[House Report 115-904]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-904
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TO REQUIRE THE SECURITIES AND EXCHANGE COMMISSION TO ADJUST CERTAIN
RESUBMISSION THRESHOLDS FOR SHAREHOLDER PROPOSALS
_______
August 24, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 5756]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 5756) to require the Securities and Exchange
Commission to adjust certain resubmission thresholds for
shareholder proposals, having considered the same, report
favorably thereon without amendment and recommend that the bill
do pass.
PURPOSE AND SUMMARY
On May 10, 2018, Representative Sean Duffy introduced H.R.
5756 to direct the U.S. Securities and Exchange Commission
(SEC) to revise Rule 14a-8(c)(12) to protect the interests of
long-term shareholders and allow a company to exclude a
shareholder proposal that focuses on substantially the same
subject matter as a prior proposal that failed to receive at
least six 6 percent of the vote on its first submission, 15
percent on the second submission, and 30 percent on the third
submission.
BACKGROUND AND NEED FOR LEGISLATION
The goal of H.R. 5756 is to eliminate burdensome costs on
companies by modernizing the shareholder resubmission
thresholds.
Modern corporations are subject to numerous pressures and
continuous scrutiny from the respective corporation's many
stakeholders--which include its shareholders, management,
employees, customers, suppliers, special interest groups,
communities, politicians, and regulators. These stakeholders
have a broad array of interests in the corporation's operation
and success. Although boards are expected to consider these
diverse and sometimes conflicting interests of the
corporation's stakeholders, the board's primary obligation is
to ensure that the corporation creates long-term value for the
corporation's shareholders.
Over time, a board's ability to focus on shareholder value
has been inhibited by the proliferation of shareholder
proposals for public companies' annual meetings. Section 14 of
the Securities Exchange Act of 1934, and Rule 14a-8 thereunder,
govern the submission of shareholder proposals. The Rule allows
any shareholder who holds $2,000 or 1 percent worth of a
company's stock for a period of one year to submit a non-
binding shareholder proposal on any subject matter. (To put
this into perspective, the largest publicly traded company in
the United States by market capitalization is Apple, with a
current market cap of more than $1 trillion. Rule 14a-8
currently would allow a shareholder who owns .000000002 worth
of the stock (or roughly 10 shares of Apple) to offer a
proposal, and force Apple (and all other shareholders) to pay
for the proposal's dissemination.
Due in part to the extremely low bar for qualification to
submit a proposal, as well as the SEC's increasing tendency
over the past decade to err on the side of proponents in
allowing these proposals access to the corporate proxy, the
shareholder proposal process has become one of the favorite
vehicles for special interest activists to advance their
social, environmental, or political agendas. Proponents largely
include activist public pension funds, social, or
environmentally-focused funds, as well as so-called ``gadfly''
investors who own miniscule amounts of a company's stock, often
times just so they are able to submit proposals year after
year. In other words, the current shareholder proposal rules
allow persons to hijack U.S. public companies' proxy processes
to advance non-value related goals at the expense of long-term
shareholders. The cost of a proposal can run $150,000 per
measure, and some companies face 15 or more a year--equating in
such instances to $2 million of time and resources being
diverted from the core fiduciary responsibility to maximize
shareholder value.
Despite the increasing number of proposals at public
companies, shareholder support for environmental, social, or
political issues remains stubbornly low. According to Proxy
Monitor, in the decade they have been tracking proposals at
Fortune 250 companies, only two environmental-related
shareholder proposals received the majority support of
shareholders over board opposition.
In addition to low thresholds for the initial submission of
a proposal, shareholders are allowed to resubmit their proposal
in subsequent years, even if they receive extremely low levels
of support. Current regulations allow a company to exclude a
resubmitted proposal from its proxy only if it failed to
receive the support of 3 percent of shareholders the last time
it was voted on; 6 percent if it has been voted on twice in the
last five years; and 10 percent if it was voted on three or
more times in the last five years. Thus, in many cases
shareholder proposals that have been opposed by over 90 percent
of shareholders on multiple occasions are allowed to be
resubmitted, forcing companies to spend time and money in
deciding how to deal with them.
Data shows that out of 2,341 shareholder proposals
submitted to companies that comprise the Russell 200 index from
2001 to 2018 relating to special meeting, environmental and
social, political and social and human rights, only 4 percent
passed and 29 percent, were zombie proposals (those that failed
to gain the majority support after three times). Additionally,
the U.S. Department of Treasury's Report on Capital Markets
issued pursuant to President Trump's Executive Order 13772 on
Core Principles for Regulating the United States Financial
System, found between 2007 and 2016, 31 percent of shareholder
proposals were a resubmission of a prior proposal,
demonstrating that companies have to waste resources on
proposals that have continuously been rejected.
Under the leadership of Chairman Jay Clayton, the SEC has
begun to focus on the overly burdensome nature of the
shareholder proposal process and has offered some new
shareholder proposal guidance. The SEC's Division of
Corporation Finance published a Staff Legal Bulletin on
November 1, 2017, to provide guidance to shareholders and
companies for the upcoming proxy season. The guidance addresses
the following: (1) the ordinary business exclusion; (2) the
relevance exclusion; (3) proposals by proxy; and (4) the use of
images in proposals. The updated ordinary business exclusion
suggests that the SEC will give greater deference to companies
whose board of directors provide detailed analysis on how a
proposal may implicate an ordinary business matter, and thus
can be excluded. The relevance exclusion provides the same
deference to companies if their board can determine that a
proposal does not account for more than 5 percent of a
company's total assets or net earnings and gross sales. The
proposals by proxy guidance would have proposals by proxy to
provide documentation describing the shareholder's delegation
of authority to proxy. Lastly, the use of images in proposals
would prohibit the use of graphs and/or images that are
misleading or irrelevant to the subject matter of a proposal.
While the SEC's staff guidance is a step in the right
direction, it does not significantly reduce the burdens placed
on companies from the current shareholder proposal process. The
bill offered by Mr. Duffy is a modest change to the current
regulatory structure that would help to reduce unnecessary
shareholder proposals and allow companies to focus their
resources on getting the greatest returns for investors. The
bill would update the resubmissions thresholds for companies to
exclude a resubmitted proposal from its proxy if it failed to
receive the support of 6 percent of shareholders the last time
it was voted on; 15 percent if it had been voted on twice in
the last five years and 30 percent if it was voted on three or
more times in the last five years. The updated thresholds are
based on a 1997 SEC proposed rule.
The U.S. Department of the Treasury's October 2017 Report
on Capital Markets included several recommendations to the
shareholder submission regime. The Treasury report recommended
that the resubmission thresholds be updated from their current
form to promote accountability, better manage costs, and reduce
unnecessary burdens.\1\ Treasury also recommended ``substantial
revisions'' to the $2,000 holding requirement, which was
instituted in 1983 and last updated in 1998 to adjust for
inflation. Treasury also recommended that the SEC ``might also
want to explore options that better align shareholder interests
(such as considering the shareholder's dollar holding in
company stock as a percentage of his or her net liquid assets)
when evaluating eligibility, rather than basing eligibility
solely on a fixed dollar holding in stock or percentage of the
company's outstanding stock.''
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\1\U.S. Department of the Treasury, A Financial System That Creates
Economic Opportunities: Capital Markets, available at: https://
www.treasury.gov/press-center/press-releases/Documents/A-Financial-
System-Capital-Markets-FINAL-FINAL.pdf.
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Further, the campaign to allow persons to hijack public
companies to advance political projects that are immaterial to
shareholder value has distorted the impact of this modest
modernization. First, nothing in this bill eliminates a
shareholder's ability to submit a proposal for the first time
under the current rules; the bill simply raises the thresholds
to levels proposed in 1997 to govern when a shareholder can
resubmit the same proposal. The new thresholds provided in this
legislation are sensible, and the idea that shareholders'
ability to effect change at companies will be mooted disregards
basic facts. After all, if these thresholds had been in place
since 2001, proposals relating to special meeting,
environmental and social, political and social and human rights
matters that failed to gain majority support after at least
three tries still would have been eligible for a third year on
company ballots two-thirds of the time--and a quarter of them
would have been eligible for a fourth year. These are sensible
ratios because of all the proposals relating to these issues,
which often are immaterial to shareholder value, only 4 percent
of them pass anyways. This outdated system imposes costs on the
investors that have no interest in such proposals, and also
serves as a distraction for boards of directors and management,
which are trying to focus on long-term performance.
This bill is important for all companies that are incurring
unnecessary costs from shareholder proposals that are submitted
year after year to push a social or political agenda and are
not supported by the majority of shareholders. However, this
bill is especially important for small and emerging companies
that cannot afford to waste necessary capital on the same
proposals every year. The Business Roundtable correctly noted
``As the rule currently stands, a proposal that is opposed by
90 percent of a company's shareholders can be resubmitted
indefinitely, leading to a ``tyranny of the minority''
situation.''\2\ When a company cannot use their capital to grow
and create long-term value, shareholders are ultimately the
ones who suffer because they cannot get the greatest return on
their investment.
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\2\https://www.businessroundtable.org/resources/responsible-
shareholder-engagement-long-term-value-creation.
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HEARINGS
The Committee on Financial Services held a hearing
examining matters relating to H.R. 5756 on May 23, 2018.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
June 7, 2018, and ordered H.R. 5756 to be reported favorably to
the House by a vote of 34 yeas to 22 nays (recorded vote no.
FC-183), a quorum being present.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House without amendment. The
motion was agreed to by a recorded vote of 34 yeas to 22 nays
(recorded vote no. FC-183), a quorum being present.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 5756
will reduce regulatory burden and allow companies to focus
their resources on getting the greatest return for investors by
raising the shareholder resubmission thresholds.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, July 11, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 5756, a bill to
require the Securities and Exchange Commission to adjust
certain resubmission thresholds for shareholder proposals.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Mark P. Hadley
(For Keith Hall, Director).
Enclosure.
H.R. 5756--A bill to require the Securities and Exchange Commission to
adjust certain resubmission thresholds for shareholder
proposals
Under current law, shareholders' proposals may be excluded
from the proxy statements of publicly traded companies if the
proposals are substantially the same as others presented for a
vote within the previous five years. If a proposal fails to
receive 3 percent support in a first vote, 6 percent on the
second, or 10 percent after the third vote in a five-year
period, the company may exclude it. H.R. 5756 would raise those
thresholds to 6 percent, 15 percent, and 30 percent,
respectively.
Using information from the Securities and Exchange
Commission (SEC) on the costs of similar activities, CBO
estimates that implementing H.R. 5756 would cost less than
$500,000 for the agency to amend its rules. However, the SEC is
authorized to collect fees sufficient to offset its annual
appropriation; therefore, CBO estimates that the net effect on
discretionary spending would be negligible, assuming
appropriation actions consistent with that authority.
Enacting H.R. 5756 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
CBO estimates that enacting H.R. 5756 would not increase
net direct spending or on-budget deficits in any of the four
consecutive 10-year periods beginning in 2029.
H.R. 5756 contains no intergovernmental mandates as defined
in the Unfunded Mandate Reform Act (UMRA) and would not affect
the budgets of state, local, or tribal governments. If the SEC
increased fees to offset the costs of amending its rules, H.R.
5756 would increase the cost of an existing mandate on private
entities required to pay those fees. Using information from the
SEC, CBO estimates that such an increase would amount to no
more than $500,000, falling well below the annual threshold for
private-sector mandates established in UMRA ($160 million in
2018, adjusted annually for inflation).
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Rachel Austin (for mandates). The
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires one
directed rule making within the meaning of such section. The
directed rulemaking requires the SEC to revise section 240.14a-
8(i)(12) of title 17, Code of Federal Regulations to raise the
resubmissions thresholds for companies to exclude a resubmitted
proposal from its proxy if it failed to receive the support of
6% of shareholders the last time it was voted on; 15% if it had
been voted on twice in the last five years and 30% if it was
voted on three or more times in the last five years.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Resubmission thresholds for shareholder proposals
This section directs the SEC to raise the resubmission
thresholds to at least six 6 percent of the vote on its first
submission, 15 percent on the second submission, and 30% on the
third submission.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
H.R. 5756 does not repeal or amend any section of a
statute. Therefore, the Office of Legislative Counsel did not
prepare the report contemplated by Clause 3(e)(1)(B) of rule
XIII of the House of Representatives.
MINORITY VIEWS
H.R. 5756 harms shareholders by making it easier for
companies to exclude shareholder proposals from their proxy
materials. The shareholder proposal process, governed by SEC
Rule 14a-8, gives shareholders an opportunity to engage
corporate management on issues that boards might otherwise be
reluctant to address To be eligible to submit a proposal, an
investor must have continuously held the lower of $2,000 or 1%
of the company's securities for at least one year. To resubmit
the same proposal in successive years, an investor must garner
an increasing percentage of affirmative votes. Currently, a
board can exclude a resubmitted shareholder proposal that
received less than 3% of the vote on its first submission, 6%
on the second, and 10% on the third. H.R. 5756 would increase
the resubmission thresholds to 6% of the vote on the first
submission; 15% for the second submission; and 30% for the
third.
Proposals related to emerging issues have often taken years
to develop enough traction among investors to receive more than
10% of the vote. However, many proposals that received low
support in the beginning have facilitated industry-wide changes
in the long term. For example, a 1997 shareholder proposal
calling upon ExxonMobil to evaluate and report on the business
implications of climate change received less than 6% of the
vote. In 2017, after decades of resubmissions, similar climate
change proposals at ExxonMobil and other energy companies
passed with majority shareholder support. H.R. 5756 would have
the effect of restricting many important shareholder proposals
on the environment, diversity, corporate governance, and other
critical issues.
H.R. 5756 is premised on the misconception that
shareholders are abusing the shareholder proposal process to
promote activist interests to the detriment of public
companies. To the contrary, shareholder proposals have
benefited public companies in terms of increased shareholder
engagement and improved performance. For example, in a letter
to the Committee opposing H.R. 5756, New York State Comptroller
Thomas DiNapoli noted shareholder success in improving gender
diversity on corporate boards, which has enhanced company
financial performance and board decision-making. According to
Mr. DiNapoli, this progress would not have been possible if
H.R. 5756 had been enacted during the early stages of board
diversity proposals.
Another misconception is that shareholder proposals
routinely force companies to expend significant resources to
analyze and answer them. This is false because most public
companies never receive shareholder proposals and thus incur no
burden whatsoever from the existing process. According to a
voting analytics database maintained by Institutional
Shareholder Services, Inc. (ISS), only 13% of Russell 3000
companies received a shareholder proposal in any given year
between 2004 and 2017. The data also shows that any company
that receives a shareholder proposal is likely among the
largest corporations, as less than 4% of shareholder proposals
in the ISS database were filed at companies with under $1
billion in market capitalization.
When a similar provision was included in H.R. 10, the
``Financial CHOICE Act,''--which was unanimously opposed by all
House Democrats--several state treasurers and comptrollers
signed a joint letter that underscored the importance of
preserving shareholder rights as set forth in Rule 14a-8.
According to these state officials, ``[t]he robust shareholder
proposal process, as currently structured and administered
under SEC Rule 14a-8, works well for investors, public
companies and capital markets.''
In addition, several consumer and investor advocates,
religious organizations, civil rights groups, organized labor
organizations, public company shareholders, pension plans,
institutional investors, and other proponents of sound
corporate governance wrote to Congress opposing H.R. 5756 and
the related provision in H.R. 10. These stakeholders view the
existing shareholder proposal process as striking an
appropriate balance between management discretion and
accountability to shareholders.
For these reasons, we oppose H.R. 5756.
Maxine Waters.
Wm. Lacy Clay.
Stephen F. Lynch.
Carolyn B. Maloney.
Daniel T. Kildee.
Michael E. Capuano.
[all]