The Shareholder Rights Group is a group of leading proponents of shareholder proposals that have come together in defense of shareholder proposals under rule 14a-8. After the SEC issued its November 5, 2019 proposed changes to the rule, we examined how the proposed changes would have affected recent proposals and engagements at companies with high profile corporate responsibility challenges: Boeing, Wells Fargo and Chevron.   

One of the proposed rule changes would alter the ability of shareholders to resubmit proposals previously considered. Under current rules, to resubmit a previously voted proposal requires at least 3 percent, 6 percent, and 10 percent supporting votes in the first, second, and third years of voting respectively, and 10 percent or more as well as in subsequent years.  But the SEC is considering much steeper thresholds, 5 percent support the first year, 15 percent on the second year and 25 percent on the third year, and a brand new requirement that a proposal in its fourth year not “lose momentum” (see a drop of 10 percent of supporting votes). 

We found that under the proposed rules, shareholder proposals addressing core issues at Boeing, Wells Fargo, and Chevron would have been blocked from recent proxy statements.

Boeing

Prior to the two crashes of Boeing’s 737 MAX airliners in 2018 and 2019, shareholders voted on a proposal seeking improved disclosure of Boeing’s lobbying policies, expenditures and internal controls.  The failure of regulators to intercept the safety hazards has been attributed by media to Boeing’s aggressive lobbying practices—in effect, curtailing government oversight and allowing the company to regulate itself.

Under the proposed rule on resubmissions, lobbying proposals would have been barred beginning in 2017, having missed the proposed 25 percent third-year threshold in 2016. Yet 32.6 percent of shareholders voted in favor when the proposal was considered in 2019.  

Wells Fargo

Wells Fargo has suffered and continues to suffer a prolonged crisis of public, government, and consumer trust, and has incurred over $17.2 billion in penalties since 2000.  Failings of leadership, toxic corporate culture, and misdirected incentives seem to have produced a company-wide epidemic encouraging consumer fraud. The deterioration of confidence in the company has cost investors at least $24 billion in market value.  On February 20, the company agreed to pay out $3 billion to settle federal and criminal charges about the fraudulent accounts.

As the company’s problems emerged and worsened, some shareholder proponents had been seeking reform of the company’s predatory consumer culture through the shareholder proposal process. If the board and management had heeded the early warnings in proposals, billions of dollars in losses might have been averted.

Yet under the proposed rules, investor engagement would have been thwarted. Predatory lending related proposals would have been excludable from 2013 to 2016, since they failed to reach the 15 percent threshold in 2012. Proposals for an independent board chair would not have been permitted from 2013 to 2016 due to “loss of momentum.” It is unclear how eager the company would have been to negotiate on this important governance issue when the proposal was filed in 2017, had the topic been excludable from corporate annual meetings for the prior three years.

Chevron

In the United States, advancement on corporate climate initiatives has been driven to a large degree by shareholder proposals and shareholder engagement. One informative example is the progression of 2011-2018 hydraulic fracturing and methane proposals at Chevron. In 2018, approximately 45 percent of Chevron’s shareholders voted in favor of a fugitive methane reduction resolution. In anticipation of the vote on the shareholder proposal, the company began to announce new measures to address methane management. For the first time, Chevron provided an intensity rate for its methane emissions in its Corporate Responsibility Report. It also signed on to oil & gas industry “Guiding Principles” for reducing methane emissions from across the natural gas value chain. 

This significant advancement followed seven years of shareholder proposals and engagement. A slight decline in voting support to a low of 26.6 percent in 2014 would have triggered exclusion in following years, under the SEC’s proposed momentum exclusion. The resubmitted 2016 proposal rebounded to a 30.7 percent vote, followed by the 45 percent vote in 2018—and company action. The importance of methane management clearly had not diminished for the company, but the proposed rules would have cut off this productive investor engagement process in the most critical time period.

Other aspects of the proposed rule changes would also make the job of investment fiduciaries more difficult, adding convoluted procedures, costs and red tape that would make it harder to implement client instructions related to engagement and proposals. This raises serious concerns about the proposed rules interfering with state laws of agency and contract, as well as investors’ First Amendment rights of expression and association.

In a time in which mainstream investors increasingly monitor environmental, social, and governance (ESG) issues, the rulemaking threatens to disrupt the best available pathway to improving ESG performance and disclosure through a functional ecosystem of working relationships among shareholder proponents, institutional investors, proxy advisors and companies. 

Additional info on the proposed rule changes: InvestorRightsForum.com

Sanford Lewis
Director, Shareholder Rights Group