Shareholder proposals from small investors are credited with pushing big companies to improve their record over the past decade on social issues. In two examples from this year, Starbucks committed to cut landfill waste and Chevron pledged more transparency about its lobbying on climate change after shareholders pushed the companies on these issues with proxy voting proposals.
Starbucks spokeswoman Megan Lagesse said the waste announcement was part of a broader company commitment to become more resource-positive. Chevron did not respond to a request for comment.
Business lobbyists have campaigned against investor proposals, saying they often represent the interests of small groups of activists who aren’t committed to long-term company goals. Large corporations, including ExxonMobil, and business advocacy groups, including the Business Roundtable, have argued reducing the number of shareholder proposals will free up time for management teams and shareholders who are bogged down by these votes each year.
The SEC approved the new limits on shareholder activism by a 3-2 vote Wednesday. In his comments supporting the measure, Chairman Jay Clayton said the agency had discussed the potential changes with investors for several years and found support for “modernizing” the standards, some of which had changed little in nearly 70 years. Reviewing shareholder proposals imposes costs on companies and on other investors, Clayton said, adding that there is a risk that “shareholder-proponents would use the proposal process in a way that does not benefit the company or its other shareholders.”
In her dissenting comments, Commissioner Allison Herren Lee said the measure will deal a setback to movements to bring environmental, social and governance issues to the forefront at companies and small investors will be “dramatically disadvantaged.”
“These actions collectively put a thumb on the scale for management in the balance of power between companies and their owners,” Lee wrote.
The new limits were opposed by hundreds of investors representing trillions of dollars in assets, who filed comments to the SEC over the past year. They included representatives of asset managers, pension funds, labor unions, state and local governments, universities and religious institutions.
“This rule impedes the voice of shareholders bringing to the attention of companies things they need to pay attention to,” said Christopher Cox, associate director at the Seventh Generation Interfaith Coalition for Responsible Investment, a nonprofit investor group.
Clayton, a former corporate lawyer who had no government experience when President Trump picked him to run the SEC in 2017, has overseen a shift at the agency toward policies many see as business-friendly. Consumer advocates criticized his overhaul of brokerage conflict-of-interest regulations last year as being too weak, and this past July, CNBC’s Jim Cramer called Clayton’s proposal to raise the threshold at which investment managers must report holdings “an outrageous rule change that would make the market a lot less transparent.”
The SEC’s process for collecting public comments on the proposed shareholder rule fell under scrutiny last year, when Bloomberg News reported that several submissions in support of the rule, including some Clayton cited in public comments, appeared to come from people who never wrote them. The news outlet traced connections between some of the letters and the Main Street Investors Coalition, a group backed by a prominent fossil fuel industry association.
Natalie Strom, am SEC spokeswoman, said the Bloomberg News story “has proven to be inaccurate,” adding that some of the people mentioned in the article have since sent the agency signed affidavits stating they did, in fact, write letters in support of the shareholder rule changes.
A tiny portion of investors are responsible for the vast majority of all shareholder proposals. One study by researchers at the University of Warwick and the Stockholm School of Economics found that between 2003 and 2014, just three individuals accounted for 50 percent of all shareholder proposals. However, the researchers found shareholder proposals can generate positive long-term returns for companies and concluded that “regulations limiting the ability of individual shareholders to submit proposals would be harmful.”
Shareholder proposals are finding support with a growing portion of public company investors, according to data collected by shareholder advisory firm Institutional Shareholder Services, which tracks all corporate proxy votes. During proxy voting at 3,000 of the largest publicly traded U.S. companies, the average environmental or social measure won support from 28 percent of shareholders this year, up from 16 percent a decade ago.
The SEC also voted to tighten requirements on which failed shareholder proposals can be resubmitted the following year. Previously, proposals had to receive 3 percent of support for revote the second year, and then 6 percent and 10 percent in subsequent years. The new rule raises these thresholds to 5 percent, 10 percent and 25 percent in the first three years.
According to investor groups, this change could stifle campaigns that are building momentum now. A recent proposal to install a civil rights expert on Facebook’s board of directors was supported by 3.6 percent of shareholders at the social network earlier this year. An effort to improve working conditions for meatpacking workers at Tyson Foods, who are largely minorities, received 14.7 percent of the vote in its second year.
Only shareholder proposals submitted after January 2022 will be subject to the new regulations, the SEC said.
Gary Mickelson, a spokesman for Tyson, said the company is working to improve worker health and safety “no matter what shareholder proposals might say.” Facebook did not respond to a request for comment.
The largest business lobbying group, the U.S. Chamber of Commerce, applauded the SEC’s adoption of new limits on shareholder proposals. In a statement, the group called it a victory over “special interest activists” who, it said, “push narrow agendas unrelated to the success of public companies and investor return.”
The Business Roundtable’s support for the SEC rule coincided with the group’s push to make environmental and social causes some of the biggest priorities for chief executives at top global firms, through its August 2019 statement of corporate purpose and a more recent set of published principles and policies to address climate change.
The two positions appear to be at odds, said Timothy Smith, a director at investment firm Boston Trust Walden.
“They are acknowledging the importance of climate change,” Smith said. But at the same time, he said, “they are lobbying to try to make it more difficult for investors to file resolutions on climate change.”
In an emailed statement, Maria Ghazal, Business Roundtable’s senior vice president and counsel, said the SEC amendments are consistent with the group’s other principles and “will help create a better proxy system that will benefit investors and other stakeholders over the long term.”