How the CHOICE Act eliminates key shareholder right
Shareholder engagements with companies have improved corporate policies and practices and impacted lives far beyond the corporate boardroom walls.
But the looming repercussions of the Financial CHOICE Act of 2017 jeopardize a right long held by shareholders to hold the companies they own accountable.
For nearly 50 years, shareholders have used the shareholder resolution process in Securities and Exchange Commission Rule 14a-8 to raise important issues including human rights, climate change, and irregularities in mortgage practices with the companies they own.
The CHOICE Act, which deals mostly with financial reform regulation, would alter the current rights of shareholders, significantly increasing the ownership requirements of company stock and barring most investors from bringing issues of concern to the attention of the companies they own.
One of these rights, the ability to file a shareholder resolution, opens the door for shareholders to effectively communicate with the companies they own, and is a fundamental benefit shareholders receive in exchange for their investment.
The shareholder resolution process provides shareholders a direct way to communicate with company boards and management, which is less disruptive and more constructive than simply voting “no” on the proxy ballot.
As long-term investors with an extensive history of corporate engagement, the Sisters of Mercy address a company’s environmental, social and governance (ESG) policies and impacts in collaboration with fellow investors.
These investors, which range from public pension funds to foundations and other religious investors, also view ESG issues as important concerns in the companies they own that potentially impact the company’s long-term financial performance.
A 2015 study found that successful shareholder engagements can generate cumulative excess returns of +7.1 percent. J.P. Morgan Asset Management states in its April 2017 Sustainable Investing, “We believe that a company’s environmental, social and governance policies have a long-term impact on the company’s financial performance.”
In 2016, shareholders filed approximately 1,000 resolutions, with most related to governance concerns and around 400 related to environmental and social concerns. Shareholder support for many resolutions has grown in recent years.
In 2016, 21 percent of shareholder resolutions received majority support, and 61 percent percent of shareholder proposals resolutions received at least 25 percent shareholder support, almost double the 31 percent of resolutions earning that level of support in 2000.
On May 31, 2017, a shareholder proposal asking ExxonMobil to adopt a plan to address climate change garnered more than 62 percent of shareholder support. Management and boards need the important input and outside perspective shareholders offer through the resolution process.
Under Sec. 844 of the CHOICE Act, smaller shareholders, whether individuals or institutional investors, would be cut out of the shareholder resolution process entirely.
The CHOICE Act would require a shareholder to own at least one percent of the company’s market value for at least three years. Depending on the size of the company, the holdings required would be in the millions or even billions of dollars.
This is a staggering increase from the 2,000 dollars currently required and would allow only the few largest shareholders to participate. For example, an investor in Wells Fargo would need to own 2.5 billion dollars worth of shares to file a proposal. Improvements in business come from quality ideas from shareholders, regardless of the size of their ownership.
As owners of companies, shareholders have earned – and deserve – the right to bring forward issues that have impacts outside the boardroom walls.
Shutting down this avenue for most shareholders would eliminate a crucial check and balance in the corporate world.
Susan Makos is the vice president of social responsibility for Mercy Investment Services, the socially responsible asset management program for the Institute of the Sisters of Mercy of the Americas. She has more than 10 years of experience in shareholder advocacy and socially responsible investing.
The views expressed by contributors are their own and are not the views of The Hill.