Corporate America is about to erect new barriers against dissent from pesky shareholders pressing for better behavior on governance, the environment, and worker rights. All it took was a 3–2 majority of Trump appointees on the Securities and Exchange Commission (SEC) and a clever lobbying campaign that included bogus complaint letters.
Sometime early next year, the SEC is expected to formally adopt rules that will upend the existing process for proxy voting at corporate annual meetings. In the winner column will be the U.S. Chamber of Commerce, the Business Roundtable, JPMorgan Chase CEO Jamie Dimon, and major oil companies represented by the National Association of Manufacturers. The losers will include unions, environmental groups, religious institutions, campaign finance activists and an array of other reformers seeking greater social responsibility — and less greed — on the part of America’s publicly traded corporations.
Among those affected will be institutional investors that advocate for corporate change under the umbrella of the environmental, social, and governance (ESG) movement, a metrics-driven “sustainability” grading system that Trump’s appointees disparage. Under ESG, analysts rate a broad range of company practices to assess risk and see how well or poorly a company is doing relative to peers.
The proposed SEC rules, which won a preliminary commission vote along party lines on Nov. 5, take on shareholder voting rights on two fronts. Individual investors will face stricter eligibility requirements for placing proxy questions before company shareholders, and companies will gain new tools to push back against outside firms that advise institutional shareholders on how to vote their shares on proxy resolutions. The rules are now the subject of a 60-day comment period, though it would be unusual for the commission to reverse its preliminary vote.
Under existing proxy voting rules, an investor who wants to place a resolution before company shareholders must have owned at least $2,000 worth of stock for a year. The proposed new rule bumps that up to a minimum of $25,000 for one year, $15,000 for two years, or $2,000 for three years. Another proposed rule would limit anyone representing a shareholder to a single proposal at an annual meeting; currently, the one-proposal limit applies to the shareholder but not his or her representative.
Another rule change would raise the threshold for repeat proposals. Currently, a first-time resolution must gain 3% support to be resubmitted at a future annual meeting. A second proposal requires 6%, and a third 10% to advance to a new vote. The SEC now proposes to raise the thresholds to 5%, 15%, and 25%, respectively.
Business groups lobbied hard to “modernize” the proxy rules, which in some cases date to the 1950s. Before the Nov. 5 vote, SEC Chairman Jay Clayton, a Wall Street lawyer and Trump appointee, added a heart-warming personal touch to the debate, noting the many letters the SEC had received from mom-and-pop investors urging limits on shareholder activism. He said these included “an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single mom, a couple of retirees who saved for retirement.” When Bloomberg News took a closer look at the letters, its reporters found that many were “the product of a misleading — and laughably clumsy — public relations campaign by corporate interests.” Some of the signers said they’d never sent the complaints.
This variety of corporate lobbying isn’t uncommon. As The New York Times reported last year, the National Association of Manufacturers helped create and finance the Main Street Investors Coalition, a group of purportedly retail investors pushing for more limits on proxy questions by ESG and other activists.
Corporate interests pressed for another restriction on proxy voting that will affect advisory firms, which help big institutional investors like pension funds decide how to cast ballots on hundreds of activist resolutions. The SEC recently declared such firms to be subject to SEC rules, and the commission now proposes to let management “fact check” the advice the advisory firms give clients twice in advance of any vote and to attach comments. Opponents say this will choke the advisory process with red tape and endless lawsuits from companies quibbling with proxy recommendations. When the SEC in August issued its preliminary guidance outlining the new oversight of advisory firms, one of the biggest, Institutional Shareholder Services, went to court. Their suit against the SEC is pending.
Dimon will certainly be pleased by the new rules. A frequent target of activists, he has long chafed at the power of advisory firms to influence shareholders, labeling investors and investment managers that rely on advisors “irresponsible” and “lazy,” saying they should do their own research.
Not everyone believes the ESG movement and individual activists will allow themselves to be steamrolled by the new rules. The advisory-focused investment bank PJT Partners says the SEC rules might instead drive activists to form more powerful coalitions, push investors to target individual board members, or encourage money managers touting their ESG rating system to take bolder stands on sustainability or risk losing some of their clients.
After the SEC vote, the National Association of Manufacturers’ president, Jay Timmons, hailed the action as a step “to rein in the abuses and risky practices of proxy advisory firms and politically motivated activists.”
But to corporate reformers and unions, the SEC has chosen to fix something that isn’t broken. New York City Comptroller Scott Stringer called the vote “a shameful gift to corporate executives.” Afterward, Commissioner Rob Jackson, a Democrat, said, “Whatever problems plague corporate America today, too much accountability is simply not one of them.”