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Fire (Ready, Aim): The Budding Campaign to Diminish Shareholder Rights

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Recently, there have been several public calls by prominent officials calling for curtailment of shareholder activism. Daniel Gallagher, a Commissioner of the Securities and Exchange Commission, is reported to have said that "the commission must clamp down on the filing of shareholder proposals unrelated to the long-term interests of corporations, such as those relating to climate change or sustainability" (Source). In an opinion piece in the Wall Street Journal, the executive vice president, general counsel and chief regulatory officer of Nasdaq OMX Group Inc., Edward Knight, argued that shareholder proposals cost "a minimum of $50,000 per proposal" and suggested that social networking sites like Facebook should be used instead for shareholder communications that might otherwise be contained in shareholder proposals (Source).

These arguments are misleading at best, and more often simply wrong. Arguing that climate change is unrelated to long-term interests of corporations, for example, goes against reams of financial analysis and the SEC's own interpretive guidance, published in 2010, regarding the reporting of climate-related risks and opportunities.

Moreover, the idea that every corporation spends at least $50,000 on every shareholder proposal is unsupported and does not match up with the facts; many shareholder proposals are withdrawn after the proposal filers and the corporations reach an agreement on a course of action after dialogue, and most of those dialogues are not onerous. My own firm, Pax World, recently wrote letters to 42 fossil fuel companies asking about the corporations' plans to deal with the possibility of stranded assets in the event that action is taken to keep the majority of fossil fuel reserves in the ground, to avoid additional global temperature increases of more than 2°C, or if the reserves were extracted and burned, how those companies were planning to deal with the physical changes of a world that is 4°C warmer. Nine of them got back to us. Last year, we wrote to 35 large apparel manufacturers and retailers noting the appalling conditions that garment workers often face in those companies' global supply chains. We heard back from five of them.

So maybe corporations can't answer every letter they get, and I do understand that some of them are frivolous. But letters from shareholders -- owners -- shouldn't be routinely ignored. They are though, even when the shareholders writing those letters have trillions of dollars under management. The Carbon Disclosure Project (CDP) amasses a coalition of investors concerned about the impact of climate change on the companies they invest in, and those investors together had $87 trillion in assets under management. Enough, in short, for companies to understand that this isn't just one or a handful of investors, but a great many, all of whom are concerned enough about long-term impacts of climate change to be signatories. While corporate response rates to the annual CDP are steadily rising, there are still corporations that ignore it; in 2013, the response rate among the S&P 500 was only 68 percent (though a handful of corporations may have responded after the deadline).

A recent study by Yuanzhi Li and David Yermack studied nearly 10,000 annual shareholder meetings between 2006 and 2010 and identified a systematic pattern of poor company financial performance following meetings that are moved far from corporate headquarters. Stock prices tended to significantly underperform market benchmarks for six months following those distant annual meetings. Li and Yermack conclude that such moves appear to signal that corporations have "private, adverse information about future performance and wish to discourage scrutiny by shareholders, activists, and the media."

Many companies are responsive to requests for dialogue, but certainly not all of them. Shareholders need the ability to file shareholder proposals precisely because many corporations decline dialogues, often repeatedly, and the only way to achieve that dialogue is to take an action that corporations cannot ignore. One of the ways that corporations could avoid the costs of fighting shareholder proposals -- which is where the $50,000 might come in -- is to actually talk to their owners. And not just on Facebook.