Morningstar - Q3 2021 - 40

Spotlight: Integrating ESG
A Higher Hurdle
There's a history of individual investors like Bowles
submitting resolutions to companies for better
shareholder outcomes. According to James
McRitchie, founder and publisher of the website
$2,000 worth of stock and be a shareholder for
at least a year before submitting resolutions.
To resubmit a failed resolution, the proposal must
have received 3% of the supporting vote once
in the past five years, 6% of the vote if voted on
twice in the past five years, and 10% of the
vote if voted on three times or more in the past
five years, according to the SEC.
The average individual investor, without Bowles'
background and expertise, would find it
difficult to replicate her efforts. Indeed, Bowles
says her own success rested on the guidance
she received from a number of experts in the
field, including contacts at US SIF: The Forum for
Sustainable and Responsible Investment,
the Interfaith Center on Corporate Responsibility,
and Calvert Research and Management.
Lily Bowles, advocate for shareholder
engagement.
Corporate Governance, the SEC in 1942 allowed
shareholders to submit 215-word proposals
with no minimum ownership requirements, no
holding period limits, and no limits for resolution
submissions. In 1947, a federal judge ruled
in SEC v. Transamerica that a " corporation is run
for the benefit of its stockholders and not for
that of its managers. " This decision benefited
shareholders, and some investors filed thousands
of resolutions to spur action on corporate
governance. Though many of their resolutions
didn't have majority support, these investors
helped secure the right for shareholders to file
proposals, McRitchie says.
Today, the resolution process is much harder.
When Bowles submitted her resolution in December
2018, individual investors had to own at least
40
Morningstar Q3 2021
Filers must understand the proxy process and
have a keen sense of corporate governance, says
Jackie Cook, Morningstar's director of investment
stewardship. They also need to engage with
the company's management team, which is
no easy task. Most successful resolutions require
significant time and effort, which is easier for
larger institutions that can devote entire
teams to engagement. And even institutions have
a hard time with corporations whose founder
owns a majority of the stock, like Facebook FB or
Amazon AMZN, which " makes them really
impervious to shareholder pressure, " Cook says.
The hurdle recently got even higher. Just
weeks before Bowles submitted her resolution,
the SEC held a roundtable aimed at changing
the way shareholders communicate and
submit resolutions. The discussion led to rules
that make it harder for individual investors
to do what Bowles did with Netflix, Cook says.
The rules, enacted in September 2020, upped
the thresholds of support needed to resubmit a
failed resolution from 3% to 5%, 6% to 10%,
and 10% to 20% and shortened the resubmission
window for failed resolutions from five years
to three. These changes went into effect
during the Trump administration under SEC
chair Jay Clayton.
In a letter to the SEC, Szapiro, Cook, and
Morningstar's associate director of policy research,
Jasmin Sethi, explained why this rule hurts
investors: " This rulemaking is not necessary
for the protection of investors. Instead,
the proposal would make it more difficult for
shareholders to exercise their voices in
corporate governance. "
Bowles expressed similar concerns and calls
the changes " absolutely un-American. "
" The U.S. corporate-investor relationship is unique,
and there is no doubt the SEC rule fundamentally
weakens this relationship, " she says.
Change in the Air
With Democratic President Joe Biden in the White
House, the SEC has a new chair, Gary Gensler.
He was the chair of the U.S. Commodity Futures
Trading Commission under President Barack
Obama. Serving with Gensler are two Democratic
and two Republican commissioners. That
gives Democrats a 3-2 majority in the SEC. As a
result, the rule that limits shareholder resolutions
has come back into discussion. On June 1,
Gensler announced that he's " directing the staff
to consider whether to recommend further
regulatory action regarding proxy voting advice. "
In March 2020, SEC Commissioner Allison
Herren Lee, a Democrat, highlighted the
importance of proxy voting at the Investment
Adviser Association Compliance Conference
2020. " A reduction of investor engagement with
the companies that they own is clearly not
in the best interest of investors, " Lee said.
" This is the opposite of investor empowerment. "
Bowles says shareholder engagement tends
to get a bad rap. But it's meant to open up lines of
communication between investors and the
companies-not create a lot of paperwork or
unresolvable concerns.
" Investor participation in shareholder engagement
shouldn't be viewed as a burden to corporations,
but rather as an opportunity to listen, learn, reflect,
and improve, " she says. K
Sachin Nagarajan is a data journalist at Morningstar.
https://www.morningstar.com/stocks/xnas/fb/quote https://www.morningstar.com/stocks/xnas/amzn/quote
Morningstar - Q3 2021

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