The SEC’s shareholder proposal rule was the subject of a speech by SEC Commissioner Mark Uyeda on June 21, 2023 at the national conference of the Society for Corporate Governance. The speech identifies troubling trends involving the rule and offers several policy solutions. The Commissioner dates the troubles to a 2021 SEC staff decision that opened the floodgates to increasing numbers of shareholders’ proposals on social issues. These have come to swamp managers and hurt most shareholders while vesting a minority of shareholders with tyrannical power, the Commissioner says. Among the Commissioner’s solutions are to return the subject of shareholder proposals largely to state corporation law and related corporate charters or bylaws, to restore a requirement of a materiality nexus between a shareholder proposal and a company’s business, and to reduce the role of the SEC staff in the shareholder proposal process.
Troubling Trends
The Floodgates Opened. The troubling trends Commissioner Uyeda identifies date to a 2021 decision by the SEC staff to loosen eligibility standards for shareholder proposals raising questions of significant social policy. Before then, companies were allowed to exclude shareholder proposals that involved social policy questions unrelated to a company’s business, under SEC Rule 14a-8(i)(7). Since the reversal, SEC staff has disregarded the nexus between a social policy issue and the company and instead focused solely on the social policy significance. The data reflects the change: in the year before the reversal, the staff agreed with company requests to exclude proposals under that Rule 40% of the time, but the next year that figure dropped to 23%.
A Deluge Came. The staff’s new approach correlates with increases in shareholder proposal submissions and ensuing votes the Commissioner cited. The number of proposals in 2023 increased 18% over 2021, rising to almost 1,000 while the portion put to a vote increased 40%, exceeding 600 this year. Environmental and social topics led the increases, up 52% in submissions and 125% in those put to a vote. Commissioner Uyeda asks: “At what point will there be shareholder proposal overload?”
Swamping Companies. Acknowledging that some shareholder proposals “can add value to a company, others may not,” the Commissioner reported asset managers expressing concern that the deluge is not presently increasing shareholder value and risks losing value long-term. One reason is that managers are preoccupied with administering proposals rather than running their business, the Commissioner says.
Support Declines. Commissioner Uyeda deduces it is therefore “not surprising” that support for shareholder proposals has declined by many measures he cited. Comparing 2021 to 2023, the Commissioner reports that, among all proposals, the average percentage of shares voting in favor dropped from 36% to 24% and the portion of proposals attracting majority support fell from 19% to 5%. For environmental and social 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%.
Reign of Tyranny. Despite low and declining support levels among most shareholders, the Commissioner observes that all shareholders pay the costs of the process. A striking data point: “For the 2023 season, the top five shareholder proponents submitted approximately 55% of all proposals.” Concurring with descriptions of his predecessors, Commissioner Uyeda accordingly laments a “tyranny of the minority.”
Suggested Solutions
Commissioner Uyeda offers three policy reforms: more private ordering in the shareholder process under state corporation law; excluding proposals on social policy issues that lack a material relationship with the company; and changes to how the SEC staff processes shareholder proposals.
Private Ordering. The Commissioner encourages more private ordering, meaning permitting companies to tailor their own rules governing shareholder proposals rather than having federal rule makers impose a single standard. Based on a detailed review of the law in this area, Commissioner Uyeda opines that SEC’s shareholder proposals rules are default standards which companies should be free to tailor in accordance with state law. After all, Congress has not preempted state law in this area and SEC rules continue to permit companies to exclude proposals that are not a proper subject for action by shareholders under state law.
Materiality Nexus. The Commissioner notes that the existing SEC shareholder proposal rule contains a mix of approaches for evaluating social policy issues in shareholder proposals in two different exclusions under the rule—Rule 14a-8(i)(5) and (i)(7). Providing a rich history of these provisions, the Commissioner makes a strong argument to harmonize the two into a single standard which includes a nexus between the social policy issue and the company. In short, he expects: “The degree of the relationship should be sufficiently unique so that social policy issues generally applicable to any company are excludable.”
Restraining the Staff. The Commissioner believes the current processing of shareholder proposals is inefficient and suggests several improvements. Chief among these is to reduce the SEC staff’s role in reviewing proposals and no-action letter requests as costly, non-binding, and of limited value. At minimum, the Commissioner believes the staff should not opine on whether an issue is one of social policy, as that is beyond their competence and “can inject line staff members into the middle of Congressional investigations and oversight.” Nor should the staff make “any determinations on whether a proposal violates an area of law other than federal securities law,” Commissioner Uyeda says. Such reticence would enable staff to devote their time and resources to better explanations of their reasoning when addressing other bases for exclusion.
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