There are a handful of orders of Catholic nuns that have been active users of the SEC's shareholder proposal rule (Exchange Act Rule 14a-8). They're not happy with the SEC's plans to reform the rule to make it harder for shareholder gadflies to micromanage corporations, as Crux reports:
Sister Nora Nash, a longtime participant in the shareholder advocacy field, is part of a broad coalition of faith-based and other investors who are lining up to push the SEC to modify if not rollback the proposed steps they say would restrict their voice in seeking corporate accountability.
“I don’t think it will be a possibility for many institutions to be able to participate” at the same level of shareholder advocacy if the amendments to existing rules are implemented, said Nash, director of corporate social responsibility for her order, the Sisters of St. Francis of Philadelphia.
As I have argued:
Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the traditional answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions.
This allocation of decision-making power follows from the basic principle that public corporations are not shareholder democracies. Although shareholders nominally own the corporation, they possess very few control rights normally associated with ownership. Instead, corporate law assigns virtually plenary decision-making authority to the board of directors and the subordinate managers to whom the board properly delegates authority.
This allocation of authority is essential if the corporation is to be run efficiently. Just as a large city cannot be run as a New England town meeting, a large corporation is a poor candidate for direct democracy. There simply are too many widely dispersed shareholders who have varying degrees of information about the company, differing goals and investment time horizons, and competing ideas about optimal business practices for their preferences to be aggregated efficiently. Accordingly, state corporate law traditionally has given primary decision-making authority to the board and the managers to whom the board properly delegates authority. As the Delaware General Corporation Law puts it, the “business and affairs” of a corporation “shall be managed by or under the direction of a board of directors.”…
In principle, Rule 14a-8 contains protections designed to prevent it from being used as a tool for effectuating a shift in the locus of corporate decision making from the board to the shareholders. As the D.C. Circuit explained, the Rule's drafters recognized that “management cannot exercise its specialized talents effectively if corporate investors assert the power to dictate the minutiae of daily business decisions.”
Stephen M. Bainbridge, Revitalizing Sec Rule 14a-8's Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal, 85 Fordham L. Rev. 705 (2016).
The problem is that the Rule has been interpreted in ways that allow the nuns and other shareholders to make proposals on a wide range of governance, social, strategic, and operational decisions that ought to be made by the board.
Worse yet, many of the nuns' proposals are actually counter to the interests of the companies and the other investors in those companies.
The SEC proposals put a band-aid on the problem. It's a highly imperfect solution, but at least it's start.
