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Shareholder Resolutions
Shareholders in a publicly traded company are entitled to introduce shareholder resolutions, or proposals, to the company management to be voted on in the next annual meeting. These resolutions may pertain to company policies and procedures, corporate governance or issues of social or environmental concern. Shareholder resolutions are a meaningful way for shareholders to encourage corporate responsibility and discourage company practices that are unsustainable or unethical. A shareholder resolution need not win a majority of the shares voted to succeed in persuading management to adopt some or all of the requested changes.
Who May File a Shareholder Resolution?
In the United States, the regulations and bulletins that the Securities and Exchange Commission (SEC) has issued under Section 14a-8 of the Securities Exchange Act of 1934 govern the inclusion of shareholder proposals in proxy statements. This shareholder proposal rule—which was changed in late-2020—permits shareholders to file a proposal at a company if they own at least $25,000 of the company’s share for one year or $15,000 for two years to file a resolution, while smaller shareholders owning between $2,000 and $15,000 would have to wait three years to be eligible to file.
Additionally, the SEC’s new rule changes how much support a resolution must win—measured by the percentage of the shares voted—in order to be resubmitted in subsequent years. The rule changes these thresholds from 3 percent (first year), 6 percent (second year) and 10 percent (third and subsequent years) to 5 percent, 15 percent and 25 percent, respectively.
Under the previous rule, a shareholder had to own $2,000 or 1 percent of the company’s shares and have held the shares continuously for the year prior to the company’s annual submission deadline to file a shareholder resolution. The SEC historically allowed resolutions that consistently earned the support of 10 percent or more of the shares voted to be resubmitted year after year, keeping them in the eye of management and other shareholders.
SEC Rules on Subject Matter and Format of Resolutions
Under the SEC rules, shareholder proposals are limited to 500 words and cannot contain false or misleading information or be based on or motivated by a personal grievance. Proposals also generally need to address corporate environmental, social and governance policy questions that are considered significant public issues; they cannot pertain to “ordinary business” issues such as employee benefits, personnel changes or the sale of particular products. Finally, the shareholder proponent—or a designated representative—must attend the annual meeting in person to present the proposal formally. (Companies typically treat a resolution that is not presented as if it had never been filed.)
Companies receiving proposals can challenge them at the SEC based on the proposal’s content or length or the ability of the proponents to prove they meet share ownership requirements. The SEC acts as a referee in these cases by sending a letter to both corporate management and the filers of the resolution with its opinion on whether the company can omit the proposal from its meeting agenda and proxy statement—or must include it.
Persistence of a Shareholder Resolution
The SEC sets fairly low support thresholds for first-time shareholder proposals, recognizing that it may take a few years for shareholders to learn about the issues underlying proposals. To resubmit resolutions in subsequent years after an initial filing, the proposal must win the support of at least 3 percent of the shares voted in its first year, 6 percent in its second and 10 percent in its third year and all years thereafter. The SEC calculates support levels by dividing the total votes cast for the proposal by the total votes cast for and against the proposal. (It does not count abstentions.) If a proposal fails to meet the requisite resubmission thresholds, the filer must wait three years to resubmit it. In sum, a proposal that consistently gets the support of at least 10 percent of the shares voted can be re-filed indefinitely, assuming it meets the overall requirements for proper subject matter.
The Impact of Shareholder Resolutions
It is rare for shareholder resolutions on ESG issues to win the support of the majority of shares voted at company annual meetings. Moreover, most shareholder resolutions filed are non-binding, meaning that even if they gain a majority of votes, the company need not comply with their requests. Despite these constraints, filing shareholder resolutions can achieve important successes, as noted below.
Fair Labor and Pay Standards: In recent years, sustainable investors have filed several types of resolutions to deal with persistent workplace discrimination issues. These efforts gained momentum as both the “MeToo” movement and the police murders of George Floyd and other African Americans focused shareholders on the barriers to full equity for women and people of color in society at large, including the workplace.
For example, a proposal from Trillium Asset Management asking Paycom Software to report on its executive diversity programs earned 94 percent support in 2021 when the company declined to recommend either in favor or against. Similarly, the office of the New York City Comptroller, which manages the shareholder advocacy of the New York City pension funds, stated: “Highâprofile killings of Black men and women in 2020 highlighted the grave consequences of systemic racism in society, sparked nationwide protests for racial justice, and prompted many major companies to publicize their commitments to racial equity, diversity and inclusion.” In response, the Comptroller’s office spearheaded an effort to ask companies to match their statements by providing breakdowns of their workforce–by race, ethnicity and sex–into the 10 job categories defined by the US Equal Employment Opportunity Commission (EEOC). The majority of companies engaged by New York City and US SIF members on this issue agreed to disclose their EEO-1 data, enabling the resolutions to be withdrawn.
Fair Labor and Pay Standards: In recent years, sustainable investors have filed several types of resolutions to deal with persistent workplace discrimination issues. These efforts gained momentum as both the “MeToo” movement and the police murders of George Floyd and other African Americans focused shareholders on the barriers to full equity for women and people of color in society at large, including the workplace.
For example, a proposal from Trillium Asset Management asking Paycom Software to report on its executive diversity programs earned 94 percent support in 2021 when the company declined to recommend either in favor or against. Similarly, the office of the New York City Comptroller, which manages the shareholder advocacy of the New York City pension funds, stated: “Highâprofile killings of Black men and women in 2020 highlighted the grave consequences of systemic racism in society, sparked nationwide protests for racial justice, and prompted many major companies to publicize their commitments to racial equity, diversity and inclusion.” In response, the Comptroller’s office spearheaded an effort to ask companies to match their statements by providing breakdowns of their workforce–by race, ethnicity and sex–into the 10 job categories defined by the US Equal Employment Opportunity Commission (EEOC). The majority of companies engaged by New York City and US SIF members on this issue agreed to disclose their EEO-1 data, enabling the resolutions to be withdrawn.
Climate Change: Although concerned shareholders have been filing resolutions related to climate change for well over a decade, these efforts appeared to gain new urgency and support from other investors, reflected in the bumper crop of majority votes, particularly in 2021 and 2022.
The majority of the proposals filed on climate issues in 2021 and 2022 asked companies for reports of some kind: on their greenhouse gas emissions, their records to date in meeting their stated emission reduction goals or their climate transition plans. Many of these proposals highlighted the urgency of meeting the goals of the Paris climate talks of net zero emissions by 2050. In this broad group of proposals, investors gave majority support to several, in some cases taking their cues from the companies’ neutrality or support.
Perhaps the most noteworthy example of shareholder advocacy around climate concerns occurred in the contested board election at ExxonMobil in 2021. Engine No. 1, an ESG impact hedge fund, believed that Exxon’s troubles lay in a board that had no independent directors with outside energy experience and a culture that continued to pursue a business-as-usual scenario of investing capital for expanded fossil fuel development. It proposed four alternative directors, with expertise ranging from fossil fuels to lower-carbon energy sources and related regulatory issues, and it made pitches for its vision to Exxon’s major shareholders. Three of the four candidates were elected. In the year since, Exxon announced that it would commit $15 billion over six years to low-carbon energy development, and re-organized its business around three units, one of which is Low Carbon Solutions.
Corporate Political Activity: Investor demands for disclosure and oversight of corporate political spending and lobbying expenditures have long been one of the leading issues raised in shareholder proposals at US companies. Concerned shareholders want companies to exercise proper oversight to ensure that these payments serve the best interests of the firms and their shareholders and do not harm their reputations.
Since 2004, pension funds, labor unions, environmental groups and sustainable investment managers have submitted resolutions to companies, and often persuaded them, to disclose and require board oversight of their use of corporate funds to support political candidates or influence elections. These resolutions typically ask companies to disclose on a regular basis each of the recipients of this spending and the amount received.
In a related initiative, since 2012 scores of investors have asked companies to report as well on indirect political spending—lobbying expenditures through trade associations and nonprofit organizations that do not have to report their donors. The filers have often asked companies to explain their membership in organizations whose lobbying positions contradict the companies’ policies on issues such as climate change, fair employment and public health. They have particularly targeted companies that are members of the American Petroleum Institute, the National Association of Manufacturers and the US Chamber of Commerce, which lobby against federal and state efforts to promote renewable energy and reduce greenhouse gas emissions.
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