End of Week Notes

The SEC will move to limit shareholder democracy this week

Jon Hale
Jon Hale
Nov 1 · 4 min read

One of the advantages of owning sustainable funds is that many of them actively engage, as shareholders, with the companies in their portfolios on material ESG issues and generally vote in favor of shareholder resolutions at annual corporate shareholder meetings about climate risk, diversity and gender pay equity, human rights in the supply chain, political and lobbying activity, and other pertinent issues that shareholders have brought to companies’ attention via the resolution process. Along with individual investors and larger institutional investors, some sustainable asset managers also sponsor shareholder resolutions.

Such resolutions are a critical means of communication between companies and their shareholders — especially smaller individual “Main Street” shareholders who are able to propose resolutions alongside all the big institutional shareholders. Over the years, shareholder resolutions have helped put ESG issues front-and-center on many companies’ radars, helping them attend to issues before they suffer the financial consequences of ignoring them.

But as part of its campaign to limit shareholder democracy, our Securities and Exchange Commission wants to change that. Responding to business lobby groups, the SEC is expected to propose changes this Tuesday to make it harder for shareholders to file proposals, and harder for proposals to be eligible for re-filing in subsequent years.

This comes on the heels of the SEC’s recent guidance limiting the independence of proxy advisors to recommend how asset managers should vote their proxies at company annual meetings. (Proxy advisor ISS filed suit this week to have the guidance set aside because it improperly applied proxy advice to the proxy solicitation rule, resulting in a de facto rule that was promulgated outside of the rulemaking process and without supporting evidence.)

Word on the street is that the new limitations will be significant. Today, a shareholder need only hold $2000 worth of stock continuously for 12 months to be eligible to propose a resolution. A significant increase will shut out the very “mom-and-pop” investors that Republican SEC chair Jay Clayton and commissioner Elad Roisman have said they want to benefit with their agenda.

Increases in re-submission thresholds will have more widespread negative effects. Currently, a resolution must get only 3% of proxies cast in order to be eligible for re-submission the next year. After that it must get 6% and then 10% in year three and thereafter. This allows time for support to grow over time as more shareholders consider the issue being raised. Significant boosts in re-submission thresholds could eliminate virtually all shareholder resolutions from consideration after year one.

Take a look at the chart below that shows the growing level of shareholder support for ESG-related resolutions. If these were frivolous wastes of time, like Jamie Dimon suggests, why are so many shareholders supporting them?

It’s because more shareholders are taking seriously the idea that companies should govern themselves on behalf of all their stakeholders, something Dimon himself just made a big splash about as head the Business Roundtable, which he chaired until last month. The Business Roundtable released a statement in August saying that the purpose of the corporation should be to serve all its stakeholders — customers, workers, communities, and shareholders.

But in so doing, apparently Dimon and the Business Roundtable, which has encouraged the SEC’s efforts to limit shareholder democracy, don’t actually want to hear the concerns of “mom-and-pop” investors on these subjects.

Read the column by US SIF CEO Lisa Woll and Fortune’s take on Jamie Dimon:

I’ve referred to “Main Street” and “mom-and-pop” investors here because corporate lobby groups and the Republicans on the SEC have conjured up the notion that somehow investors proposing ESG-related shareholder resolutions are hurting small investors.

Last year, they even went so far as to create an “astroturf” (fake grass-roots) group opposing shareholder democracy called “The Main Street Investors Coalition” with not a single small investor in its membership. Check that: the group didn’t even have a membership! The cynicism is appalling, especially in light of a recent Morgan Stanley survey in which 85% of individual investors said they were interested in sustainable investing.

Source: Morgan Stanley

The ESG Advisor

Jon Hale

Written by

Jon Hale

Global Head, Sustainable Investing Research, Morningstar. Views expressed here may not reflect those of Morningstar Research Services LLC. or its affilliates.

The ESG Advisor

Incorporating sustainability and impact into your investments

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