TSC Weighs in on the Shareholder Proposal Rule

On October 15, The Shareholder Commons added its voice to a lawsuit that seeks to invalidate new rules that make it harder for shareholders to submit  proposals at the annual meetings of U.S. corporations. The U.S. Securities and Exchange Commission (SEC) changed the rules in the waning days of the previous administration. The new rules would preclude 41 percent of the proposals TSC supported from being resubmitted next year.

The lawsuit was brought by the Interfaith Center on Corporate Responsibility (ICCR), As You Sow, and James McRitchie. TSC filed its own argument in a “friend of the court” (“amicus”) filing, which emphasizes that the new rules are especially problematic for proposals that raise concerns about social and environmental damage created by corporations in search of increased profits.

The brief points out that such damage hurts diversified portfolios, which may be threatened when individual companies boost their own profits with practices that undermine important social and environmental systems. While many large institutional shareholders are diversified, they may be reluctant to make proposals at public companies, because those companies are often their clients: one of the largest sources of revenues for institutional investors is the management of defined contribution retirement plans, such as U.S. 401(k) plans.

As a result, a significant proportion of social and environmental shareholder proposals are brought by individual holders with diversified portfolios. However, under the new rules, shareholders would have to hold relatively large positions in companies in order to bring proposals. But for a small shareholder, that might mean concentrating a large portion of her savings in a single company, which is risky and counter to the advice that investors should not put all their eggs in one basket.

But the choice forced by the new rules would affect the types of proposals that are brought. It is diversified shareholders who have the greatest financial incentive to bring proposals that rein in profitable corporate behavior that creates significant costs to the economy. Shareholder engagement on these issues can protect the economy, as well as the return of the markets overall. But by forcing small holders to choose between diversifying and making shareholder proposals, the Amendments essentially remove any incentive for small shareholders to participate in such private ordering that preserves a healthy economy. The Commission failed to account for any change to the types of proposals presented that the Amendments might engender, or the economic impact of any such change.

The brief argued that the changes would harm shareholders as both investors and human beings:

In sum, Main Street investors need the ability to (1) remain diversified and (2) engage with issuers on conduct that threatens the social and economic systems that companies rely on over the long term. It’s also the case that those investors have additional interests in preserving those systems, as they must live in a society that depends on the health of the planet and communities in order to thrive. …

The economic analysis that the Commission undertook failed to consider that the Amendments might not simply reduce the number of proposals but might also be more likely to reduce a particular type of proposal, i.e., those that relate to systemic issues that affect the economy as a whole.

A decision in the case is expected in the first quarter of 2022.

You can read the full brief here.


From The Shareholder Common’s October 2021 Newsletter. Sign up for our newsletter here to get more updates from TSC on our work, research, and opportunities for action.