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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
• 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
• 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
• 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 companies.
• 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."
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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