Today, Mayer Brown’s Larry Cunningham provided testimony to the House Financial Services Committee on shareholder proposals and related issues.
Read an excerpt below:
For decades, the SEC’s shareholder proposal rule (“Rule 14a-8” under the Securities Exchange Act of 1934) has been used to channel shareholder proposals to align with state corporation laws that vest corporate authority in the board and to filter out those that are illegal, irrelevant, illegitimate, or otherwise inappropriate. First, Rule 14a-8 limits eligibility based on the proposing shareholder’s minimum share ownership value and ownership duration. Second, Rule 14a-8 lists reasons companies can exclude a proposal, such as those the fact that it is not a proper subject for shareholder proposals under applicable state corporation law or is irrelevant in relation to the company’s size and business. Over the years, with changing socioeconomic settings, amid new regimes of regulatory leadership, these rules have been permitted to be interpreted in numerous ways. Accordingly, the number and type of shareholder proposals has varied, both by kind of shareholder and kind of proposal. Currently, the eligibility levels are set relatively low, which fails to screen out many proposals. On proposal topics, the pendulum has recently swung sharply towards social, political and environmental subjects, a swing accelerated by an SEC staff decision to require companies to include them, even if they have little or nothing to do with the company or its business. Individuals and groups have used this change to pursue ends increasingly unrelated to corporate business. Many proponents acknowledge as much, stressing that they buy minimal stakes in big companies to advance their missions regardless of the effects on a company’s performance or shareholder value—an approach some commentators seem to support. Data reflect the change: in the year before the SEC staff’s reversal, the staff agreed with company requests to exclude proposals under the related 14a-8 exclusion 40% of the time, but the next year that figure dropped to 23%. The SEC staff’s new approach correlates with increases in shareholder proposal submissions and ensuing votes. The number of proposals submitted to companies in 2023 increased 18% over 2021, rising to almost 1000, while the portion put to a vote increased 40%, exceeding 600 this year. Social and environmental topics led the increases, up 52% in submissions and 125% in those put to a vote. Not coincidentally, support for shareholder proposals has declined sharply in the past two years, after rising for several years before that. Comparing 2021 to 2023 among all proposals, the average percentage of shares voting in favor fell from 36% to 24% and the portion of proposals attracting majority support dove from 19% to 5%. For social and environmental proposals, the average percentage of shares voting in favor dropped from 37% to 20% and the portion attracting a majority plummeted from 23% to 3%.
Read Larry’s written testimony here.