SEC rule curbs input from some investors

WASHINGTON — A new federal rule will limit the influence of small investors over the direction of large companies, a policy shift that investors and shareholder advocates warn could stifle efforts to make corporate boardrooms more responsive to societal issues such as climate change, social justice and human rights.

The Securities and Exchange Commission this week raised the limit on the amount of stock investors must hold in order to propose a resolution that receives a shareholder vote during a company’s annual proxy period. The rule, which previously required investors to hold at least $2,000 in stock for one year, now requires $25,000 in stock ownership for one year before proposing a shareholder resolution or $15,000 for two years. Investors who own $2,000 in stock for at least three years still will be permitted to file proposals.

Shareholder proposals from small investors are credited with pushing big companies to improve their record over the past decade on social issues. In two examples from this year, Starbucks committed to cut landfill waste and Chevron pledged more transparency about its lobbying on climate change after shareholders pushed the companies on these issues with proxy voting proposals.

Starbucks spokeswomanMegan Lagesse said the waste announcement was part of a broader company commitment to become more resource positive. Chevron did not respond to a request for comment.

Business lobbyists have campaigned against investor proposals, saying

they often represent the interests of small groups of activists who aren’t committed to long-term company goals. Large corporations including Exxon Mobil and business advocacy groups including the Business Roundtable have argued that reducing the number of shareholder proposals will free up time for management teams and shareholders who are bogged down by these votes each year.

The SEC approved the new limits on shareholder activism by a 3-2 vote Wednesday. In his comments supporting the measure, Chairman Jay Clayton said the agency had discussed the potential changes with investors for several years and found support for “modernizing” the standards, some of which had changed little in more than 70 years. Reviewing shareholder proposals imposes

costs on companies and on other investors, Clayton said, adding that there is a risk that “shareholder proponents would use the proposal process in a way that does not benefit the company or its other shareholders.”

In her dissenting comments, Commissioner Allison Herren Lee said the measure will deal a setback to movements to bring environmental, social and governance issues to the forefront at companies and “dramatically disadvantage” small investors.

“These actions collectively put a thumb on the scale for management in the balance of power between companies and their owners,” Lee wrote.

The new limits were opposed by hundreds of investors representing trillions of dollars in assets, who filed comments to the SEC over the past year. They included representatives of asset managers, pension funds, labor unions, state and local gov

ernments, universities and religious institutions.

“This rule impedes the voice of shareholders bringing to the attention of companies things they need to pay attention to,” said Christopher Cox, associate director at the Seventh Generation Interfaith Coalition for Responsible Investment, a nonprofit investor group.

Clayton, a former corporate lawyer who had no government experience when President Donald Trump picked him to run the SEC in 2017, has overseen a shift at the agency toward policies many see as business friendly. Consumer advocates criticized his overhaul of brokerage conflict-of-interest regulations last year as being too weak, and in July, CNBC’s Jim Cramer called Clayton’s proposal to raise the threshold at which investment managers must report holdings “an outrageous rule change that would make the market a lot less transparent.”

The SEC’s process for collecting public comments on the proposed shareholder rule fell under scrutiny last year, when Bloomberg reported that several submissions in support of the rule, including some Clayton cited in public comments, appeared to come from people who never actually wrote them. The news outlet traced connections between some of the letters and the Main Street Investors Coalition, a group backed by a prominent fossil fuel industry association.

A spokeswoman for the SEC said the Bloomberg report “has proven to be inaccurate,” adding that some of the people mentioned in the article have since sent the agency signed affidavits stating they did, in fact, write letters in support of the shareholder rule changes.

A tiny portion of investors are responsible for the vast majority of all shareholder proposals. One study by researchers at the

University of Warwick and the Stockholm School of Economics found that between 2003 and 2014, just three individuals accounted for 50 percent of all shareholder proposals. However, the researchers found shareholder proposals can generate positive long-term returns for companies and concluded that “regulations limiting the ability of individual shareholders to submit proposals would be harmful.”

Shareholder proposals are finding support with a growing portion of public company investors, according to data collected by shareholder advisory company Institutional Shareholder Services, which tracks all corporate proxy votes. During proxy voting at 3,000 of the largest publicly traded U.S. companies, the average environmental or social measure won support from 28 percent of shareholders this year, up from 16 percent a decade ago.

The SEC also voted to tighten requirements on which failed shareholder proposals can be resubmitted the next year. Previously, proposals had to receive 3 percent of support for revote the second year and then 6 percent and 10 percent in subsequent years. The new rule raises these thresholds to 5 percent, 10 percent and 25 percent in the first three years.

According to investor groups, this change could stifle campaigns that are just building momentum now. A recent proposal to install a civil rights expert on Facebook’s board of directors was supported by 3.6 percent of shareholders at the social network this year. An effort to improve working conditions for meatpackingworkers at Tyson Foods, who are largely minorities, received 14.7 percent of the vote in its second year.

Only shareholder proposals submitted after January 2022 will be subject to the new regulations, the SEC said.