SEC Proxy Rulemaking: Insightful Comment with Compelling Data from Tom Shaffner

One of the most compelling and persuasively documented comments we have seen on the SEC’s proposed rule on proxy advisory firms and proxy proposals comes from an individual investor and data scientist named Tom Shaffner. We highly recommend reading the comment in full at the link below. Some highlights (footnotes omitted):

The more I’ve learned of these changes the more I’m mystified by the proposal. The stated purpose of these rules is to strike an appropriate balance between the ability of shareholders to make proposals and the burdens of corporations to include such proposals. On learning that the rule change increases the thresholds for proposal eligibility, I expected the data to tell a story of proposal abuse that needed reining in.

Digging into the data, I found that the case seems to be rather the opposite. Based on the analysis in the amendment proposal itself, the number of shareholder proposals in the last twenty years is shown to have no statistical trend overall, while average proposals received per company are low and have decreased across the board since 2004. In this same time average voting support has either remained stable or shown increases in all categories. Finally, there is a significant downward trend in the number of individual proponents2 making submissions. The proposal includes additional analysis about a variety of subcategories of proposal or proposer type increasing or decreasing, but the above facts are the essentials that frame this story.

And this is a story that does seem to merit change; in balancing the burdens of proposals with the ability to make proposals, fewer individuals making proposals4 should raise concern that this process is too difficult, and thresholds need to be lowered. At the same time, companies receiving fewer proposals on average can give us confidence that there is leeway for a lowering of the standards without undue additional burden on companies.
In light of this, the proposed rule changes seem like a fundamental misreading of the data in the proposal itself, representing a solution to a problem that doesn’t exist while exacerbating one that does.

In summary, I would suggest that the actual rule amendments that should be made are the following:
1. A change explicitly allowing proponents to make proposals via teleconference at shareholder meetings as discussed in Remote Proposal Possibilities.
2. A requirement that proponents (as discussed in 14a-8(b)(1)(iii)) but also companies make themselves available to one another for discussion within a window of time after a proposal or a no-action request. This should be made more specific, as discussed in Requirement for a discussion between the shareholder-proponent and the company.
3. Require companies to share with shareholders any preliminary shareholder proposal vote results collected at the time at which they are shared with management (for discussion see Additional Concerns about Shareholder Voting)
4. Require companies to report shareholder proposal vote results, on both a count and percentage basis, independently for two separate populations: (for discussion see Additional Concerns about Shareholder Voting
a. The entire shareholder base.
b. The shareholder population that does not include passively managed investments.
5. The proposed amendment to 14a-8(b)(1)(iv) requiring additional written documentation in
instances of representative usage should be implemented.
6. No other changes.
These changes are likely to result in either no change or a slight increase54 in shareholder proposals, an improvement in communication between proponents and companies during the proposal and no-action processes, a reduction in concerns that companies are artificially influencing shareholder proposal support, and an increase in transparency around informed and uninformed voting (enabling more effective filtering of unproductive proposals). In light of the data regarding the current situation these changes strike the appropriate balance of protecting investor interests and enabling shareholders and companies to monitor and differentiate proposals by quality and current relevance.

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