Defenders of big business have long claimed that large publicly traded companies are democratic institutions, since shareholders are able to vote on issues of corporate policy. Activist groups, in turn, have used that avenue to press for changes in harmful practices.
This system, which has significant limitations, is set to become a lot less effective as the result of a rule change being proposed by the Securities and Exchange Commission. The SEC wants to eliminate Rule 14a-8, which would, in effect, free corporations of the obligation to include qualifying shareholder proposals in the proxy statements that are sent out in advance of annual meetings.
Paul Atkins, who was chosen by Trump to run the SEC, put out a statement disingenuously claiming the move is designed to ensure that “the Commission does not improperly intrude into state corporate law,” while failing to mention that this supposed intrusion has been in place since the 1940s.
By removing the SEC from consideration of shareholder resolutions, Atkins would leave it up to the states to oversee the process. Atkins knows full well that most large corporations are chartered in states such as Delaware that will adopt policies that would make it less likely that proposals will end up in proxy statements. Given the difficulties in publicizing proposals on their own, shareholder activists could very well give up on the effort.
Groups such as the Interfaith Center on Corporate Responsibility (ICCR) have been using the proposal process for decades. Often this does not involve an actual vote by shareholders, which in any event is not binding. Since managers would prefer that the vote never take place, activists can win concessions by agreeing to withdraw a resolution. The SEC’s proposal would likely eliminate that leverage.
The ICCR put out a statement questioning the legality of the proposed rule change and vowing to fight it. The big question is whether public pension funds and other institutional investors will take a strong stance on the issue. One encouraging sign: New York State Comptroller Thomas P. DiNapoli, trustee of the New York State Common Retirement Fund, issued a statement saying: “With this attempt to rescind Rule 14a-8, the SEC has chosen to allow corporate management to shield themselves from accountability rather than protect the investors it was created to serve. I will continue to fight to defend the NYS pension fund’s rights as a shareholder against these reckless attacks.”
Corporate America, on the other hand, is welcoming the move. The U.S. Chamber of Commerce praised the SEC, adding: “For too long, special interests have exploited Rule 14a-8 to advance their own agendas at the expense of public companies and their shareholders.” Leave it to the Chamber, the voice of some of the most powerful entities in the country, to pretend that it, and not the likes of ICCR, represents the public interest.
The elimination of Rule 14a-8 would not mean the complete disappearance of shareholder activism. Some states might adopt policies on resolutions that are not draconian, and there are tactics other than resolutions that activists can use to pressure management.
Yet the withering of the resolution process would represent another troubling step in the consolidation of corporate power.
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