Shareholders Are Owners – Their Voices Must Be Heard
by Bruce Herbert, AIF | Chief Executive, Newground Social Investment
On September 16th the Securities and Exchange Commission (“SEC” or “Commission”) proposed an unprecedented rule change that would eliminate one of the most important tools investors have to remain informed, and hold corporate management and boards accountable. The proposal would rescind Rule 14a-8. This is the federal regulatory framework that governs shareholders’ ability to place advisory questions on a company’s annual proxy ballot.
For more than eight decades, Rule 14a-8 has provided qualifying shareholders a practical way to propose and discuss issues with fellow shareholders. This radical rescission proposal runs counter to the SEC’s three-fold mission to (a) protect investors; (b) maintain fair, orderly, and efficient markets; and (c) facilitate capital formation.
This precipitous rollback should be opposed because every shareholder benefits from an efficient, nationally consistent means of raising questions with one another and with the companies they own. Further, shareholders need the transparency and accountability that Rule 14a-8 proceedings provide.
The rescission question reaches well beyond the current political debate over “ESG” and “DEI”. Shareholder proposals address core governance and material sustainability issues such as:
- Executive compensation
- Board accountability
- Voting rights
- Governance structures
- Corporate risk
- Environmental liabilities
- Political spending
- Workplace practices
...and a plethora of other subjects.
Rule 14a-8 proposals inform boards on shareholder views, while leaving directors responsible for deciding what actions to take.
Since 1942, Rule 14a-8 has made that conversation practical in a market where ownership is dispersed among millions of investors. Subject to substantial eligibility, procedural, and technical requirements, shareholders can place proposals on a company’s proxy ballot without bearing the expense of conducting an independent proxy solicitation – which can easily run into the hundreds of thousands of dollars and more.
The rescission proposal would eliminate the eight-decade bulwark of Rule 14a-8 – a consistent, uniform federal framework – and leave determinations about shareholder proposals to a fractured set of state laws, and even to the governing documents of individual companies.
Critics of rescission – who favor preserving Rule 14a-8 – include the Council of Institutional Investors, Ceres, and Freedom to Invest to shareholder-advocacy groups such as As You Sow, which has warned the change would undermine property rights and trust in public markets. Public pension fiduciaries and shareholder organizations have argued that the result could be a fragmented system in which an investor’s practical ability to raise a proposal depends upon where a company is incorporated, what its governing documents permit, and how much money the shareholder can spend.
What is striking is that the SEC’s own economic analysis acknowledges these many risks, yet ignores them.
The Commission admits that alternative mechanisms are not perfect substitutes for the kind of proactive shareholder engagement Rule 14a-8 enables. It acknowledges that rescission could eliminate value-enhancing proposals, including proposals that improve corporate performance, limit management entrenchment, or provide useful information about shareholder views. It further admits that eliminating the Rule could disproportionately affect individual and lower-resourced investors, for whom an independent proxy solicitation would be cost-prohibitive.
These are not peripheral concerns. They go directly to the relationship between ownership and accountability.
There is a misconception that shareholder proposals are only about achieving a majority vote. While we do receive 50%+ votes, in our fourth decade now of working with companies on a range of sustainability and governance issues, our experience is that the simple filing of a proposal creates the conditions for productive, mutually-beneficial dialogue.
The sequence is this: An investor like Newground identifies a concern. Management responds. Information is exchanged. More often than not a company takes productive action and the proposal is withdrawn – all without shareholders ever voting on it. Even low votes are taken seriously and lead to change because management realizes that such votes represent the views of truly independent shareholders.
The SEC has acknowledged that eliminating Rule 14a-8 could increase engagement costs for both companies and shareholder proponents. Proxy solicitations currently fall under a uniform set of rules and disclosures which the SEC monitors for compliance, and as a result every shareholder receives the same facts on which they are asked to vote. Shifting this SEC compliance oversight role and placing it under the aegis of fifty states and thousands of individual corporations invites chaos, confusion, and multiple burdens on shareholders – not the least of which would be insurmountable costs.
This deserves particular attention – because the debate is misleadingly framed as though shareholder proposals impose annual costs on public companies. However, the Council of Institutional Investors notes that each year the majority of publicly traded companies receive no shareholder proposal at all, and for the companies that do, the proposal process can serve as an efficient early-warning and communications mechanism between boards and owners.
Rule 14a-8 can be improved – and the Rule has been amended numerous times during its long history to adapt to changing conditions. However, amending an efficient, smooth-running mechanism is fundamentally different from eliminating it.
The deeper question is one of market architecture: In a system of dispersed ownership, how should owners communicate efficiently with one another and with those entrusted to manage their capital?
Capital markets depend upon trust – in disclosure, in boards, in voting, and in the proposition that ownership carries meaningful rights alongside economic exposure.
For more than eight decades, Rule 14a-8 has been the main mechanism supporting that relationship.
As the SEC proposes dismantling Rule 14a-8, investors, companies, state policymakers, and the Commission itself will need to confront a consequential question: what, precisely, would take its place – and how would it preserve the practical ability of shareholders large and small to participate as owners?
Shareholders still have a say in this – but only until November 20.
The SEC is required to weigh the public comments it receives, and you don’t need to be an expert or write at length. A few honest sentences from someone who owns stock are exactly what counts.
The simplest ways to weigh in are at SaveInvestorVoice.org and ProtectShareholderVoice.com. To write the SEC directly, reference File No. S7-2026-32 at sec.gov.
We’ll follow up after the midterms with a short, plain-English guide to commenting – what to say and how to say it – so your voice reaches the SEC before the deadline.
But in the meantime, here are several simple talking points:
- I own shares in American companies, and Rule 14a-8 is one of the few practical ways I can raise a concern with the companies I own. Please don’t take that away.
- If this rule is rescinded, whether I can even raise a question would depend on which state a company is incorporated in and what its bylaws allow. That trades one clear national standard for fifty, and prices out ordinary investors like me.
- The SEC’s own analysis admits this change could silence useful proposals and fall hardest on smaller investors. That alone is reason to stop.
[Image Credit: flickr user scott*eric]
Note: This material is intended for educational purposes only. As with all our public writing, blog posts do not constitute tax or financial planning advice; likewise, they are neither an offer to sell nor solicitation to buy any investment or security.
