerce, for example, commended the commission on the ‘long-overdue’ move.

‘The Eisenhower-era rules on shareholder proposals are no longer sufficient in the 21st century. The current structure allows special-interest activists to push narrow agendas even when shareholders have repeatedly rejected those proposals,’ said Tom Quaadman, executive vice president of the chamber’s Center for Capital Markets Competitiveness, in a statement. ‘These new SEC reforms will help improve communication between investors and businesses.’

An SEC announcement of the proposal stated that it is ‘part of [the commission’s] ongoing focus on improving the proxy process and the ability of shareholders to exercise their voting rights.’

‘[The] proposed amendments follow from the staff’s extensive experience with shareholder proposals and recognize the significant changes that have taken place in our markets in the decades since these regulatory requirements were last revised, including, in particular, the types and use of communications, the types and frequency of shareholder-company engagement and the substantial shift to investing through mutual funds and ETFs, rather than directly by Main Street investors,’ said SEC chair Jay Clayton in a statement.

DEADLINE EXTENSION
Meanwhile, others are pressing the SEC to extend the comment period on the proposal. The Shareholder Rights Group, which includes As You Sow, Boston Common Asset Management, Boston Trust Walden, NorthStar Asset Management and Trillium Asset Management, writes in a separate comment letter that the 60-day feedback deadline should be at least 120 days, and preferably run until the end of April 2020.

‘Due to recent actions by the [SEC] staff that limit the ability of shareholders to raise certain risk-related issues, a rigorous economic analysis of the rulemaking proposal would be impossible without viewing the outcomes of the 2020 proxy season, including receiving shareholder perspectives on how these recent changes affect the economic analysis,’ writes Sanford Lewis, director of the Shareholder Rights Group.

He points to Staff Legal Bulletin 14K issued in October as having expanded the definition of micromanagement ‘so as to exclude many climate change proposals and narrow the window of opportunity to file such proposals to such a degree that many large fossil fuel companies in particular may be on the cusp of immunity from accountability on climate change risk.’

Lewis also points to the division of corporation finance’s September 2019 announcement of a revised approach to ruling on shareholder proposal no-action requests, noting that this may have a significant impact on the number of proposals appearing on proxy statements.

The division said that from proxy season 2020 it will in some cases respond orally to no-action requests under Rule 14a-8 and emphasized that it retains the option not to make a decision on excluding a proposal.

‘The implication of the no-decision no-action decisions could have a strong bearing on economic analysis,’ Lewis writes. ‘The rulemaking proposal’s economic analysis substantially understates the benefits to companies and investors of shareholder proposals. However, the commission would likely further understate the damage done by the rulemaking if the cumulative effects of the latest changes, as playing out in the upcoming proxy season, are not integrated to the public comment process.’

As a result, the group argues that the comment period should be extended through the upcoming no-action season to give investors an opportunity to present ‘informed economic analysis that includes consideration of how the aforementioned changes being implemented this season may have lowered the baseline capacity for proposals to advance investor protection, and the degree to which the commission’s new proposed rules would therefore further erode investor protection and economic outcomes against that baseline.’

The SEC as a matter of policy does not comment on comment letters.