June 11, 2014
Shareowner Rights Under Attack
by Robert Kropp
Abetted by comments by an SEC commissioner, the US Chamber of Commerce petitions to keep shareowner
resolutions from returning to proxy ballots.
Earlier this spring, Securities and Exchange (SEC) Commissioner Daniel Gallagher railed against
several aspects of the current proxy rules of the Commission. At Corpgov.net,
corporate governance advocate James McRitchie quoted Gallagher as stating, "Activist investors and
corporate gadflies have used these loose rules to hijack the shareholder proposal system."
McRitchie writes, "He then goes on to
outline a program of reform that would essentially gut the proxy proposal rules affirmed by
recommending the following requirements for shareowner proposals:
• Instead of $2,000 of
shares, Commissioner Gallagher recommends a minimum of $2 million a percent to be determined.
Instead of a holding period of one year, Commissioner Gallagher recommends an unspecified
term, since one year “is hardly a serious impediment to some activists.”
• The SEC
should address “the practice of ‘proposal by proxy,’ where the proponent of a resolution—typically
one of the corporate gadflies—has no skin in the game, but rather receives permission to act ‘on
behalf’ of a shareholder that meets the threshold.”
• SEC rules provide an exception to its
‘ordinary business’ exclusion for ‘significant policy issue’ proposals. Gallagher wants each of
those proposals to be voted on by the full Commission.
• When it comes to the language of
proposals, Gallagher wants to reverse the burden of proof for those that companies allege are
materially false and misleading or vague. Shareowners should have the burden of proof, rather than
• Instead of proposals needing 3, 6, or 10% of votes in support to be
resubmitted in subsequent years, Gallagher proposes 5, 20 and 50%."
The US Chamber of
Commerce and other business groups seized on the last of Gallagher's recommendations, petitioning the
SEC for "amendment of the Resubmission Rule to increase significantly the percentage of
favorable votes required before the company is obligated to include in its proxy materials the
substance of proposals shareholders previously rejected."
However, as McRitchie pointed
out, "Gallagher’s recommendations would do nothing to protect investors or promote fair markets and
capital formation. Instead, he would essentially sanction the complete turnover of the shareowner’s
proxy to managers to facilitate their own entrenchment, with the possible exception that some
rights to submit proxy proposals might still be maintained by hedge funds, the only shareowners
recognized in Gallagher’s speech as representing the rights of 'ordinary' investors."
Recently, Timothy Smith of Walden Asset
Management commented on the matter. "We suspect that the Chamber hopes the SEC will open the
door to a proxy rule review that would result in multiple radical changes limiting the influence of
shareholders," Smith writes.
"Walden will advance a different perspective in defending the
current rules that govern the submission of shareholder resolutions," he continued. "We will
explain how shareholder proposals on environmental, social, and corporate governance matters often
raise issues with a direct impact on long-term shareholder value (e.g., effective management of
climate change risk or encouraging stronger board oversight and independence). We will highlight
that many companies embrace the substance of these shareholder proposals as good for business. We
will make the case that fiduciary duty compels us to raise these matters that address long-term
risk and brand reputation. And finally, we will argue that sometimes voting support is modest in
early years but later garners significant shareholder backing as knowledge about an issue
Smith noted also that Walden met with Commissioner Gallagher to express its
views on current proxy rules.
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