July 20, 2017

A leading expert on securities law and corporate governance, Boston University School of Law Professor David H. Webber is the author of a forthcoming book on shareholder activism to be published by Harvard University Press in 2018.  In addition to publishing scholarly articles, he has contributed op-eds to the Chicago Tribune, Reuters, and most recently the Washington Post.  Speaking with the Shareholder Advocate, Professor Webber expanded on the subject he covered in his Post article.

Shareholder Advocate:  The Business Roundtable is pushing an effort to sharply limit the ability of investors to have a say in their companies through shareholder proposals.  Can you please discuss what the Business Roundtable is proposing? 

David Webber:  The Business Roundtable has proposed sharply increasing the ownership threshold shareholders must reach before they can file a shareholder proposal. Today, the threshold is 1% or $2,000. The BRT wants to drop the absolute $2,000 threshold and create a sliding scale based on percentage of ownership alone. In the current iteration of the Choice Act bill, which was passed in the House of Representatives, the new threshold is 1%. Take a company like Apple which has in excess of $700 billion in market cap. Today, a shareholder would need to own $2,000 of Apple to file a shareholder proposal. If the Choice Act were to pass in current form, that shareholder would need to own over $7 billion in Apple shares. That’s quite an increase!  Even Steve Jobs would have been unable to meet the threshold proposed by the Business Roundtable. 

S.A.:  The Business Roundtable claims that these proposed changes are merely “technical” in nature.  Is that true? 

Webber:  The proposed changes are not just technical in nature – they will have a huge impact on the ability of shareholders to make proposals.  Both CalPERS and CalSTRS – two of the largest US pension funds – have stated that they would be prevented from making proposals to virtually all companies.  The only entities that could even potentially approach the ownership thresholds would be massive mutual funds, which never will file shareholder proposals due to various business conflicts.  Thus, if the Business Roundtable’s threshold proposal were to go into effect, it would likely mean the end for shareholder proposals as we have come to know them.   

S.A.:  What is the context of the Business Roundtable effort? Is this an isolated event or part of a movement to push back the success of some shareholder proposals, such as those seeking proxy access?

Webber:  The Business Roundtable has fought to disempower shareholders at every turn.  After shareholders finally won the long-sought proxy access right in Dodd-Frank, it sued the SEC to stop it from implementing it, and won. (its co-plaintiff was the US Chamber of Commerce). After that, the New York City Pension Funds and others pursued proxy access at scores of companies, winning decisive victories.  They did so using the same shareholder proposal mechanism that the Business Roundtable now seeks to eliminate.

S.A.:  The Business Roundtable frames its argument for reform as a reasonable response to abuses in the corporate proposals process.  Specifically, according to the Business Roundtable, three families have “hijacked” the proposals process by accounting for more than two-thirds of the individual proposals?  Does you research demonstrate such abuses?

Webber:  The Business Roundtable claims that their main concern is repeat filing of shareholder proposals by a small number of individual investors.  Some of those proposals have done some good.  Some haven’t.  But the Business Roundtable proposal goes far beyond stopping these individual investors and is a pretext for gutting shareholder proposals completely.  It doesn’t just eliminate so-called gadfly investors, who by the way have done at least some good.  It basically would eliminate everyone from being able to file.   

The reality is that very few companies face shareholder proposals in any given year.  On average only 70 companies – or only 1-3% of all public companies – receive a shareholder proposal per year.  Take the proxy access issue.  The weight of the empirical evidence shows that proxy access adds substantial shareholder value.  For example, a recent Securities Exchange Commission study found that the NYC funds alone have increased the value of public companies by more than $10 billion through proxy access proposals.  If the Business Roundtable’s threshold had been instituted years ago, we would not have proxy access today.

But moving beyond the cost-benefit analysis, i think that many shareholders view proposals as a fundamental right.  If you own stock in the company, particularly if you are a long-term investor, you should have the right to file a proposal.  It’s your investment, it’s your property, you should have some say over it.

S.A.:  Do any of the Business Roundtable suggestions seem reasonable to you? Are there any that are particularly onerous or concerning?

Webber:  The most onerous and concerning is the ownership threshold.  Their proposed thresholds are so high that almost no one can meet them.  For example, I asked the New York City Pension Funds if they could meet the new threshold and they said it would eliminate their ability to file proposals almost everywhere.

There are some technical reforms that I could live with, like increasing the thresholds for refiling the same proposal a year after it attracted a very small amount of support.  I could also live with tightening up the holding requirement, and limiting the ability to borrow someone else’s shares just for purposes of filing a shareholder proposal.

S.A.:  The Business Roundtable initiative seems largely focused on curtailing proposals with environmental and social components, which it views as often unrelated to the company’s mission and distracting shareholders from focusing on increasing value. Do you agree?  Do you believe that shareholders should have the right to bring such proposals? 

Webber:  Shareholder proposals are often derided as political.  That was true when proxy access and other governance proposals were first getting filed, though few people make that argument anymore.  That same charge is being levelled against diversity and environmental proposals today.  But there is a growing movement arguing that environmental and diversity issues are investment issues.  Global warming presents investment, regulatory and litigation risks.  State Street’s recent embrace of a new voting policy strongly favoring the hiring of women as board members is one example of how certain ideas once viewed as primarily political can obtain mainstream investor support.  Shareholder proposals have played a significant role in that process.

Speaking of environmental shareholder proposals, during the last week of May, a number of institutional investors, led by the New York State Common Retirement Fund and the Church of England Investment Fund, successfully submitted a shareholder proposal calling for ExxonMobil to disclose the impact on its business of compliance with global climate change guidelines.  However, it took the shareholders two times to get the shareholder proposal passed (in 2016, it only received 38% of votes in favor, in 2017, it passed with over 62% votes in favor).  How would environmental shareholder proposals like the one at Exxon, and environmental disclosures generally, be impacted by the business roundtable’s proposals?  What does the percentage of Exxon shareholders who voted for the proposal tell us about the importance of environmental disclosures to investors?

The majority support for environmental proposals at both Exxon and Occidental this past proxy season was historic.  What made them unique was that a number of large mutual funds that normally vote with management voted in favor of these climate-change proposals.  That’s what pushed them past the 50% threshold.  This is a perfect example of how some issues that are first coded as political can make their way into the investment mainstream.  If the Business Roundtable proposal is adopted, the coalition that filed those proposals would not have been able to do so.  It is likely they would not have happened.  To some extent, this depends on whether the mutual funds that voted in favor would also have taken the earlier, more confrontational step of filing the proposal in the first place.  It’s one thing to vote for a proposal, another to file one.  The latter is viewed as a more confrontational act.  Mutual funds have tended in recent years to avoid open confrontations with management, leaving the more aggressive work to public pension funds and labor union funds.  But these latter funds will be too small to file these proposals on their own if the new threshold is adopted.

S.A.:  How do you think the current administration and congress will view this reform effort?  Does the support of Jamie Dimon of JPMorgan Chase bode poorly for shareholders who believe the proposal process should be broadened, not narrowed?

Webber:  Dimon’s support is disheartening but not surprising.  He almost lost the chairmanship of JPMorgan after the London whale debacle in 2012 because of a shareholder proposal.  I hope that democratic opposition in the senate can stymie some of the worst aspects of the Choice Act, including what it does to shareholder proposals.  There is reason for optimism here.  There seems to be a lot of resistance to the choice act in the Senate, at least as currently written.

S.A.:  The Trump Administration and Congress are seeking to roll back Obama-era regulatory reforms and narrow investor rights in numerous areas.  Where does this fall on the scale of concern?

Webber:  The rollback of investor rights goes beyond just this issue to include changing rules around say on pay votes, and CEO-worker pay ratio reporting.  Shareholders should be concerned about all of these developments.  They all cut in one direction: reducing shareholder voice.

S.A.  What can institutional investors who disagree with the Business Roundtable’s proposals do to demonstrate their objections?

Webber:  Writing letters to your congressional representatives always helps.  Checking in with the Council of Institutional Investors and lending support to their efforts would also be a good thing.  Financial regulatory issues are often more technical than other kinds of political issues, and may attract less public attention.  The more Congress knows people are watching these developments carefully, the less likely provisions like these can sneak through.