Silencing the Nun: SEC Aims to Curb Small Investors’ Activism
(Bloomberg) -- Sister Nora Nash, a Franciscan nun from the Philadelphia area, spent the last 15 years pushing corporations to change their policies on guns, tobacco and fracking. As a shareholder, the sisters’ retirement fund has filed hundreds of proposals at companies from Chevron Corp. to Wells Fargo & Co.
She might not be able to do that kind of activism anymore if the U.S. Securities and Exchange Commission goes ahead with a plan to limit proposals from small investors like the fund, which often hold just a few thousand shares out of hundreds of millions. The agency last week proposed higher ownership thresholds for submitting proposals and a higher bar to resubmit ones that fail.
Companies have said that frequent proposals from small investors can be a costly drain on management’s time. But Nash said she hears a different response as well.
“I can think of several companies that have said ‘thank you’ for helping them to address human rights, or the rights of the community,” she said, saying she’s disappointed in the SEC’s proposal. “We’re helping corporations to realize that they can improve.”
Nash and her community — the Sisters of St. Francis of Philadelphia — have taken a vow of poverty but maintain a small investment portfolio to support health care for elderly nuns. The shareholder-proposal process has been one of their most effective ways to hold companies accountable, said Nash, the order’s director of corporate social responsibility. “This tool has given us a voice,” she said.
Companies, led by Washington trade group the Business Roundtable, have told the SEC that the process needs to be streamlined to reduce the number of proposals submitted and resubmitted. This would mostly affect small shareholders, because large asset managers historically have avoided shareholder proposals, preferring closed-door “engagement” meetings with executives and boards.
Under the SEC’s plan, before submitting a proposal, shareholders with just $2,000 of a company’s stock would need to be invested for three years instead of just 12 months as currently required. The commission’s plan would also raise the thresholds for resubmitting proposals that fail. A shareholder would need at least 5% support on their first try in order to try again on the same topic within five years, 15% support on the second vote in order to call for a third, and 25% support the third time around in order to seek a fourth vote.
The proposals are open for a 60-day comment period, so commissioners may hold a second vote on them next year after considering public feedback.
Those new thresholds would significantly change the process, according to a review of 3,600 proposals at Russell 3000 companies by the Council of Institutional Investors. About 12.1% of proposals between 2011 and 2018 would have been excluded from corporate ballots after a shareholder’s first attempt, compared to 5.2% under the existing thresholds. After a second attempt, 24.1% would have been excluded, up from 8.8% with the current thresholds, the council said.
Fiona Reynolds, chief executive of the UN-backed Principles for Responsible Investment, says she views the SEC’s proposal as an attack on shareholder rights. “You can’t take shareholders’ money then say they have no say,” Reynolds said. “It often takes decades for some of these issues shareholders raise to get traction, but it’s important to get started and send a signal to companies.”
Shareholders say the new rules would make it particularly tough for investors to raise issues at companies with dual-class share structures, or firms where insiders hold particularly large stakes, because a majority of shares aren’t even able to be voted. A proposal at Boeing Co. to require an independent chairman would have been excluded after its low performance in 2018, but the proposal received 35% this year after the airplane maker’s safety issues. The company acceded to the request and created an independent chairmanship.
Investors who submit proposals — often faith-based investors like Nash, environmentally focused funds, and public pension plans — say they’re often able to use the process to raise issues that are not yet on the radar of big investors or management. It’s common not to garner large support in the first year.
SEC Chairman Jay Clayton, a political independent who sided with the agencies’ two Republicans in voting to propose the rule, said in a statement this month that the process needs to be brought up to date: “Modernization and retrospective review of the commission’s rules in these areas of our shareholder engagement ecosystem are clearly overdue,” he said.
“Our proposed changes are content neutral and designed to enhance the accuracy, transparency and efficiency of our proxy voting system,” Bill Hinman, who leads the SEC unit whose staff drafted the proposed rule changes, said in a statement this week. “While back-testing has its limitations, our analysis shows that virtually all proposals that eventually receive majority support would not be adversely affected by our proposals.”
Investors say the process isn’t antiquated. Holly Testa, director of shareowner engagement at First Affirmative Financial Network, an adviser focusing on sustainable investing, said the SEC’s plans will have a “chilling effect” on the ability of smaller investors to get meetings with companies.
“I don’t think it’s modernization; I think it’s marginalization of smaller investors in favor of large institutional investors and corporations,” she said. “The playing field is already titled toward corporations, and this is going to tilt it even further.”
The process is relatively undemocratic. Proposals are typically not binding on the company, and votes on environmental and social issues rarely get majority support. Even when a company decides to address a proposal, it can take up to a year to change bylaws or issue a report. But as a growing number of socially conscious investors have pressed management and boards to address these issues, they’ve demanded more meetings, and often companies have been willing to settle by offering to produce a report rather than send a proposal to a vote.
Companies say the cost of proposals is high, because they co-opt the attention of management. But investors say conversations around proposals are often productive, and the cost is really a function of how much a firm chooses to fight the proposal with lawyers, regulators and the public. As companies have engaged more with smaller shareholders, the number of proposals going to votes has already started to decline.
“If the system isn’t broke, why are we trying to fix it?” said Mindy Lubber, CEO of Ceres, a Boston-based advocacy group that advises investment funds on climate issues. “When you have resolutions asking companies to disclose material risk information for investors to make proper decisions, that’s a good thing.”
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