Statement at the Open Meeting: Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8
Nov. 5, 2019
Thank you, Chairman Clayton.
As you mentioned, Rule 14a-8, our shareholder proposal rule, allows a shareholder who meets certain eligibility criteria to have his or her proposal included in a company’s proxy statement and put to a shareholder vote. Without this rule, a shareholder seeking to force a vote on a proposal would have to pay for his or her own proxy solicitation, in compliance with the federal proxy rules, a process that can be expensive and difficult to navigate for the inexperienced.
When used properly, Rule 14a-8 can facilitate productive communication between companies and individual shareholders and lead to positive outcomes for all shareholders. But any company’s consideration of shareholder proposals comes at a cost, one ultimately borne by the owners of that company’s shares—including long-term retail investors. Thus, the ability for shareholders to submit proposals under the rule has historically had limits, lest the proposal process become abused or misused.
Ever since the Commission adopted Rule 14a-8, there has been debate and controversy. In fact, SEC Commissioner McCormick recounted in a speech in 1950:
When our proxy rules were amended to permit stockholders to make and justify proposals within the sphere of proper stockholder action a bomb exploded. We were branded as wild-eyed radicals, a Congressional investigation was touched off, and it was confidently predicted that the proxy solicitation would be converted into a forum for crackpots, and hare-brained reformers.
With that in mind, I would like to walk you through the measured approach we took in proposing the changes we will consider today.
I. Submission Thresholds
Rule 14a-8 was initially adopted in 1942 and first amended just five years later to add greater specificity as to who was eligible to submit a shareholder proposal. The Commission has revisited the rule several times since then, evaluating its use by shareholder proponents and adopting changes when they saw signs of misuse. For instance, the Commission amended the rule in 1983 to establish minimum ownership and duration requirements. In the adopting release, the Commission pointed to the view of many commenters that “abuse of the security holder proposal rule could be curtailed by requiring shareholders who put the company and other shareholders to the expense of including a proposal in a proxy statement to have some measured economic stake or investment interest in the corporation.”
The last time the Commission revised the share ownership requirements was in 1998. In 1998, I was a junior in high school with a full mane of hair. Mark McGwire battled Sammy Sosa to set the single-season home run record. Boy bands dominated the music scene. Pets.com was founded but had two years to go before its initial public offering. My point is: we have all come a long way since 1998. The world is not the same, and neither are our markets.
I understand that certain people will be unhappy with any changes we propose to Rule 14a-8. However, it is incumbent upon the Commission to revisit our rules regularly to ensure they remain appropriate in the current dynamic. This is especially true when we hear from market participants that rules are not working as intended, or are being misused. That is undeniably the case today as public issuers and many investors have voiced complaints about the shareholder proposal process for over two decades.
As the Commission has previously recognized, the ownership threshold and holding period in Rule 14a-8(b) aim to strike an appropriate balance by ensuring that a shareholder has some meaningful “economic stake or investment interest” in a company before that shareholder is able to use company resources to require the inclusion of a proposal in the company’s proxy statement, and before the shareholder is able to command the attention of other shareholders to consider and vote upon the proposal. Endeavoring to preserve this balance, the staff has recommended a tiered approach to determining a shareholder’s eligibility to rely on the rule. By measuring shareholders’ stakes in the company by not only money invested, but also by how long they have held their shares, we preserve the intent of the rule but keep the proposal process open to those who cannot afford a great monetary investment.
In considering updates to the current thresholds, the staff considered trends in the market since the rule was last amended. For instance, the rule was intended to facilitate communication between companies and individual shareholders and first established when the mechanisms for communicating were expensive, uncertain, and limited. Making a long-distance call to a company’s executives in the early 20th century—let alone traveling to see them in person—was costly and not a reliable way for a shareholder to secure a hearing with anyone willing to listen. Today, however, most companies have purposefully increased shareholder engagement efforts over the years, including through growth of communications and investor relations departments, as well as general outreach. Additionally, the internet and social media have allowed shareholders cheap and easily-accessible ways to get messages across to management, directors, and even other shareholders, proving to be incredibly powerful tools for influencing change even in the largest corporations. These trends cannot be ignored as they call into question the entire purpose of the rule, let alone the question of what are appropriate limits on shareholders who seek to force proposals to a vote through the proxy process.
II. Resubmission Thresholds
Today’s proposal also includes changes to the current thresholds that shareholder proposals must reach before they can be resubmitted for inclusion on the company’s proxy. The Commission first proposed a threshold for resubmission in 1948, stating that such limitations were appropriate to “relieve the management of the necessity of including proposals that have been previously submitted to security holders without evoking any substantial security holder interest therein.” The Commission has not amended the current resubmission thresholds since 1954. Don’t worry—I cannot and will not provide you with a list of great historical moments from 1954. However, I will provide a statistic: When the SEC first adopted its resubmission thresholds, the vast majority (i.e., between one-half and three-quarters) of proposals failed to win sufficient support to be resubmitted. In contrast, today the 3, 6, and 10 percent resubmission thresholds preclude a much smaller proportion of shareholder proposals than in the past. This is another area where the staff heard the persistent calls for retrospective review and carefully crafted a path forward for the Commission’s consideration.
The staff’s recommendation would allow a company to exclude only those shareholder proposals that an overwhelming majority of shareholders have not supported, and that show no sign of gaining broader shareholder support. Why should shareholders have to foot the bill to hold votes on matters they have overwhelmingly rejected in the recent past? I commend the staff on their thoughtful approach to determining their recommended resubmission thresholds. They are based on an analysis of historical data and the staff’s finding that these recommended changes would have had a nearly zero percent impact on precluding any proposal that ultimately was approved by a majority of shareholders.
III. Other Procedural Requirements
Beyond submission and resubmission thresholds, I appreciate the staff’s holistic review of other procedural requirements of Rule 14a-8. Based on their assessment of what is working well and what could use further refinement or enhancement, they have devised recommendations for optimizing the information that shareholder-proponents must provide when they use a representative to submit a proposal. They have recommended a change to facilitate shareholder-company engagement at the outset of the shareholder proposal process. Finally, the proposal includes an amendment to the “one proposal” rule, Rule 14a-8(c), which has been misused in the past by persons who wish to submit multiple proposals at the same shareholder meeting.
In sum, I am proud to support proposing these amendments to Rule 14a-8. They seek to strike a balance between maintaining an avenue of communication for shareholders, including long-term shareholders, while also recognizing the costs incurred by companies and their shareholders in addressing shareholder proposals. I believe that these proposed changes will preserve the rights of smaller, long-term shareholders, facilitate and encourage meaningful company-shareholder engagement, and make changes that, at least for now, can help prevent misuse of the process.
As I have endeavored to make clear, developing this proposal was a thoughtful policy making exercise that involved much deliberation. I ask those of you who are interested and knowledgeable about these issues: Recognize that any rule with threshold requirements necessitates that the Commission draw a line somewhere. Please read the proposing release to provide thoughtful feedback on its content, not to formulate sound bites. I look forward to receiving your tailored and well-reasoned responses to our questions and welcome any data you have that could help inform our decision-making. As I have remarked at previous open Commission meetings, I wish that the Commission and the staff had had the benefit of Commissioner Jackson’s research, data, and analysis when drafting and considering the proposing releases. I would have appreciated the opportunity to evaluate his analysis before voting and hope he will provide the public with the data, underlying assumptions, and methodologies used so that commenters have the ability to address Commissioner Jackson’s findings in the comment file. Thank you.
 See Commissioner Edward T. McCormick, “The Corporate Secretary and the Proxy Rules” (May 13, 1950), available at https://www.sec.gov/news/speech/1950/051350mccormick.pdf.
 See Adoption of Revised Proxy Rules, Release No. 34-4037 (Dec. 12, 1947) [12 FR 8768 (Dec. 24, 1947)].
 The Commission in the proposing release explained: “It has been suggested that under current construction of the rule, a few proponents have been able to use the rule as a publicity mechanism to further personal interests that are unrelated to the interests of security holders as security holders and that certain sophisticated proponents, who submit proposals annually to a variety of issuers, are able to require the inclusion of a proposal which has generated little security holder interest by simply changing its form or minimally varying its coverage. The rule was not designed to burden the proxy solicitation process by requiring the inclusion of such proposals.” See Proposed Amendments to Rule 14a-8, Release No. 34-19135 (Oct. 14, 1982) [47 FR 47420 (Oct. 26, 1982)] (“1982 Proposing Release”).
 See Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Release No. 34-20091 (Aug. 16, 1983) [48 FR 38218 (Aug. 23, 1983)] (“1983 Adopting Release”).
 See, e.g., transcript of the SEC Roundtable on the Federal Proxy Rules and State Corporation Law (May 24, 2007), available at https://www.sec.gov/spotlight/proxyprocess/proxy-transcript050707.pdf; transcript of the SEC Roundtable on the Proxy Process (Nov. 15, 2018), available at https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf.
 See 1982 Proposing Release; 1983 Adopting Release.
 See, e.g., letters in response to the Proxy Process Roundtable from Business Roundtable dated Jun. 3, 2019; Chevron Corporation dated Aug. 20, 2019; Society for Corporate Governance dated Nov. 9, 2018.
 See, e.g., Donna Fuscaldo, Say Gives Retail Investors A Voice And Tesla Listens, Forbes (Feb. 19, 2019), https://www.forbes.com/sites/donnafuscaldo/2019/02/19/say-gives-retail-investors-a-voice-and-tesla-listens/; Vanessa Fuhrmans, Some U.S. Companies Bow to Social-Media Pressure, Sever NRA Ties, Wall Street Journal (Feb. 24, 2018), https://www.wsj.com/articles/some-u-s-companies-bow-to-social-media-pressure-sever-nra-ties-1519431715.
 See Notice of Proposal to Amend Proxy Rules, Release No. 34-4114 (Jul. 6, 1948) [13 FR 3973 (Jul. 14, 1948)].
 See Brandon Whitehill, “Clearing the Bar: Shareholder Proposals and Resubmission Thresholds,” Council of Institutional Investors Research and Education Fund (Nov. 2018), https://docs.wixstatic.com/ugd/72d47f_092014c240614a1b9454629039d1c649.pdf.