SEC Commissioner Uyeda Recommends Changes to Shareholder Proposal Process
Commentary by Steven Lofchie
SEC Commissioner Mark T. Uyeda described a number of policy approaches to prevent "value-eroding" shareholder proposals from being part of the annual shareholder meeting process.
In remarks before the Society for Corporate Governance 2023 National Conference, Mr. Uyeda considered recent trends in shareholder activity and offered several recommendations. Reviewing developments on Exchange Act Rule 14a-8 ("Shareholder proposals,") Mr. Uyeda highlighted changes in the agency's position on shareholder proposal exclusions, which, he said, correlated to a substantial increase in shareholder proposal submissions to companies. He cited asset managers’ recent concerns that there has been an influx of proposals with a "high level of prescriptiveness, lack of connection to material risks or long-term value, and decreased overall quality." The Commissioner also described an increase in the costs to the company of responding to the increase in submissions, including both "process" costs (estimated at about $150,000 per proposal) and opportunity costs. Mr. Uyeda noted that a majority of shareholder proposals are submitted by only the top five shareholder proponents, and quoted former Commissioner Paul Atkins' warning that the shareholder proposal process "not result in the tyranny of the minority."
Potential Policy Approaches
To address these current trends, Mr. Uyeda recommended:
- greater use of private ordering to manage shareholder proposals, which can offer potential benefits to companies and their shareholders by (i) clarifying procedural standards that will not change based on SEC leadership, (ii) allowing a company to move away from a "one-size-fits-all" approach under rule 14a-8 and (iii) enabling companies to adjust their shareholder proposal procedures to account for evolving governance trends;
- excluding proposals on social policy issues that "lack a material relationship with the company" to prevent companies from having to take positions on political issues;
- that the SEC reassess whether companies must continue to send the shareholder proponent a copy of the opposition statement prior to filing the definitive proxy statement, given that the SEC no longer requires shareholder proposals to be filed in preliminary form for review; and
- that the SEC determine whether to continue applying a task force of attorneys to review no-action requests due to (i) the incredible opportunity cost of this commitment and (ii) the fact that only a court is able to adjudicate whether a no-action decision is in compliance with rule 14a-8.
Commentary
While it may seem, on a surface level, that easing proxy requirements facilitates "democracy," a good number of proxies on political issues are advanced by holders whose goals are adverse to the interests of the company, its shareholders, employees and customers. In many cases, they may hope to obtain a compromise by threatening a public fight that damages the company's reputation. When these activists achieve their desired political goal, they then sell their stock and move on, as the goal was not to drive value, but to achieve some desired political result. The SEC might consider raising the share ownership required for an investor to submit proxies.