CEOs notch win as SEC adds hurdles for shareholder campaigns

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U.S. companies notched a big Trump-era win Wednesday as regulators made it harder for small-time shareholders to put forth proposals aimed at cracking down on excessive pay, climate change and other corporate governance concerns.

The Securities and Exchange Commission rules overhaul follows years of C-suite complaints that proxy regulations are outdated and play into the hands of dissident shareholders. But investor advocates, religious groups and proponents of what’s known as environmental, social and governance, or ESG, investing argue the changes are a gift to business lobbyists that will muzzle corporate critics.

At issue are the criteria that stockholders must meet in order to submit, or resubmit, proposals that investors vote on at companies’ annual meetings. The regulations that SEC commissioners approved Wednesday largely track with a plan first proposed in 2019.

Under the new rules, the value of stock that an investor needs to hold to submit a plan will generally increase. The level of support needed to resubmit failed proposals also will increase.

In a response to a question about concerns expressed by ESG advocates, SEC Chairman Jay Clayton told reporters ahead of the meeting that the requirements that smaller shareholders hold stock for longer before submitting plans was “not much of an incremental cost, and it provides a demonstrable alignment of interests.” He added that he was “completely comfortable that this was done by the staff in a content neutral way.”

In July, the SEC approved a related rule that curbed the power of so-called proxy advisory firms, which are paid by pension funds to advise stockholders on how to vote their shares. Those advisers have drawn the ire of executives in part because of the outsize role they can play in determining whether activist campaigns succeed.

Key details

The new SEC rule will require new shareholders who have only held stock for one year to have $25,000 worth to submit a plan for the first time. The previous threshold of $2,000 would apply to investors who have had their positions for at least three years.

The regulations would also increase to 5 percent the support level needed to resubmit a plan within five years of it failing to pass, from 3 percent currently. The amount of backing needed increases in additional attempts.

Vanguard Group Inc., the Business Roundtable and the U.S. Chamber of Commerce wrote letters in support of the plan. The Council of Institutional Investors, the Presbyterian Church (U.S.A.) and Neuberger Berman were among those commenting in opposition.

Commissioners approved the new rule in the 3-2 vote, with the two Republican members joining Chairman Jay Clayton in supporting the revisions.

Whistleblower award changes

In a separate rule change, the SEC on Wednesday also voted 3-2 to give the agency additional flexibility in determining whistleblower awards. Agency officials said that they don’t expect the changes to diminish the program and that the final rule doesn’t include a controversial plan to let commissioners reduce awards in cases where penalties are $100 million or more. Whistleblowers are now eligible to get 10 percent to 30 percent of the amount collected in enforcement cases where penalties exceed $1 million.

Democratic Commissioner Allison Lee said before that vote that she opposed the rule in part because it involved the SEC claiming additional “discretion” to reduce whistleblower awards based on the size of the penalty involved.

Bloomberg News
SEC regulations SEC Corporate governance Investments ESG Jay Clayton Whistleblower
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