Op-Ed by SEC Commissioner Gallagher Urges Changes to Shareholder Proposal Rules

March 28, 2014

The low ownership thresholds shareholders must meet when submitting shareholder resolutions for inclusion in company proxies encourage frivolous proposals, imposing excessive costs on companies to the detriment of long-term shareholders, said Republican SEC Commissioner Dan Gallagher, Delaware Chief Justice Leo Strine, and Nasdaq OMX General Counsel Edward Knight in recent speeches and articles.  In prepared remarks given at the 26th Annual Corporate Law Institute this week, Commissioner Gallagher called for changes to the process, noting the vast majority of shareholder proposals come from individuals or activist groups with "idiosyncratic and often political agendas" which conflict with the long-term interests of shareholders.  Gallagher noted that the proposals "are predominantly from organized labor, including union pension funds,which brought approximately 34% of last year’s shareholder proposals, as well as social or policy investors and religious institutions, which accounted for about 25% of 2013’s proposals."  Delaware Supreme Court Chief Justice Leo Strine included similar remarks in a recent essay published in the Columbia Law Review, arguing that investors risk turning "the corporate governance process into a constant 'Model United Nations' where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes."  Similarly, in a March 26 op-ed in the Wall Street Journal, Knight acknowledges that while the spirit of the proxy submission process is to enhance shareholder engagement, a worthy goal, the costs far exceed the benefits.  The Nasdaq General Counsel explains that shareholders owning as little as $2,000 in company stock for one year can submit a proposal, yet each proposal costs a company a minimum of $50,000 and in the end only about seven percent of proposals are adopted by shareholders.  All three authors believe that significant changes to the process are needed, with a particular emphasis on the minimum $2,000 holding requirement.  Commissioner Gallagher proposed getting rid of the flat dollar test in favor of a scalable percentage test. Gallagher also suggested that the SEC revisit the entire process by which companies can exclude proposals to avoid a process which he characterized as "perennially problematic."  Strine went a step further and argued that say on pay votes be held every three or four years "consistent with the rational time frame for employment arrangements."  Reconsideration of the shareholder proposal process was one of the many topics on which the SEC sought comment in its proxy plumbing concept release in 2010, and one the Association's Center On Executive Compensation supports.