Corporate America Can’t Handle Any Form of Dissent
Shareholder activism is a limited tool for mitigating the worst abuses of corporations. But now, major business groups are fighting to restrict people’s ability to engage even in that.
Last summer the Business Roundtable (BRT) announced it had turned over a new leaf and that, moving forward, it would honor all stakeholders. It sure has a funny way of showing so. Instead of “respect[ing] the people in our communities” and “protect[ing] the environment by embracing sustainable practices,” the BRT has teamed up with the National Association of Manufacturers (NAM) to throttle what little voice stakeholders have in shaping business practices.
The BRT and NAM are the muscle behind a recent move by the Securities and Exchange Commission (SEC) — led by Donald Trump nominee Jay Clayton — to change the rules regarding the rights of shareholders to advance corporate reform proposals and the role of proxy advisers, who facilitate the annual voting process for investors.
The new restrictions, first released last November and set to be finalized soon, would make it more difficult for small investors to submit shareholder proposals, reduce the number of proposals shareholders are allowed to submit to one per year, and limit the ability of shareholders to re-up proposals from previous years.
The potential changes to Rule 14a-8 could significantly weaken shareholder activism. A backtest analysis conducted by the Sustainable Investments Institute (Si2) estimates that the SEC’s new resubmission strictures alone, had they been applied to previously submitted shareholder proposals, would have prevented more than 14 percent from ever reaching a vote.
The SEC claims that the new rules are necessary to “modernize” the shareholder voting process and cited broad support from “long-term Main Street investors.” In announcing the changes, the SEC chairman read letters from a public servant, a single mom, a military veteran, and several retirees who Clayton claimed had written to the commission expressing concern about the power of proxy advisers.
Turns out, the driving force behind the new regulations is actually companies like Chevron and ExxonMobil. A Bloomberg investigation revealed that the messages Clayton held up were the product of a NAM front group called 60 Plus. Some of the writers had no idea that their names had been attached to the letters, while others were employees of 60 Plus. The retired public servant, whose missive had criticized proxy advisers, didn’t even know what a proxy adviser was when journalists reached her on the phone.
NAM’s clumsy efforts demonstrate just how keen companies are to stifle activist shareholders.
Granted, shareholder proposals, even those passed by a majority vote at companies’ annual shareholder meetings, have limited power to shape corporate practices. Proposals that interfere with a company’s “ordinary business” — the aim of many environmental, social, and governance proposals — are in most instances not legally binding.
This doesn’t mean, however, that shareholder activism has no value. Corporations are required to give at least some attention to shareholder pitches that meet SEC submission guidelines. Sometimes companies even meet with shareholders beforehand to mitigate their concerns and prevent proposals from going to a vote at the annual shareholder meeting.
More importantly, shareholder proposals enable investors to shine a light on the business practices and priorities of the United States’ biggest companies. Ethically minded shareholders use them to highlight issues such as company funds spent on political lobbying, extravagant corporate pay packages, and harmful environmental practices.
This has made shareholder proposals a key political strategy for corporate social responsibility advocates — from individuals and small groups, like Amazon Employees for Climate Justice, to larger institutional investors, such as the Interfaith Center on Corporate Responsibility.
Nuns appear to be a particularly tenacious bunch. The Benedictine Sisters of Baltimore, along with other shareholders, recently demanded that Google reveal how much it spends on lobbying. The Sisters of St Francis of Philadelphia, led by Sister Nora Nash, have made it their mission to push the companies whose stocks they hold in their small retirement portfolio to be more ethical, filing proposals against guns, tobacco, and fracking. After students and teachers were gunned down at Marjory Stoneman Douglas High School in 2018, Sister Judy Byron, a member of the Adrian Dominican Sisters in Seattle, was instrumental in forcing two firearm manufacturers to “produce reports detailing how their guns are used in violent crimes and what the companies are doing to develop safer weapons.”
Shareholder power is circumscribed to be sure, and we would be wise not to hitch our wagon to the dream of corporate social responsibility. But the fact remains that some of America’s biggest companies are doing their damnedest to destroy one of the few avenues for investors — many of whom are ordinary Americans thanks to the shift from defined benefit pensions to 401(k) retirement plans — to voice their concerns about the behavior of corporate America.
It’s not clear they’ll succeed, however. Individual shareholders, institutional investors, and corporate social responsibility advocates submitted tens of thousands of objections to the revisions before the comment period closed on February 3 — yet another sign that people are fed up with Corporate America’s broken promises.