SEC lambasted over shareholder rights change as companies fail to meet ESG targets

SEC lambasted over shareholder rights change as companies fail to meet ESG targets 

The US Securities and Exchange Commission (SEC) has come under fire from investor groups after it voted to adopt amendments to its shareholder proposal rules.

In what is being seen by investors as a major blow for corporate transparency and shareholder democracy, the SEC has announced new rules restricting shareholders’ access to corporate proxy voting by limiting the filing of resolutions.

The Interfaith Center on Corporate Responsibility (ICCR), which campaigns for greater corporate democracy, says the amendments will “significantly” limit investors’ ability to submit and refile proposals by raising the thresholds of ownership.

“The new rule guts the existing shareholder proposal process, which has long served as a cost-effective way for shareholders to communicate their priorities and concerns to management, with little economic analysis supporting the needs for these substantial changes,” said Josh Zinner, chief executive of the ICCR.

“The new rules appear to be based on a wholly unsupported assumption that shareholder proposals are simply a burden to companies with no benefits for companies or non-proponent investors when there is 50 years of evidence to the contrary,” he added.

Changes to Rule 14a-8 raise the eligibility thresholds for shareholders wanting to submit a proposal.

Under the amended rules, a shareholder can submit an initial proposal only after holding $2,000 of company stock for at least three years. To put a proposal forward before this three-year period, an individual or entity must hold $15,000 of the company’s securities for at least two years, or $25,000 of the company’s securities for at least one year.

The SEC has also raised the vote thresholds for proxy proposal resubmissions. Proposals must now get at least 5% support in the first year, 15% in the second and 25% in the third year in order to be resubmitted within five years, up from the current thresholds of 3%, 6% and 10%, respectively.

The amendments to the shareholder proposal rules will become effective 60 days after publication in the Federal Register.

US shareholder proposals have grown in importance in recent years as investors pay more attention to issues such as climate change.

However corporate trade associations have been pressing for restrictions on shareholder proposals to stop niche issues apparently clogging up corporate ballots.

These latest rule changes could make it more difficult for shareholders to encourage companies to behave more responsibly on climate change, human rights and other critical environmental, social and governance (ESG) issues.

Stakeholders versus shareholders

Already, there are doubts that that companies can be trusted to voluntarily put long-term ESG issues ahead of short-term profits.

A report by a group of researchers, Test of Corporate Purpose (TCP), has revealed companies that signed up to Business Roundtable’s statement for their improving “corporate purpose” have failed to make any progress on their pledges.

In 2019, 181 chief executives in the Business Roundtable – a group that includes major companies such as Amazon, Apple, and Bank of America – redefined the purpose of a corporation to one that delivers value to all stakeholders and not just shareholders.

They committed to deliver value to customers, invest in their employees, deal ethically with their suppliers ethically, support the communities in which they work, and generate long-term value for shareholders.

The TCP’s report found that signatory companies responded worse than others during the coronavirus pandemic.

Business Roundtable signatories did not outperform S&P 500 peers in more than a dozen categories, including employee safety, labour practices, job security and COVID-19 policies. They also underperformed compared to their S&P500 and European company counterparts.

Some of the worst ranked companies include corporate giants like Amazon, Bank of America, BP, Exxon, Facebook, Ford, Morgan Stanley and Walmart.

The report calls on asset owners to integrate TCP’s analysis into manager selection to help them judge investment managers’ “handling of critical stakeholder issues” at investee companies.

Managers are similarly called upon to use initiative’s work to inform their engagement with corporates.

The report concludes that corporate commitments to purpose are less informative about a company’s future performance on social and human capital issues than other indicators.

“What matters more is whether a company has a strong track record of proactively managing issues that may become material during a crisis, and whether a company is an early responder on relevant issues during a crisis,” the report said.

Last Updated: 25 September 2020
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