Testimony before the House Financial Services Subcommittee on SEC Rule 14a-8

SEC Rule 14a-8: Ripe for Reform

Chairman Garrett, Ranking Member Maloney, and members of the Subcommittee, I would like to thank you for the invitation to testify today. My name is James R. Copland. I am a senior fellow with the Manhattan Institute for Policy Research, a public-policy think tank in New York City. I have directed the Institute’s legal-policy efforts since 2003.

The shareholder-proposal process governed by SEC Rule 14a-8 has constituted a significant focus of my research. In 2011, I helped launch the Manhattan Institute’s Proxy Monitor database, a publicly available catalogue of shareholder proposals at the 250 largest publicly traded American companies. Over the past five years, I have periodically authored reports on the shareholder-proposal process.

The SEC’s Rule 14a-8 permits stockholders of publicly traded companies who have held shares valued at $2,000 or more for at least one year to introduce proposals for shareholders’ consideration at corporate annual meetings. The SEC’s process is ripe for reform:

• The shareholder-proposal process has strayed far from the principal legal purpose authorizing the rule under the Securities Exchange Act.
• The process has been used almost exclusively by a small number of investors, with a focus potentially or actually centered on concerns other than maximizing share value.
• The process has actually operated to permit such minority shareholders to extract corporate rents or influence corporate behavior to the detriment of the average diversified shareholder.

My written statement discusses these issues in more detail. Today I would like to emphasize the following facts, drawn from my research.

1.    A small group of individuals—often referred to as “corporate gadflies”—repeatedly file substantially similar proposals across a broad set of companies. In 2016, six gadfly investors and their family members have sponsored one-third of all shareholder proposals. Typically, these individuals own very small percentages of a company’s stock. For instance, John Chevedden, the most-active sponsor of shareholder proposals dating back to 2006, has made substantially the same proposal at Ford Motor Company each of those years. In 2016, Mr. Chevedden owned 500 shares of Ford stock, approximately 0.00001% of the company’s market capitalization.

2.     A large percentage of shareholder proposals concern social or policy goals that may not be related—or at least have an attenuated relationship—to share value. In 2016, to date, half of shareholder proposals have related to a social or policy issue, an all-time high.

3.      These social- and policy-related shareholder proposals have consistently been rejected by most shareholders. Over the last 11 years, at Fortune 250 companies, 1,444 shareholder proposals related to social or policy concerns have been presented to shareholders for a vote over board opposition. All but two of those failed to garner majority shareholder support.

4.     A large percentage of institutional shareholders vote their shares based on the advice of proxy advisory firms, whose power over shareholder voting is vast. A 2012 analysis I authored for the Manhattan Institute found that a recommendation that shareholders vote “for” a given shareholder proposal by the largest proxy advisory firm, ISS, was associated with a 15-percentage-point increase in the shareholder vote for any given proposal. My research also shows that ISS has, historically, been almost eight times as likely as the median shareholder to support a shareholder proposal—in particular social- and policy-oriented proposals.

5.     Over the last ten years, 31% of all shareholder proposals were resubmissions of a preceding year’s proposal. Under current SEC rules, any proposal that receives at least 10% shareholder support can never be excluded from a company’s proxy ballot in future years for want of support.  The current SEC rule means that a single proxy advisory firm, ISS, effectively serves as the gatekeeper for shareholder-proposal resubmissions: if ISS supports a proposal, it can remain indefinitely on the ballot.

6.     The ultimate test of whether shareholder proposals are an effective tool is whether they enhance share value. Last year, the Manhattan Institute commissioned an econometric study on this issue by Tracie Woidtke, a professor at the University of Tennessee. Woidtke found that public pension funds’ “social-issue shareholder-proposal activism appears to be negatively related to firm value.” As such, shareholder-proposal activism intended to affect corporate behavior in pursuit of social or policy goals may be harming the financial interests of the average diversified investor, as well.

In conclusion, it is hard to argue that the 14a-8 shareholder-proposal process is functioning well. Rule 14a-8 is a long-standing rule that has some utility, but activists have seized upon the SEC’s outdated and overly permissive standards to push policy agendas in an effective end-run around Congress. Congress has an interest in addressing this situation and reorienting the SEC around its statutory obligation to “promote efficiency, competition, and capital formation.”

This testimony was delivered before the House Committee on Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises.