The shareholder proposal process, originally intended to engage a company’s shareholders in matters of corporate governance, has increasingly become a platform for promoting special interests. Despite intended discussions around issues such as dividend policy and board structure, the focus has shifted towards agendas of a more parochial nature.
In response to this, the House Financial Services Committee began investigations over the summer. Reforms are needed in the shareholder proposal process, ensuring the representation of the interests of standard investors over those with alternative motives. As made clear in my testimony before Congress in July, corporations must return to their crucial role of creating shareholder value, rather than acting as political entities shaping societal norms.
Securities laws have struggled to catch up with the swift changes in the financial sector. Such lag has resulted in the misuse of the shareholder proposal process, shifting the debate towards cultural and social matters instead of focusing on the core business of the business. The need for Congress to update these laws has thus become ever more pressing.
At the heart of changing market dynamics lies the growing popularity of massive index funds. These funds now hold a significant percentage of shareholder voting power at all public companies. While this trend has allowed for increased retail investor participation in the stock market, fueling broad-based prosperity, it has also paved the way for special interests to push their agendas at the expense of the company and its shareholders.
This past year alone, a small number of influential interests purchased the minimal stakes required to qualify as nominal shareholders and proposed issues such as abortion, diversity, gun control, and freedom of speech. With more than half of all proposals submitted by only five parties, it’s evident that the system is being manipulated for interests separate from the benefits of the invested individuals.
The Securities and Exchange Commission (SEC) hasn’t helped the situation, either. Last year, it actively encouraged further political proposals from shareholders by announcing that companies would have to include these proposals when they “raise significant social policy issues”—even if these issues were unrelated to the company’s business. Furthermore, the SEC has put forth new amendments that would simplify the process for special interest groups to revisit defeated proposals and even submit duplicate proposals.
While the misuse of the shareholder proposal process tends to lean in favor of progressive causes, last year marked an increase in conservative proposals. However, regardless of the political direction, the main issue persists—special interests are benefiting at the expense of corporations, shareholders, and the general investing public.
On a hopeful note, a series of bills have been introduced aiming to reduce abuses of the shareholder proposal process. The proposed legislation addresses voting practices of asset managers and oversight of proxy advisors, and provides essential guidance to the SEC.
All parties support these reforms in the hopes of curbing the politicization of corporate America. Unless these measures are enacted, shareholders and investors are at risk as company leaders allocate more resources to political matters than to the business itself.
Shareholders should retain a voice in corporate governance—once a vital function of the shareholder proposal process. This process has been a key aspect of US public capital markets’ admiration worldwide and its consistent delivery of solid returns to American investors. It is now up to Congress to act to safeguard these strengths.