SEC Chair Presses Materiality Focus and Shareholder-Proposal Reassessment
Commentary by Steven Lofchie
SEC Chair Paul Atkins said he wants to refocus corporate disclosure on material information and rethink the rule on shareholder-initiated proxy proposals.
In a speech at the Society for Corporate Governance National Conference, Mr. Atkins said the SEC should return its disclosure regime to materiality. He noted that years of rulemaking drew immaterial information and buried investors in paperwork. Mr. Atkins said that materiality means information a reasonable investor would likely consider important and that the standard rests on financial returns.
Mr. Atkins then turned to Rule 14a-8 (Shareholder proposals). He recalled that the Division of Corporation Finance stopped responding to most no-action requests this proxy season and that feared disruptions did not occur. He said proposal trends tracked with the prior year, only six lawsuits followed, and proxy-advisor opposition was rare, demonstrating that the staff's role as intermediary is unnecessary.
Mr. Atkins said the SEC is also weighing Rule 14a-8 itself, including its relationship to state corporate law, stating that the agency's authority is not unlimited. He reported that one individual was the sole or lead proponent of about 41 percent of proposals voted on this season and that only 8 percent of that person's proposals won majority support. Mr. Atkins warned against a "tyranny of the minority," urging states to keep their corporate laws from enabling the politicization of shareholder meetings.
Commentary
It is always the case that when a measure is put forward to raise the bar for proxy submissions, critics will complain about the loss of shareholder democracy, and ignore the fact that holders of some nominal number of shares are likely attempting to advance their personal/political interests rather than benefit the issuer. It seems prudent to require that shareholders wishing to force a vote should have a large enough number of shares to demonstrate that their personal interests are aligned with the interests of the issuer.
As to claims about shareholder democracy, it is useful in the way of context to look at how much citizen democracy state governments allow. Here, for example, is the California Statewide Initiative Guide. For a citizen to put forward a ballot measure for a change in a statute, the citizen must collect 546,651 verified signatures. The proposal can be rejected if the state determines that more than 5 percent of the signatures cannot be verified, without regard to the number of signatures that are collected. Beyond that, California imposes very significant procedural requirements as to the manner in which signatures may be collected. Rather weirdly, it seems that significantly more protective measures are put in place on the verification of signatures to get a referendum on the ballot than are put in place to vote in an election for political office.