A coalition of business groups is petitioning the Securities and Exchange Commission to increase the percentage of favorable votes that are required before a company is obligated to include proposals shareholders previously rejected in their proxy materials.
Signing onto the Petition for Rulemaking are the U.S. Chamber of Commerce, National Association of Corporate Directors, National Black Chamber of Commerce, American Petroleum Institute, American Insurance Association, The Latino Coalition, Financial Services Roundtable, Center on Executive Compensation, and Financial Services Forum.
The SEC's Resubmission Rule already requires a marginally higher percentage of support each time a shareholder proposal dealing with “substantially the same subject matter” as another proposal or proposals is submitted one or more times within a five-year period. To qualify for resubmission, proposals must garner at least 3 percent of the total vote the first year to be resubmitted, 6 percent of votes in the second year, and 10 percent a third year. If an initiative fails to meet these minimums, it may not be resubmitted for at least three years.
“Ten percent of shareholders, motivated by concerns unrelated to enhancing shareholder value, can override the expressed will of 90 percent of the shareholders, indefinitely,” the petitioners wrote. They lamented that two proxy advisory firms—ISS and Glass Lewis—control nearly 97 percent of the market for proxy advisory services and proposals they back can be expected to receive at least 10 percent greater support than those that do not. “This tyranny of the minority is aided by two proxy advisory firms that operate outside any internal or external oversight vis-à-vis shareholder proposals, and…function as de facto standard setters of U.S. corporate governance,” the petition says.
Although the groups want the SEC to change its resubmission vote thresholds, they stopped short of recommending what percentages they want instead. That determination should be made following a new cost-benefit analysis, they say.
The petition also asks the SEC to change how votes are counted for purposes of a resubmission. Currently, only votes cast “for” and against” the proposal are counted. This tends to “exaggerate the amount of shareholder support for a proposal,” since abstentions are not counted, it says, suggesting that a more accurate way to characterize shareholder support for a proposal would be to divide votes cast “for” the proposal by all votes cast, including abstentions.
The push follows a March speech by SEC Commissioner Daniel Gallagher where he questioned the merits of the current shareholder proposal system. He said the stock ownership threshold for submitting shareholder proposals should increase from an “absurdly low” $2,000 to as high as $2 million. He also urged revising resubmission thresholds and taking a “three strikes and you're out” policy. If a proposal fails in its third year to garner majority support, it would be excludable for the following five years.