July was an eventful month on Capitol Hill. Dubbed in some quarters as ‘ESG Month’, no fewer than six hearings were held by the House Financial Services Committee aimed at countering the trend toward greater consideration of ESG issues in capital markets.
The most eye-catching development was Representative Steil’s (R-WI) introduction of the Protecting Americans’ Retirement Savings from Politics Act.
The bill proposed that “A shareholder proposal submitted to an issuer pursuant to section 240.14a–8 of title 17, Code of Federal Regulations, may be excluded by an issuer from its proxy or consent solicitation material for a meeting of the shareholders of such issuer if the subject matter of the shareholder proposal is environmental, social, or political (or a similar subject matter).”
As it stands, shareholder proposals – motions by an owner of a company recommending that the company, or its board of directors, take some specific action – are governed by the Code of Federal Regulations (CFR). The CFR already sets out valid reasons for why a company can exclude shareholder proposals, such as, if it is not relevant to the company’s business, would interfere with director elections, or is substantially duplicative of another proposal.
The current rules don’t aim to influence the topics that shareholders discuss and vote on, but this is exactly what the proposed bill aims to do. It aims to set a precedent for a proposal to be excluded if it relates to the environment, society or politics.
The reasoning behind the proposal of Representative Steil’s bill is unclear. The title and text suggest that Americans’ retirement savings are being threatened by shareholder proposals related to the environment, society and politics.
In truth, it’s hard to see how shareholder proposals are a direct threat. They aren’t binding, and if the board or management does choose to take the recommended actions, they do so because they believe it is in the shareholders’ best overall interests. Discussing and voting on shareholder proposals does have a cost, but it is difficult to justify that these activities meaningfully reduce investor returns.
The proposed rule may in fact make it harder for retirement savers to protect their savings from being used for political means, such as donations to political campaigns and causes. Shareholders interested in maximizing their returns may propose that a company make no political donations – or at least disclose the ones that they do make. Under existing rules, the company would be required to include this proposal in its proxy materials, provided the proposal met all eligibility requirement. However under the proposed bill, the company could exclude it simply because the subject matter is political in nature.
Steil’s Act less popular with investors
Despite clear proof of an actual problem to be solved, we should ask whether the proposed rule has merit in practical terms. Boards and management would argue it does because shareholder proposals often conflict with their views of what the company should do.
But it is bad for investors. Giving companies the power to decide if the subject matter of a shareholder proposal is environmental, social or political gives an excessive amount of power to companies to control what can and cannot be discussed and voted on by investors. If management and the board want to silence discussions about a certain topic, it would be quite easy for them to connect it to the broad-brush terms of environment, society or politics.
Consider that a company may exclude a proposal related to a relevant international trade agreement because it’s considered a political issue. Could they exclude a proposal related to the company’s relationship with the community in which it operates because community relations are a social issue? Would a proposal about how the company will maintain operations in the face of a natural disaster be excluded because natural disasters are an environmental phenomenon?
There is no denying that shareholder proposals contribute to strong corporate governance and are an important mechanism for holding boards and management accountable. But the proposed rule raises more questions than answers.
It opens the door for politicians to endlessly attempt to influence the sorts of topics that investors address in their general meetings. If the end goal is truly to protect Americans’ retirement savings from politics, then we need to protect shareholder’s rights from politicians who want to take them away.
