Predictably, Democratic SEC Commissioner Caroline Crenshaw opposed the important and timely SEC Staff Bulletin updating the way the SEC applies the economic significance and ordinary business exclusions to the shareholder proposal rule. I discussed the new bulletin in the prior post.
In this post, I reply to some of the claims Crenshaw makes trying to defend the indefensible.
Crenshaw repeatedly says this is a political decision:
This type of political policy shifting mid-season serves to undercut capital formation, not facilitate it.
The rescission comes as no surprise given that the shareholder proposal process has become the target of politicized messaging ...
We are so focused on undoing the prior Commission’s agenda that we sow chaos now.
... this leadership has rushed out staff guidance for the sake of political expediency
Elections have consequences. More important, the shareholder proposal rule has become politicized precisely because for the past several decades it has been a tool almost exclusively used by either gadflies or progressive political interest groups to advance an agenda unshared by their fellow investors. It is Crenshaw's political sponsors who have brought us to this point by turning the proposal rule into a soapbox paid for by investors at large.
True, it has finally been the case that some conservative activists are using the proposal rule to advance their agenda. (As far back as 2004, I wondered why they ignored this potential communication medium.) Not that they had much luck under Gensler.
In any case, while I acknowledge that what is sauce for the goose should also be sauce for the gander, I would prefer that no activists of any political stripe be able to abuse the rule as they have done.
Crenshaw also says that the rule has become "a preferred punching bag of those who wish to diminish corporate democracy."
Sigh.
There is no such thing as corporate democracy.
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.”
Stephen M. Bainbridge, Revitalizing SEC Rule 14a-8's Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal, 85 Fordham L. Rev. 705, 707–08 (2016). Put simply, democracy is not an appropriate metaphor for corporate governance. It thus cannot serve as a justification for the shareholder proposal rule.
Finally, Crenshaw complains that the new bulletin will allow exclusion of "topics relating to poison pills, compensation, emerging issues such as AI, political and lobbying expenditures, and environmental or other issues that shareholders have identified as materially impacting the firm’s financial value." (My emphasis.)
I call BS. These are not topics that investors have identified as materially impacting the firm’s financial value.
How do I know? Because proposals advanced by leftwing activists relating to those proposals almost always fail to receive majority support. In a 2003 Barrons op-ed, for example, I wrote that:
Recent SEC guidance allowing more proposals dealing with broad societal issues to be considered has led to a significant increase in the number of shareholder proposals centered on political questions. But while the SEC insists that investors are demanding these changes, shareholders are increasingly rejecting proposals dealing with social issues. In fact, in 2023, support for ESG-related proposals fell to just 22% on average, a decline of 11 percentage points since 2021.
ExxonMobil, Chevron, JP Morgan, and Goldman Sachs all defeated proposals that would require the companies to disclose their absolute emissions data rather than carbon intensity metrics, Bloomberg Law recently reported. ...
As I explained in my recent book, The Profit Motive, most investors still care mainly about maximizing value rather than advancing partisan agendas.
In thinking about Crenshaw's statement I couldn't help but recall a Friends episode in which Russ told Ross "You could not be more wrong. You could try but you would not be successful."
