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Tyrant of Fiduciary? SEC Action Raises Alarm by Timothy Smith From the Fall, 2007 issue of ValuesIt is the “tyranny of the minority,” said Securities and Exchange Commissioner Paul Atkins in describing shareowners that use their “nominal economic interest to hijack the agenda of all investors” by sponsoring advisory proxy resolutions.[1] His remarks echo similar comments made by U.S. Chamber of Commerce representatives. We couldn’t disagree more.
In July the Securities and Exchange Commission (SEC) shocked investors when it presented for comment potential changes to rules that govern investors’ ability to file shareholder resolutions. It is not rhetorical flourish to describe the SEC’s proposed solutions as perilous for shareholder rights.
Walden has used the shareholder resolution process for more than 20 years to encourage positive corporate change on environmental, social and governance (ESG) issues. Resolutions have been a vitally important tool in communicating with directors, management and other investors on key issues such as climate change, workforce diversity, executive compensation, human rights in overseas factories, and governance reforms.
There is a long history of positive results stemming from the use of shareholder resolutions, demonstrated by companies making specific reforms, changing policies, and increasing transparency. Some stimulate new best practices, as did recent initiatives promoting majority votes for director candidates. Moreover, approximately one-quarter to one-third of shareholder resolutions are withdrawn annually because constructive dialogue with companies leads to win-win agreements. For Walden, a record 60 percent of the resolutions we filed in 2007 were withdrawn.
What do we make of charges of “hijacked agendas?” Not much.
In the 2007 proxy season, for example, over 50 resolutions were filed by various investors requesting that shareholders be given the opportunity to vote on the report of the executive compensation committee, also known as “say on pay” proposals. The average vote was approximately 42 percent in favor, with seven receiving majority support. Investor support for Walden’s nine resolutions that went to a vote ranged from 20 to 43 percent. Clearly, shareholder resolutions can unveil widespread shareholder interest and concern on a variety of topics.
Specifically, three concepts suggested by the SEC would eliminate or severely curtail the shareholder resolution process: an opt-out option; an electronic petition model; and new resubmission thresholds.
The Opt-Out Option
The SEC asks for comments on the right of a company to “opt out” of the shareholder resolution process, either by obtaining approval from shareholders through a proxy vote, or, if sanctioned under state law, by having a Board vote authorizing the company to opt out.
An opt-out option would have significant negative consequences. The most unresponsive companies would be more likely to opt out because resolutions are an important mechanism to strengthen corporate accountability. Imagine a scenario where the proxy process revealed strong criticism of a board for poor oversight and irresponsible practices, such as options backdating that exposed the company to legal action. If the company opts out of shareholder resolutions, an important tool of accountability to investors evaporates overnight.
We also cannot support an opt-out rule implemented through a shareholder vote. Far from an appropriate democratic process, this more accurately reflects the anti-democratic notion of one person, one vote, one time. Future shareholders will have no such voice.
The Electronic Petition or Chat Room
The release asks, “Should the Commission adopt a provision to enable companies to follow an electronic petition model for non-binding shareholder proposals in lieu of 14a-8?”
This proposal ignores the ongoing success of the shareholder resolution process and attempts to create an untested option as a substitute. It is also fraught with logistical difficulties and unanswered questions. Presently, shareholder resolutions assure that management and the Board focus on the issue at hand since it is included in the proxy and debated at the annual stockholder meeting. Additionally, each and every investor receiving a proxy has the opportunity to consider the proxy item and cast a vote. Walden believes that to substitute a chat room or other forms of electronic petition for the current proxy process erodes a valuable fiduciary tool.
Chat rooms and electronic forums are welcome approaches for enhancing communication with investors. They are not a substitute for a shareholder’s right to file resolutions.
Resubmission Thresholds
The Commission asks for comments on increasing the votes required for resubmitting resolutions to 10 percent after the first year, 15 percent after year two, and 20 percent thereafter, compared to current thresholds of 3 percent, 6 percent, and 10 percent, respectively.
Recent experience shows that a minority of publicly traded companies receives shareholder resolutions. In 2006 and 2007, there were fewer than 1,200 resolutions filed at fewer than 1,000 companies. This represents less than 20 percent of publicly traded companies. Furthermore, a significant percentage of shareholder resolutions filed each year are withdrawn and never appear on proxy statements because mutually acceptable agreements are struck between investor proponents and companies. By being responsive to investor concerns, companies often have opportunities to avoid proxy resolutions. Hence, the business community is not burdened significantly by the resolution process.
From the viewpoint of investors, it is clear that a major increase in resubmission thresholds would have a significant chilling effect. According to proxy advisory firm RiskMetrics Group (formerly Institutional Shareholder Services), had the resubmission thresholds been 10,15, and 20 percent in 2006, only 36 percent of environmental and social-issue resolutions would have earned enough support for resubmission compared to 81 percent under the current rules¾a dramatically negative change for shareholder proponents.
The state and municipal retirement funds, union pension funds, foundations, religious investors, mutual funds, and investment firms that sponsor resolutions all share a profound interest in protecting and creating shareholder value. For many, this is their legal and fiduciary duty. Contrary to the “tyranny of the minority” characterization, these shareholder proponents generally seek to advance broad investor interests that help foster long-term business success.
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