WASHINGTON – If you're a shareholder in a major corporation, having your voice heard may soon become harder.
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Tucked into a Republican bill to defang the Dodd-Frank financial rules is a provision to make it more difficult to bring proposals to a shareholder vote. It would mean fewer investors could force votes on issues important to them — from executive pay to political spending to gender discrimination.
The House is to vote on the legislation this week.
On its surface, the provision to weaken small-shareholder influence has nothing to do with the overall bill's goal of reversing the stricter rules that took effect after the 2008 financial crisis. But Republicans have used the opportunity to embrace a plan favored by corporations to reduce the number and reach of shareholder proposals.
Critics warn that the restriction would diminish the ability of individuals, public pension funds and social investment funds to influence corporate behavior.
"It would have a chilling effect on small shareholders' ability to effect change," says John Roe, head of ISS Analytics at Institutional Shareholder Services, which advises investors on shareholder ballots.
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Companies counter that the provision would lighten the nuisance costs they bear to keep unneeded proposals off shareholder ballots. Corporations routinely spend time and money to mount cases against such proposals to regulators and sometimes to fight them in court.
The nearly 600-page bill to roll back the 2010 Dodd-Frank legislation, which tightened rules for big banks and consumer finance companies to try to prevent another crisis, is expected to pass the Republican-led House. It faces a rougher road in the Senate.
Under the shareholder provision, individuals or groups of investors who wish to put proposals to a vote would have to hold more of a company's stock — and to have held it longer — than they now do. About one-third of proposals wouldn't make the cut, Roe estimates.
Public companies hold a significant edge in the balance of power with shareholders — by, for example, controlling access to the annual proxy ballots that guide voting. In recent years, groups of shareholders have fought, with rising success, to get names of alternative candidates for board seats on ballots.
The swaggering billionaire investors who fight big companies, like Carl Icahn and Bill Ackman, can sometimes force strategic changes. But the new requirements would reduce the influence of individual investors, public pension funds and social investment funds that hold smaller portions of company stock.
Consider John Chevedden. A self-described activist investor with slim holdings in about 80 companies, Chevedden files more proposals, by far, than any individual, public pension or social investment fund: 858 from 2010 through 2017 so far. (The next-biggest was the New York State Common Retirement Fund, a pension fund, with 323.) Chevedden tends to focus on access to proxy ballots, votes for corporate directors and shareholder rights.
He has achieved majority votes — sometimes despite company opposition — for about 40 percent of his proposals, according to ISS. The proposals, like nearly all shareholder resolutions, are nonbinding. But sometimes they'll lead companies to present their own, modified versions to appease shareholders.
At shareholder meetings, Chevedden has at times felt a security guard's hand on his shoulder as he stood at the microphone.
"I ask pointed questions," he said by phone from his home office near Los Angeles. "I want to improve governance."
Chevedden pushed successfully this year at Marathon Petroleum to adopt a simple majority vote for directors instead of a supermajority of 80 percent now required. Marathon had asked the Securities and Exchange Commission to keep the proposal off the proxy statement. But the SEC staff ruled against the company. The proposal drew 72 percent of the vote at Marathon's April meeting.
Under the Republican legislation, shareholders would have to own at least 1 percent of a company's stock for at least three years to put a proposal on the ballot. That compares with the current requirement of $2,000 worth of stock for one year.
At Apple's current share price of $154, for example, you'd have to hold about $8 billion in stock — 52 million shares.
Such hurdles "would shut down shareholder proposals" even for many pension funds, said Amy Borrus of the Council of Institutional Investors, which represents pension funds and other big investors.
This spring, the New York State Common Retirement Fund was among other investors with less than 1 percent of outstanding stock that won a majority of shareholder votes on a proposal that a company opposed. The fund asked PPL Corp., a Pennsylvania-based electric utility that uses coal, to disclose how efforts to control global warming would affect its bottom line.
PPL said it was too early and impractical to make such an assessment without a clear government policy for addressing global warming. And it said an assessment wasn't needed because its business has been shifting away from power generation toward other areas.
Another pension fund, the Philadelphia Public Employees Retirement System, had asked Cognex Corp., which makes equipment for automated manufacturing, to improve the diversity of its board. The proposal said there were no women on the board.
Cognex countered that it seeks to identify candidates for directors who meet its needs and then selects candidates based on merit, regardless of gender, race, color, religion or national origin. Despite the opposition, that proposal also won a majority of votes.
The U.S. Chamber of Commerce was among the business groups that met with House Financial Services Committee staff as the legislation was being drafted. The stricter requirements for shareholder proposals were a high priority.
"A small subset of special-interest activists has corrupted the shareholder proposal system," the chamber argued, "forcing the vast majority of public company investors to pay for issue campaigns that have nothing to do with enhancing shareholder value."
Companies increasingly seek to avoid shareholder battles, Tom Quaadman, a chamber executive, said in an interview — a factor in some companies' decisions to remain private.
Raising the requirements for proposals would help "ensure that shareholders and directors decide what is in the best interest of the company," he said.