The U.S. Securities Exchange Commission (SEC) has just announced its plans to present a revised Rule that will limit the ability of investors to file shareholder resolutions for votes at company stockholder meetings. This comes amidst a concerted effort by certain business groups to sharply limit shareholders’ ability to exercise these rights as owners of companies.
For more than 70 years, investors have been able to propose non-binding resolutions for shareholder votes at company annual meetings. These resolutions are subject to a host of requirements, and if the requirements are not met, firms may ask the SEC to allow them to exclude a proposal from a ballot. Also, if a proposal fails to receive a specified percentage of support from investors, it may not be reintroduced for three years.
In recent decades, investors have utilized shareholder resolutions to press companies to address important environmental, social and governance (ESG) issues that can affect a firm’s short- and long-term value.
Unfortunately, organizations such as the Business Roundtable, the U.S. Chamber of Commerce, and the National Association of Manufacturers (NAM) are calling these concerns “idiosyncratic interests” from “activists pursuing political goals” unrelated to the financial bottom line, to quote theBusiness Roundtable and NAM, respectively. Such characterizations are an attempt to divert debate from the real issues by attacking the motivations of the messenger. In fact, such resolutions are an appropriate means by which investors register their concerns regarding emerging business risks. Indeed, the true motivation is usually to enhance long-term shareholder value.
As the SEC launches a rulemaking change on Rule 14a-8 which would restrict shareholders’ ability to engage with companies, we urge it to see through the misleading narrative repeated by some business organizations.
Investors advancing ESG issues do so as part of their fiduciary duty, firm in the knowledge that issues such as climate change can pose significant risk to companies and shareholders alike. Thousands of companies have improved their policies on issues such as corporate governance, workplace diversity, climate change and sustainability reporting, clearly understanding how such changes assist in generating long-term value.
There is a growing consensus that firms should take ESG issues into account to protect long-term shareholder value. For example, in a recent letter to U.S. financial regulators, over 20 U.S. Senators highlighted efforts by an international group of 18 central banks and bank supervisors to address the financial risks of climate change.
Ironically, many companies that comprise the membership, and often leadership, of these industry organizations criticizing shareholder resolutions recognize the importance of addressingESG risks and frequently engage with investors in robust dialogue on how to address them. This raises the question about who groups likeNAM or the Chamber of Commerce speak for when they take such radical positions on shareholder rights.
One of the strengths of the current shareholder resolution process is that it allows for a diverse array of opinions to inform a company’s decision-making. Investors must retain this essential right. Likewise, it is critical that the SEC gather all the facts to fulfill its mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.
We also urge corporate executives to speak up, share the positive outcomes realized from the shareholder resolution process, and counter the distorted narrative advanced by industry organizations.
Many thanks to Timothy Smith, Director of ESG Shareowner Engagement at Walden Asset Management, Boston Trust & Investment Management Company, for permission to reprint this essay.