Shareholder Rights Under Attack
An uptick in virtual AGMs and a proposed rollback to Dodd Frank imperil consumer financial protections and investor proxy access
There are efforts under way by members of Congress to curtail shareholder rights by radically changing the rules of the proxy process to make the filing of resolutions much more onerous for investors.
Section 844 of the “Financial CHOICE Act” includes proposed changes to SEC rule 14(a)(8), the rule which governs shareholders’ rights to file resolutions. Proposed changes include:
- unduly restricting the financial requirements of filing a shareholder resolution (from $2,000, to 1% of a company's stock);
- increasing the length of time an investor must hold shares from one year to three;
- increasing refiling thresholds (to 6%, 15%, 30% -- up from 3%, 6% and 10%).
In practice, these changes would have the effect of preventing all but the largest shareholders from submitting proposals for the proxy: average and smaller investors would effectively be silenced.
Introduced by House Financial Services Chair Jeb Hensarling (R-TX) in 2016, the bill also takes aim at the financial protections enshrined in 2010’s Dodd-Frank law (read ICCR’s letter outlining the importance of Dodd-Frank here), and would eliminate numerous financial regulations and consumer protections. The Act would, for instance, remove the current cap on debit-card transaction fees. In addition to the impact on shareholder democracy, many believe the proposed regulatory rollbacks in the Financial CHOICE Act bill contain the seeds of the next financial crisis.
On May 4th, the Act was voted out of the House Financial Services Committee (the vote was 34-26 along party lines), and will now go before the full House for a vote.
In response, ICCR, along with other investor organizations including Ceres, CII, USSIF, and PRI sent a letter to Gary Cohn, director of the National Economic Council urging opposition to the Act (available here). ICCR member Domini Impact Investments recently wrote to the CEO of Nasdaq, criticizing Nasdaq’s endorsement of the Financial CHOICE Act, Section 844 in particular.
Dimon and the BRT oppose what they perceive to be “self-serving shareholder activity and proposals not intended to benefit the company”. Investors argue that the Choice Act would seriously weaken their ability to assess corporate performance against peers and exercise oversight of the companies they own. In impeding shareholder requests for greater transparency around the business risks they believe are material to their investment decisions, responsible investors caution against a return to pre-2008 risk-taking and short-termism which will end badly for not only shareholders, but the economy and society at large.
Why In-Person Corporate Annual General Meetings Matter
Another disturbing trend among several high profile corporations – including ConocoPhillips, Comcast, Duke Energy, Ford Motor Company, HP, Intel and Biogen – seeks to eliminate in-person stockholder meetings in favor of virtual-only (webcast) meetings. Virtual-only meetings are one of the latest in a growing list of tactics corporations are employing to actively discourage in-person attendance and participation by shareholders.
A sampling of these tactics includes the hosting of annual meetings in far-flung, inaccessible locations with limited travel options; excessive and time-consuming security check-ins; the pre-vetting of questions from shareholders; and the scheduling of meetings adjacent to major national holidays.
The Council of Institutional Investors, a coalition of America’s largest pension funds with portfolios exceeding $3 trillion, strongly argues that “Cyber meetings should only be a supplement to traditional in-person shareholder meetings, not a substitute.” In addition, New York City’s Pension Funds have announced that they plan to vote against members of Board Governance Committees which adopt “Virtual Only” meetings. Other investors are destined to follow suit.
In-person shareholder meetings are a critical component of good corporate governance. They enable long-term investors to share information and voice concerns about financial risks they believe a company may not be adequately managing. Virtual-only meetings can significantly reduce this additional input, fostering a dangerous insularity that exposes companies to even greater risk. Further, we fear the move to virtual meetings will be used by management and boards to avoid challenges, filter out negative feedback, cherry-pick questions, and downplay opposition to business decisions and plans.
We encourage vehicles and tools, including the webcast option, that facilitate the participation of all shareholders, particularly shareholders who are unable to travel to far-flung AGM locations, in investor calls and meetings. However, we believe virtual options must be just that; supplemental options that don’t preclude in-person participation.
For those companies that are able to make virtual access to annual meetings available, they must ensure that “digital participation” is as unfettered as possible and shareholders are afforded equal time to voice concerns and ask questions without censorship. In the future, we hope companies will develop strategies that will make their governance processes more, not less, transparent and inclusive, and that in-person attendance of the annual stockholder meeting will be facilitated, welcomed and encouraged by corporate boards and management.
As active investors committed to engagement, we see the Choice Act and the trends around shareholder meetings as part of a more broad strategy designed to censure productive shareholder input and empower management. The net effect of this strategy would be weakened accountability mechanisms and again, increased risk to companies and their stakeholders. Ensuring that investors are able to file resolutions for review by all shareowners and that they are welcomed to meet the board and management team of the companies they own face-to-face on an annual basis are not privileges, but fundamental shareholder rights that should be protected and empowered. And the relative openness of board and management to stakeholder input through these channels is an important indicator of their ability to adequately manage risk.