In letters to the Securities and Exchange Commission, individual and institutional investors voiced opposition to any new limits on non-binding shareholder proposals.

Of the more than 15,000 letters the SEC received during a public comment period that ended Oct. 2, more than 10,000 of them defended the rights of investors to file non-binding proposals at public companies. Many of those letters stemmed from a joint campaign by the Social Investment Forum and the Interfaith Center on Corporate Responsibility, which set up a Web site (www.SaveShareholderRights.org) to encourage investors to contact the SEC.

Specifically, shareholders opposed higher thresholds for resubmission of proposals, greater stock ownership requirements to file resolutions, and the possibility of companies adopting bylaws to “opt out” of the shareholder proposal process altogether. While the SEC has not endorsed any specific limits, the agency sought public comment on a range of suggestions to reduce the number of non-binding proposals that appear on corporate proxy statements each year. These suggestions were included in a draft proxy access rule that was released by the SEC in July.

The SEC sought input on possible new limits on shareholder proposals after several corporate advocates and law professors expressed concern at agency roundtables in May about the time and expense that companies must devote to responding to investor resolutions. In addition, SEC staff members have expressed a desire to reduce their role under Rule 14a-8 in making decisions on corporate “no action” requests to omit proposals.

As of Sept. 15, 656 investor proposals had appeared on 2007 U.S. corporate ballots, up from 581 at the same time last year, according to data compiled by RiskMetrics Group’s Governance Research Service (GRS), which covers about 4,500 U.S. companies. All but 2 percent of the 2007 proposals to go to a vote were “precatory,” or non-binding.

In their letters to the SEC, the AFL-CIO labor federation and the American Federation of State, County, and Municipal Employees (AFSCME), characterized the potential limits on non-binding proposals as a “rollback” of shareholder rights.

The Council of Institutional Investors chided commissioners for considering limits on these proposals. “We are surprised and disappointed that at a time when companies are improving their corporate governance policies in response to shareholder precatory resolutions in record numbers, the [p]roposed [a]mendments appear designed to inhibit shareowners from pursuing these proposals,” wrote Jeff Mahoney, CII’s general counsel, in the group’s comment letter.

It appears that companies have become more willing to engage with resolution proponents. As of Sept. 15, investors had withdrawn 306 proposals on various governance and social topics, often after constructive discussions with company officials, according to GRS data. That total was 27 percent of the 1,145 proposals tracked by GRS this year. During that same period in 2006, investors withdrew 189 proposals, or 20 percent of the 947 proposals tracked by GRS.

At the same time, investors have continued to give strong support to shareholder proposals that go to a vote. As of Sept. 15, 109 proposals had won a majority of votes cast, according to GRS data.

However, few pro-business letters to the SEC credited shareholder resolutions with spurring governance progress. “Five years after Enron and WorldCom, the capital markets are well into a cycle of unprecedented vigor, and no one seriously argues that shareholder activism, governance grandstanding, or the Sarbanes-Oxley Act deserves the credit,” according to the law firm of Wachtell, Lipton, Rosen & Katz, which represents corporations in governance matters and securities cases.

International investors also opposed possible restrictions on U.S. shareholder rights. “We oppose the rollback of shareholder rights … which would only reinforce the growing belief amongst global investors that the U.S. regulatory environment favors company insiders at the expense of outside shareholders,” according to a letter from nine investor groups from the United Kingdom and Australia.

Limits Under Consideration
The commissioners asked for public comment on whether the ownership requirements for filing a non-binding proposal should be raised from a $2,000 stake held for at least one year. The SEC also asked whether resubmission rules should be tightened. Currently, first-year proposals must win at least 3 percent support of votes cast “for” and “against” to qualify for resubmission an additional year; second-year proposals must get at least 6 percent; and proposals in their third year or more must win at least 10 percent. The SEC has asked for comment on whether to increase these thresholds to 10, 15, and 20 percent.

“We have seen how these proposals do have an impact on management’s decisions, even when they are receiving 3 [percent], 6 [percent], or 10 [percent],” wrote Sister Susan Mika of the Benedictine Coalition for Responsible Investment. “Many companies have told us that the topics of the resolutions alert them to possible problems and concerns.”

New York City Comptroller William Thompson Jr., who oversees the city's pension funds, recalled the example of the funds' proposals that sought policies to prohibit discrimination based on sexual orientation. While the issue was unpopular when the city first raised it in 1991, more than 90 percent of Fortune 500 companies now have anti-discrimination policies of this type, Thompson said.

Corporations generally supported both raising resubmission thresholds and upping the ownership requirements. FedEx, for instance, said that both standards should be increased “significantly.”

G. Stephen Farris, CEO of energy company Apache, argued that shareholder proposals should be banned outright, or absent that, resubmission thresholds should be raised to 33, 40, and 45 percent.

Investor advocates strongly opposed a suggestion that companies should be able to “opt out” of the shareholder proposal process by adopting a bylaw that sets company-specific limits on proposals.

“The most unresponsive companies would be most likely to opt out because resolutions are an important mechanism to strengthen corporate accountability,” wrote shareholder activist John Chevedden, who with his network of individual investors filed more than 90 proposals in 2007.

Corporate advocates expressed some wariness of “opt out” bylaws. The Business Roundtable said it believes such a provision could apply in “limited instances.” The U.S. Chamber of Commerce questioned the legality of an all-inclusive bylaw: “Under federal case law, a corporate bylaw … cannot act as ‘a block or strainer to prevent’ shareholder proposals from inclusion in a company’s proxy materials.”

Divergent Views on Proxy Access
In their comment letters, investors and issuers gave divergent opinions on a pair of competing proxy access rules on the ability of shareholders to nominate board candidates to appear on corporate proxy statements. One draft rule would essentially bar shareholders from filing access bylaw proposals, while the other would require investors to hold a 5 percent stake for at least one year and meet additional disclosure requirements about their dealings with the company.

Both proposals were largely panned by pension funds and labor groups, while the idea of proxy access itself got little to no support from most business organizations.

Anne Mulcahy, chair of the Business Roundtable, warned that giving any group of shareholders--large or small--the power to propose a bylaw for access to management’s proxy ballot would lead to many more contested elections.

Gerald McEntee, president of AFSCME, wrote that the SEC appears to be under the mistaken assumption that a shareholder right to amend bylaws to allow for proxy access essentially equals a proxy challenge.

“The proposal in itself is not a contest, and a proponent that submits a proxy access proposal may not intend to use the proxy access right,” McEntee wrote in the AFSCME letter. As proposed, the rule would only give shareholders the right to propose a bylaw amendment allowing for proxy access--the proposal would still have to pass, and each investor nominee would also have to be accepted by a majority of shareholders, he said.

While some business groups said the 5 percent threshold was too low, proxy access advocates complained that this ownership level would be too onerous for most diversified investors.

“Those institutional investors … that currently engage portfolio companies using tools such as shareowner resolutions account for less than [10] percent of the total U.S. equity market,” the Council of Institutional Investors wrote. “For example, one of the Council’s largest members--the California State Teachers’ Retirement System--generally owns only about 0.3 percent of the outstanding stock of any company in the Russell 3000.”

Attorney Cornish Hitchcock, who represents the Amalgamated Bank’s LongView funds, said that with such diffuse ownership, gathering the requisite 5 percent holding would be difficult.

CII complained that the proposal would mandate additional disclosure that would surpass that required of dissidents in a proxy contest. With a number of disparate investor groups all filing this information, Hitchcock wrote, the paperwork burden could be “crushing.” The London-based International Corporate Governance Network argued that it would be a drain on the SEC’s time to assure that investor groups complied with disclosure requirements.

Resource company Alcoa, meanwhile, advocated full disclosure of a shareholder’s position in a company’s stock in the event that the investor filed an access proposal alone or as part of a group.

Both corporations and most investor advocates agreed, however, that a holding period of two years or more would be appropriate for any shareholder filing an access proposal, to prevent undue influence by hedge funds or investor groups with short-term interests.

The companies that filed comments expressed concern that any proxy access rule would open the door to “special interest” directors who would push a narrow, short-term agenda and disrupt board functioning. However, Australian and U.K. investors countered that in other global markets, shareholders tend to reject “attempts to use proxy access for short-term manipulation.”

During the 2007 season, investors did not have to meet any additional requirements to file proxy access proposals. Those proposals fared well this year, winning 43 percent support at Hewlett-Packard, over 45 percent support at UnitedHealth Group, and receiving a majority of votes cast at Cryo-Cell International, a small-cap biotech firm.

The investors were able to get these proposals on the ballot after the SEC expressed “no view” on Hewlett-Packard’s request to exclude an access resolution filed by four investors, including AFSCME, which had won a court challenge over the exclusion of a 2005 access proposal.

If the SEC fails to adopt a new rule this year, it appears that investors will be able to file access proposals for the 2008 season. CII reported that John White, director of the Corporation Finance Division, indicated in an Oct. 1 letter to the council that the SEC staff would take a similar position if no final rule is adopted. However, White noted that “our intent is to have final rules in place this fall in time for the coming proxy season, because until that happens, there will continue to be great uncertainty across the nation--a situation that is highly undesirable.”

However, some SEC observers, including former commissioner Roel Campos, have said that it’s unlikely that the agency will act on proxy access this year, with two pending Democratic vacancies on the five-member commission. Campos left the agency in September; and Commissioner Annette Nazareth announced Oct. 2 that she would leave the SEC.

Director of Publications Ted Allen contributed to this article. This article originally appeared in the October 11 edition Risk and Governance Weekly.

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October 11, 2007