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28 Mar 2014, The Wall Street Journal
BY EDWARD S. KNIGHT. Mr. Knight is executive vice president, general counsel and chief regulatory officer of Nasdaq OMX Group Inc. He was general counsel of the U.S. Treasury Department from 1994-99.
Communicating with shareholders is a crucial part of the job for 21st century business leaders, and most of them understand the value of doing it. The proxy-proposal system is an important, regulated part of this process for publicly traded companies. It gives investors the option of bringing an issue to a vote by all shareholders and ensures that the owners have a voice in how their company is managed. But the current process is outdated, burdensome and costly.
Last year, shareholders submitted more than 800 proxy proposals to public companies. About 30% of the proposals fielded by Fortune 250 companies were initiated by a small handful of individual activist investors, according to ProxyMonitor.org, a Manhattan Institute for Policy Research database that tracks proxy proposals.
To address shareholder proposals, companies listed on U.S. exchanges must follow an established process that costs tens of millions of dollars annually. Based on our experience at Nasdaq OMX talking to corporate secretaries at several hundred of our listed companies, it costs a minimum of $50,000 per proposal, which includes staff hours, outside counsel, proxy firm outreach, solicitations and outreach to institutional and retail investors. Companies that exclude even a seemingly irrelevant proposal without following this process risk lawsuits and enforcement proceedings.
In addition, the Securities and Exchange Commission must direct its limited resources toward determining whether the proposals are eligible for a shareholder vote. According to data on the SEC website, public companies submitted more than 330 no-action letters to the SEC in 2013, representing close to half of all shareholder proxy proposals received by public companies.
Meanwhile, 93% of shareholder proposals that came to a vote at Fortune 250 companies last year failed to win support from a majority of shareholders. Notably, the small number of proxy proposals that did win majority support were largely focused on matters of corporate governance, such as board declassification, according to the Manhattan Institute data.
Clearly, shareholders and companies are spending significant amounts of money to manage the legal process involving proxy proposals. This cost is one that even shareholders would agree often will not add any long-term value to the company.
The low success rate of shareholder proposals is in part due to the low, nearly nonexistent barriers to their submission. Since 1998, the SEC’s proxy rules have required that a shareholder interested in getting a proposal into the proxy own just $2,000 of the company’s shares for at least one year.
The spirit of the rules encourages shareholder engagement. We certainly agree that ongoing, transparent communications with shareholders is a hallmark of good governance. But it is far better to communicate with shareholders through regular contact rather than the ballot box.
This regular contact is happening in myriad ways that could not have been anticipated when the proxy rules were written. Publicly traded companies increasingly use online tools such as webcasts, online voting, social networks and message boards to keep a discussion going with retail and institutional investors, especially about corporate governance. We at Nasdaq applaud the SEC for clarifying last year when companies could use inexpensive venues such as Facebook and other social-networking sites for many shareholder communications.
Yet, given all this, should a single shareholder with $2,000 in company stock be able to submit a proxy proposal and divert substantial company resources and ultimately SEC resources to address it? It happens all the time. Proposals from individual investors accounted for 86% of the proposals excluded from proxy ballots last year at Fortune 250 companies after an SEC no-action letter, according to the Manhattan Institute.
Does this minimal requirement undercut the very positive intent of the proxy rules? More than a little. Corporations are not meant to be perfect democracies, but even in democracies we require citizens to gather a threshold number of signatures to qualify an initiative for a state or municipal ballot. That threshold is markedly lower for publicly traded companies in the U.S., and the ultimate costs are high for the owners of those companies. Shareholders of U.K.-registered companies face a more reasonable test: They must be supported by at least 5% of eligible voting shareholders to submit a proposal, or represent a group of at least 100 shareholders whose collective stake is valued at a minimum of ￡10,000, or approximately $16,660.
Why not require a minimum level of support for proxy initiatives to get onto a corporate ballot in the U.S.? For example, the SEC could require any shareholder with at least $2,000 in company stock to demonstrate wider shareholder support, perhaps 5% or 10%, in an online vote—a virtual petitionsigning exercise, if you will—before the more costly process is triggered to determine whether a proposal should go onto the proxy ballot.
The time has come for the SEC to consider whether the 1998 proxy proposal rule is serving its purpose for the vast majority of shareholders. The corporate world has progressed considerably in 16 years, and there are better, more efficient ways in today’s world for shareholders to be heard, and to have their money used productively.
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