SEC Approves New Rules to Crush Shareholder Voices

Updated on

New rules will increase material risk to corporations

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q2 2020 hedge fund letters, conferences and more

BERKELEY, CA—SEPT. 23, 2020—The Trump administration’s U.S. Securities and Exchange Commission (SEC) today voted to reduce shareholders’ right to raise material issues of concern to be voted on at corporate annual meetings. This rule change is intended to curb decades of successful shareholder proposals that encourage companies to address the growing material risks associated with environmental, social, and governance (ESG) issues.

ESG Issues Have Material Impacts On Company Value

The SEC's new rule demonstrates a failure to comprehend that ESG issues, including climate change, increasingly have material impacts on company value. The commission's rule will actively impair the right of retail shareholders to communicate publicly with their companies on these critical issues.

The SEC's proposed rule changes were widely opposed in public comment letters. Commenters noted that the current rules have worked well for the past 40 years and the SEC’s concern about costs of proposals lacked sufficient support and were based in large part on anecdotal company statements. The proposed changes were widely seen as shortsighted, without basis, harmful to investors, and blatant pandering to companies’ worst instincts.

Commissioner Allison Herren Lee noted that the new rules “will not serve markets well … this will restrict shareholder rights.” She noted that the new rules will mostly impact small investors, saying, “Retail investors will be greatly disenfranchised … the rights of smaller investors is valued at zero.”

New Rules Act As If The Voices Off Retail Investors Are Not Important

Commissioner Caroline Crenshaw said, “Shareholder resolutions are a proven and effective pathway to suggesting changes to management ... today we have shut this down.” She continued that “shareholder resolutions drive positive financial performance” and that the loss of their voices will cost companies much more than the cost of the current rules. She said that the new rules act as if the voices of retail investors are not important. “The implication is that the wealthy are more likely to possess ideas that will impact a corporation.”

Key among the changes imposed today are a more than 10x increase in the amount of stock that a shareholder needs to hold to file a resolution; increasing from $2,000 to $25,000 and $15,000 for stock held for one and two years. It also makes new ideas virtually impossible to bring forth, raising the resubmission thresholds to 5% for one year, 15% for two years, and 25% thereafter.

The new rule also does not allow shareholders to have an issue expert represent them,  instead requiring shareholders to personally attend a meeting with company representatives. Shareholder representatives will also not be allowed to submit more than one proposal at a single company even if filed on behalf of different shareholders.

Comments From ESG Issue Experts

As You Sow, a non-profit, ESG issue expert, that often represents shareholders on a broad range of material issues, had the following comments:

Andrew Behar, CEO of As You Sow, said:

“The SEC has intervened to disrupt a system that has worked with fairness and integrity for over 50 years. Companies have gained deep insight into potential material risks to their businesses courtesy of their shareholder engagements. Investors have had a forum to raise their concerns, assisting companies to outperform. This is an ecosystem based on mutual respect and a common goal; helping companies be as good as they can be. The new SEC rules will force shareholders to escalate to litigation and other means.”

Danielle Fugere, President of As You Sow, said:

“With this rule, the SEC has voted to actively muzzle retail shareholders’ ability to communicate, using non-binding proposals, in the public forum of company proxies. Far from a proposal to protect Main Street investors, this rule change makes it more difficult for shareholders to have a meaningful voice with their companies. This vote comes at a time when shareholders are appropriately acknowledging — and asking their companies to address — a wide range of social and environmental issues that have the potential to harm our environment, economy, and companies' value. The market is moving inexorably into a new era of sustainable business practices; the SEC's new rule demonstrates a failure to understand and support this necessary transition. ”

As You Sow is a nonprofit organization that promotes environmental and social corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies. See our resolutions here.