Strengthening Regulation of Proxy Advisors


Originally published within the NASDAQ Governance Clearinghouse.

America’s business leaders these days are highly focused on advancing the economic interests of the United States and the overall economic climate in which our companies operate. In particular, we strive to create long-term value, good-paying jobs and innovative products and services for shareholders, workers and consumers that, in turn, lead to demand creation for our products and services.

Unfortunately, the attention and focus of senior management at U.S. public companies is strained by an outdated system that needs reform: the process for submitting shareholder proposals.

Originally designed to replicate attendance and participation by shareholders at corporate annual meetings, the Securities and Exchange Commission (SEC) Rule 14a-8 is an important component of good corporate governance in the United States. Over time, however, the process has been misused by a small number of individuals — with often de minimis stakes in companies — who file common proposals at an array of corporations.

For example, during the last four years, only three shareholders and their families accounted for more than 70 percent of all proposals submitted by individuals to Fortune 250 companies. Many of these proposals do not promote the creation of long-term value for the economic benefit of shareholders. As a result, 92 percent of non-management proposals were voted down by shareholders this year.

How does such a small group dominate shareholder submissions? The eligibility threshold for submitting a proposal, set decades ago by the SEC and not updated since, has been effectively lowered by inflation and economic growth. It allows shareholders who have owned just $2,000 worth of shares or 1 percent of the outstanding shares — whichever is less — for a minimum of one year, to submit a proposal. Let’s put that into today’s context. At current market prices, an investor only needs to purchase three shares of Google’s parent company, Alphabet, to file a proposal.

An additional problem is that a 1970 federal court ruling prevents the exclusion of shareholder proposals explicitly designed to promote political, religious or social causes. This is in place even though such proposals frequently are unrelated to the business of the company in question (nor necessarily within its control). The problem is steadily worsening. In 2015, 479 proposals were filed by various shareholders that had origins tied not to issues that an informed investor would consider material to make an investment decision in such companies, but rather to social, environmental and political issues. This marked the highest number public companies have faced since 2010.

The time required to educate, respond and engage on these topics with a corporation’s shareholders is not only a meaningful distraction, it also takes away valuable time spent on ways in which companies can grow and invest in their businesses, create jobs and further develop the U.S. economy.

Business Roundtable believes this outdated, broken system needs to be fixed. To that end, we have come together and put forth specific, pragmatic solutions to modernize and improve the process, outlined in a new report.

Our first key recommendation is to update the eligibility requirements. For any topic other than the election of directors, the monetary eligibility standard should be based on a sliding scale related to company size with a requirement to hold at least 0.15 percent of outstanding stock for proposals submitted to the largest company and up to 1 percent for proposals submitted to smaller companies.

We also recommend increasing the length of the holding requirement to three years, which would mirror the standard frequently used for proxy access. Increasing the length of time a shareholder must hold stock before being eligible to submit proposals would encourage a longer-term view. In addition, the process should require shareholder proposal proponents to provide increased disclosure, such as indicating their intentions, economic interests and holdings in the target company.

Another key, equally important fix is increasing the resubmission threshold for proposals that have been rejected in previous years. Current rules allow a proposal to be eligible for resubmission if it garners at least 3 percent of the vote on its first submission, 6 percent on the second and 10 percent on the third. This means that if a proponent can win 10 percent of the vote, then that proposal can be resubmitted indefinitely. Of course shareholders should be entitled to submit proposals more than once. However, a proposal rejected by 90 percent of shareholders should not be eligible for resubmission year after year without limit.

Improving this decades-old system is overdue. It’s time to fix it for the long-term economic benefit of our companies and, in turn, the shareholders, workers, and consumers that make them go.