Views on the integrity of global capital markets
25 May 2017

Financial Choice Act’s Shareholder Resolution Threshold May Squelch Activity

The Financial Choice Act, which is designed to undo a number of provisions in the Dodd–Frank Act and was passed recently by the House Financial Services Committee, contains a provision that has many institutional investors up in arms. The provision would require shareowners that want to file a resolution at a company’s annual meeting to hold 1% of a company’s shares for three years to qualify to do so. Currently, a shareowner must own only $2,000 of a company’s shares for one year to file a resolution. Institutional investors argue that changing the threshold by that magnitude would eliminate the filing of shareowner resolutions as a possibility for all but the largest institutions.

Supporters of the proposed changes to the shareowner resolution rules say they are looking to limit so-called “nuisance” resolutions from a handful of individual investors that, they argue, take up too much company time and resources and often gain little support. Others, including large institutions, counter that the new ownership threshold will substantially diminish the resolutions process because small investors often are with whom new governance ideas, such as “private ordering” for board nominations, get their start.

There are a handful of small investors in the United States who file a large number of resolutions at multiple companies. It can be argued that a better response to such nuisance resolutions would be a share-holding threshold somewhere between $2,000 and 1% of a public company. Adding an extra zero to the end of the current threshold might make it more difficult for nuisance-resolution filers to be as active going forward, while still allowing individual investors an opportunity to register concerns they believe are most important with companies.

Unintended Effect of the Change

The timing of this proposed change is unfortunate because it would have the effect of chilling engagement between shareowners and issuers at a time when such engagement is thriving relative to historical trends. There has never before been as much engagement between investors and corporate boards as there is now. This engagement often, though certainly not always, arises as a result of a shareowner proposal filed by an investor. Resolutions that gain significant shareowner support often bring companies to the table at which a compromise is often negotiated. In recent years, shareowners have withdrawn record numbers of proposals after they and company boards have reached accommodation. Removing this tool will enable companies to largely ignore the voices of their shareowners.

In addition, this legislation seems to assume that all investor/issuer engagements are adversarial and that the best way to resolve such matters is by reducing investors’ ability to submit resolutions. Increased engagement among issuers and investors and the level of shareowner proposal withdrawals exposes this assumption as false. Sure, there will always be adversarial relationships between some investors and some issuers, but in recent years more on each side have grown to see their relationships more as a partnership than a blood sport. This legislation could upset that positive dynamic.

In fact, an unintended consequence of this legislation may be more “no” votes in corporate-director elections. Investors will vote against boards if they are unable to submit resolutions about specific issues. The shareowner resolution process allows shareowners to bring specific and nuanced issues to boards’ attention. Removing this avenue of communication could cause many investors to resort to the blunt instrument of voting directors off a board when their concerns are not addressed.

Positive Side of Shareowner Resolutions

Finally, this legislation does not seem to appreciate that a number of corporate governance improvements over the past 10 to 20 years got their start as shareowner resolutions. Many of these garnered little support when initially proposed, but gained momentum over the years until they came to be seen as best practice. Majority voting for directors, say-on-pay, proxy access, eliminating staggered boards, and a number of ESG resolutions all began as ideas in a small number of shareowner resolutions. They often did not begin with large shareowners, and they were not immediately approved until all shareowners felt the balance was correct.

Regulators, the courts, and Congress have all seen fit to limit investor input into corporate governance matters by restricting access to the corporate proxy. Yet, with professional investors serving as guardians of corporate governance, we have yet to see the passage of frivolous shareowner proposals on more than a very limited scale. It is time, then, for policymakers to trust investors’ ability to vote in their best interests on matters without obstruction. This, we believe, is a better way to prevent corporate turmoil for the long run.

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Photo Credit: ©Getty Images/sharply_done

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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