What Does the SEC’s Shareholder Resolution Proposal Mean for Investors?
Written by Jasmin Sethi for SCA client, Morningstar.
We expect the rule to make it harder for investors to influence management.
Shareholder resolutions play a central role in corporate governance. For decades, these resolutions have:
facilitated a dialogue between investors and corporate management;
been used to suggest changes in corporate practice or disclosures;
signaled shareholder concerns; and
created momentum for regulatory initiatives protecting investor interests.
Plus, there’s ample evidence that shareholders’ participation in the proxy process via shareholder resolution filing has resulted in important enhancements to corporate disclosures on environmental, social, and governance, or ESG, matters. We believe the system has worked well and is not broken.
Even so, the SEC has proposed a rule that would make this process much more restrictive. It proposes, among other things, raising the submission and resubmission voting thresholds that qualify shareholder resolutions for the ballot. This would increase the thresholds of votes cast to 5% if previously voted on once in the past five years (up from 3%), 15% if previously voted on twice in the past five years (up from 6%), and 25% if previously voted on three times or more during the past five years (up from 10%). In all these cases, the most recent vote must have taken place within the past three years.
The SEC’s rationale for this change is that shareholder resolutions brought “year after year” that do not attain majority support are burdensome and unjustified. But in our comment letter to the SEC, we maintain that this proposal fails to account for the value brought by the filing of shareholder resolutions. The proxy process contributes to both corporate and social dialogue on significant issues pertinent to market rise.
Here’s a closer look at our perspective on the proposal.
