The full text of our comment to the SEC on its proposed rule on shareholder proposals is below. An excerpt:
The term “modernizing” means, according to the dictionary, adapting (something) to modern needs or habits, typically by installing modern equipment or adopting modern ideas or methods. It is inapplicable to this proposal, which would be more accurately characterized as “squelching.” If the Commission wants to “modernize” the shareholder proposal process, it should focus on use of social media and other online technology to make it easier for investors to file and support shareholder proposals. It should consider expanding the permissible subject matter for proposals and disclosure to recognize contemporary issues like the qualifications and independence of board members, cybersecurity, dark money, and climate change risk. It should undertake a long-overdue assessment of proxy plumbing and look for ways to streamline it and provide more transparency.
But there is no reason to make these changes to the shareholder proposal process and the record includes no data showing that the current system is burdensome. Only a tiny fraction of public companies ever receive a shareholder proposal, all proposals are strictly limited in subject matter and word count, and even a one hundred percent vote in favor is advisory-only, with no obligation for the company to comply.
The record underlying this proposal has only self-serving, self-reported, and unsubstantiated claims that this creates a burden for companies, and there has been no effort to document the costs to proponents (which this proposal would increase). There is almost nothing in the record here documenting the significant benefits that have come from shareholder initiatives over the years, from more independent, engaged, directors serving on fewer boards and with vastly increased expertise, a tighter pay/performance link (William Steiner’s shareholder proposals were crucial on this issue), and fewer conflicts of interest. For example, when I first began to work in this field in the 1980s, boards were almost universally “male, pale, and stale.” O.J. Simpson served on five boards and was one member of a two-person audit committee on one of them. The CEOs of Inland Steel and Cummins Engine chaired each other’s compensation committees. And there were many examples of directors serving on as many as ten boards and many who were receiving side payments from the company, or otherwise compromised or unqualified. While there is still much to criticize about CEO pay, it is fair to say that the pay-performance link is better as a result of shareholder oversight. Shareholder proposals have been a cost-effective way for investors to provide feedback to boards of directors that has been critical in both senses of the word. They have made companies better and increased confidence in the era of separation of ownership and control.
It does not matter that shareholder proposals are typically filed by a small number of investors. That has been the case since the first rules on shareholder proposals went into effect in recognition of the efforts of the Gilbert brothers in the 1930s, who were not allowed to speak or make suggestions at shareholder meetings until the SEC’s first regulations establishing their right to do so. The issues the Gilberts raised then are the ones shareholders still raise today and they will always be pertinent: CEO pay, board effectiveness, audit quality, accountability to investors.
The question is not how many people file shareholder proposals; the issue is how many shareholders support those proposals, and those levels show that Chairman Clayton’s implication that these proposals are somehow tangential or distracting or otherwise not in the interest of shareholders is incorrect.