A day after the White House gave formal notice to the UN that the U.S. was withdrawing from the Paris climate pact, the Securities and Exchange Commission voted 3 to 2 to adopt proposed rules that limit the ability of shareholders to advocate for corporate policies that would address climate change and other issues.
More specifically, SEC commissioners voted on several proposals affecting proxy voting practices included in Section 14A-8 of the Securities Exchange Act of 1934, raising the requirements for submissions and therefore limiting them.
A shareholder would have to own at least $2,000 worth of stock for three years to sponsor a first-time proxy proposal, up from one year currently. Alternatively a shareholder could submit a proposal if he or she or an institution like a pension fund owned $25,000 worth of stock for one year or $15,000 for two years.
Proxy proposal resubmissions, which are very common because proposals take time to gather momentum, would also face tighter restrictions.
A minimum 5% vote would be required for a first resubmission in the following five years, up from 3% currently. Proposals resubmitted twice or three or more times in five years would require minimum votes of 15% and 25%, respectively, in support, up from 6% and 10%,
The proposed rule changes, which are subject to a 60-day public comment period, would also restrict the activities of proxy advisor firms. Firms recommending a vote against executives, for example, would have to provide their analysis to management and include executives’ objections in their final report.
Before the vote on Tuesday, Chairman Jay Clayton said the amendments were long overdue and “carefully crafted to more appropriately balance the benefits and burdens to all shareholders.”
U.S. Chamber of Commerce Vice President Tom Quaadman called current regulations on proxy voting “Eisenhower-era rules … [that] are no longer sufficient in the 21st century” and seemed to fault the current rules concerning proxy advisory firms for the decline in the number of public companies in the U.S. “It is no surprise that the rise of advisory firms coincides with the steep decline in the number of public companies in the United States,” said Quaadman in a statement.
In a call with reporters after the vote, SEC Commissioner Robert Jackson, one of two commissioners who voted against the proxy proposals, said the new proposed rules would make it much harder for shareholders to hold corporate executives to account and much easier for CEOs and other corporate officials “to run companies that favor their interests.”
He called on the SEC staff to study available data about shareholder proxies to determine which proposals enhance a company’s value and which are destructive.
If the new rules are finalized as is, “CEO accountability ability will come off the ballot” and “the hand of dual-class companies will be strengthened,” said Jackson.
John Coates, vice dean for finance and strategic initiatives at Harvard Law School, likened the proposal on proxy firms to requiring consumers to submit their reviews to a restaurant before posting them on Yelp, noting that it raises First Amendment issues.
Michael Garland, New York City assistant comptroller, said he expects court challenges if the rules are finalized as proposed.
Will Martindale, director of policy research for PRI, an international network of investors advocating corporate sustainability practices, said the proposed rules “undermine” shareholder initiatives “to put ESG (environment, social and governance) issues at the top of the agenda for U.S. companies” at a time when the U.S. government is falling behind on addressing climate change.
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