In a July 22 speech to the U.S. Chamber of Commerce that’s likely to rile activist investors, outgoing SEC Commissioner Paul Atkins criticized the use of non-binding shareholder proposals and engagement efforts by some institutions. Atkins said shareholder proposals on executive compensation, the environment, operations in certain countries, and health care “often consume a significant amount of management time and attention.”

The Republican commissioner, who left the SEC August 1, noted that none of the 17 shareholder proposals on the ballot at ExxonMobil’s 2008 annual meeting passed. He also cited Delaware Chancery Judge Leo Strine’s comments at the SEC’s proxy roundtables last year that the state’s corporate law does not address non-binding proposals and that these resolutions are a result of federal action (under the SEC’s shareholder proposal rule). Atkins said the proxy process “should facilitate proposals concerning only those subjects that could properly be brought before a meeting under the corporation’s charter or bylaws and under state law.”

Numerous investors expressed support for the shareholder proposal process and its impact on corporate behavior at the SEC roundtables, but Atkins believes issuers could adopt a bylaw that limits the consideration of non-binding proposals at annual meetings. “To date, I am not aware of any company that has sought to implement such a bylaw, but it would not come as a surprise if a company decides to do so in the future,” he said.

Atkins also denounced the efforts by some institutions to negotiate withdrawal agreements with companies. “The abusive use of the shareholder proposal process by some institutional investors is troubling,” he said. “What we are seeing basically is large institutional investors, who have no duty to other shareholders, pushing behind the scenes particular measures that fail at company after company when actually put up for a shareholder vote . . . Essentially, they are using their particular influence, the threat of shame or whatever, to try to get the company to acquiesce to their position.”

“It would not surprise me if, more often than not, the board simply applies a simple cost-benefit analysis and then takes the path of least resistance,” Atkins said. “So we must be vigilant that the shareholder proposal process does not result in the tyranny of the minority.”