For 60 years, shareholders of companies listed in the United States have been entitled to add resolutions to the agenda of annual shareholders’ meetings provided they hold shares with a market value of USD 2,000. Such resolutions have been very effective in improving corporate governance practices and enhancing environmental and social responsibility.
However, shareholders are not really able to elect the members of the Board of Directors. They are called on to confirm the Board’s choice by ratifying the candidates nominated for election on a list containing as many candidates as there are seats (plurality vote). The only course of action open to unhappy shareholders is to contest the Board in full by submitting to the shareholders’ meeting a complete new slate of candidates. This is not really feasible in practice as it is very costly and time consuming. Institutional investors have therefore long advocated the SEC (Securities Exchange Commission) for the right to add one (or several) candidates to the list of those submitted by the Board (proxy access). This would allow all shareholders to vote on a list containing more candidates than seats, with those obtaining the greatest number of votes being elected.
With the 2008 proxy season just over the horizon, the SEC’s decision was therefore impatiently awaited. Unfortunately, instead of making a decision, the SEC has submitted for consultation, until 2 October, a new rule comprising several proposals, almost all of which significantly cripple shareholders’ current rights. In particular:
- companies will henceforth have the right to “opt-out” of the shareholder resolution process either by seeking a vote of the shareholders to give them that authority, or, if empowered under State law, to have the Board vote to opt-out of receiving advisory resolutions;
- shareholders will have to hold 5% or more of a company’s capital to submit a candidate of their choice for election to the shareholders’ meeting;
- the threshold for resubmission of a resolution in subsequent years will increase, from the present 3%, 6% and 10% of “yes” votes (the first, second and third years respectively) to 10%, 15% and 20%.
These changes will make it extremely difficult if not impossible for shareholders to exercise their right to submit resolutions. Disgruntled institutional investors are ready to do battle with the SEC on this point, as they did in 1997. At that time, they mobilized successfully to uphold the right of shareholders holding shares with stock market value of USD 2,000 to submit resolutions. A collective letter will be sent to the SEC requesting that it “retain and protect shareholders’ rights to file non binding resolutions”. Investors wishing to sign the letter can do so at www.domini.com before 30 September 2007. Ethos is one of the co-signatories.
