SEC Moves to Propose Limits on Shareholders' Voices: Do the new rules modernize investor relations, or undermine executive accountability and ESG?

• Author: Tahmincioglu, Eve

The Securities and Exchange Commission recently proposed new shareholder rules that would make it more difficult for investors to push companies to make changes, including environmental and social improvements.

The proposed rules include increases to the time an investor has to hold a stock before they're able to submit proposals in the company's proxy statement and limits to the number of proposals. They also include restrictions on when proxy advisers can share their advice with investors.

SEC chairman Jay Clayton described the new rules as a modernization of the proxy process. "The proposed amendments would facilitate constructive engagement by long-term shareholders in a manner that would benefit all shareholders and our public capital markets," he said in a statement.

However, the SEC vote, which broke down 3-2 in favor of putting the new rules out, was met with derision from investor advocates, including pushback from the two SEC commissioners who voted against the proposed rules.

"This makes it much less likely investors will be able to hold management to account," stresses SEC commissioner Robert Jackson Jr.

Jackson also speculates that the new hurdles could impact corporate governance. "When shareholders have a complaint with management and the SEC doesn't give them a chance to vote on that subject, what do they do? The answer may be withhold votes, votes against directors," he explains.

Some see it as a blow to the environmental, social and governance (ESG) movement.

"The shareholder proposal process has been one of the most important factors in putting ESG at the top of the agenda at U.S. companies--and it's working. U.S. companies are paying more attention to issues such as climate change and diversity, which, as the evidence shows, improve long-term returns," says Will Martindale, director of policy and research with Principles for Responsible Investment, a UN-based responsible investment body representing investors with more than $86.3 trillion in assets under management. "We now know unequivocally that ESG issues are financial issues."

But business advocates see it as a boon for corporations and investor communications.

"The current structure allows special interest activists to push narrow agendas even when shareholders have repeatedly rejected those proposals," says U.S. Chamber Center for Capital Markets Competitiveness executive vice president Tom Quaadman. "These new SEC reforms will help improve...