Saturday, September 26, 2020
The SEC made its long-awaited revisions to Rule 14a-8, which dramatically increase the dollar investment requirements, add a new prohibition on allowing shareholders to aggregate their holdings to meet those requirements, prohibit shareholder representatives from advancing proposals on behalf of more than one shareholder per meeting, and raise the resubmission thresholds, among other things. In practical effect, these rules make it much more difficult for retail shareholders – who are unlikely to hold $15K or $25K of a single company’s stock in their portfolio – to advance proposals. And, as Yaron Nili and Kobi Kastiel have documented, retail shareholders (and specific retail shareholders at that) have been the driving force behind a large number of proposals. They find that – despite critics’ claims that these “gadflies” are advancing a personal agenda – their proposals frequently win majority support. Thus, important corporate governance innovations have been driven, in part, by proposals advanced by retail investors.
Retail investors are not the only ones who advance proposals, though; pension funds do, as well. That’s where the Department of Labor comes in. As I previously blogged, the DoL has proposed new rules that would sharply limit ERISA plans’ ability to participate in corporate governance; assuming the rule goes into effect, that would knock out another source of proposals (and voting support for them).
So who’s left?
ESG/sustainability-focused funds sometimes advance proposals, and that’s a growing field. We know, however, that funds’ commitments to ESG – and their involvement in governance – varies tremendously, and so only a handful of funds may be participating in this space.
That leaves unusually wealthy/concentrated retail investors, and public pension funds, which are not subject to ERISA.
What about ordinary mutual funds? Up until now, ordinary mutual funds never advance proposals, though they will vote in favor of them. Nili and Kastiel argue that funds’ operate under various conflicts that make them uncomfortable taking the lead. As I previously blogged, these funds actually supported the new restrictions (and even more draconian changes to the resubmission rules that were not enacted); this is because, I believe, they are not only subject to public scrutiny as to how they cast their votes, but they are also on the receiving end of proposals, and would like to relieve that pressure. And when it comes to the Big Three and other large managers, it’s not as though they need a proposal to get management’s attention; they’re more than capable of quietly demanding operating changes if they want them. Proposals are more likely to be a vehicle for shareholders who do not have that kind of influence individually.
Thus, one of the immediate effects of the rule change may be to take mutual funds out of the spotlight; their governance interventions (or lack thereof) will become immediately less transparent to investors and the public, and less easy to monitor. Which is ironic, considering the Commission’s expressed concern about funds that sell a false narrative about their sustainability efforts.
Another irony is that many proposals seeks disclosure of more sustainability information – precisely the information the SEC has refused to require be disclosed because, the Commissioners have argued, relevant information varies from company to company. Proposals are used to obtain company-specific information, and now that avenue will be narrowed, if not entirely closed.
I suspect, though, that ESG activists are a creative bunch, and we will see new proponents entering the space. In a crowded ESG field, for example, some funds may find that advancing proposals can burnish their public reputations and attract new investment. One possibility would be to proceed the way the proxy access project did, by advancing proposed bylaws that would lower the investment threshold at each company on a case-by-case basis. Big Three opposition would be a serious stumbling block, but considering how much BlackRock and State Street, in particular, tried to hide their support for the new restrictions behind the Investment Company Institute, they might be persuaded to support at least limited, expanded access at specific companies.