SEC proposes curbing shareholder power

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Over the past 15 years, a series of shareholder resolutions have helped force Nike to monitor labor conditions in its international supply chain. And shareholder resolutions have persuaded corporations, including Tyco and American Electric Power, to cut back on greenhouse gas emissions.

But the SEC has proposed curbing these non-binding shareholder resolutions after a Sept. 2006 decision by the U.S. Court of Appeals for the Second District in New York spurred the agency to clarify a rule on whether shareholders can pass resolutions to nominate a person for a company’s board of directors. As a result of the court’s decision, the SEC drafted two proposals. The first would prevent such nominations. The second would allow them—but only with extensive restrictions. In the document explaining these proposals, SEC commissioners also discussed changing the way with which shareholder resolutions are dealt.

“From a legal point of view, the [SEC’s document] is not a formal rule proposal,” says Domini Social Investments General Counsel Adam Kanzer. “But you have to take this seriously because it means the SEC is considering something and the next step might be a formal proposal.”

On Nov. 28, 2007, in a 3-1 party line vote, the SEC blocked investors from nominating board of director candidates. The vote did not deal with the proposed revisions to the shareholder resolution process, so it remains unclear whether commissioners will keep that proposal on their agenda. Socially responsible investment leaders say they are watching carefully to see if the SEC will return its focus to shareholder resolutions this spring.

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Along with targeting deforestation, sweatshops, greenhouse gas emissions, investment in oppressive regimes and other such issues, non-binding shareholder resolutions can address corporate governance issues, including creating transparency, non-discriminatory hiring, and capping CEO salaries. Many times, a company may agree to change its policies to avoid having a resolution included on the proxy statement for its annual meeting.

But in the SEC’s recent proposal, the agency suggests allowing corporations to “opt-out” of allowing non-binding advisory shareholder resolutions.

“The companies that don’t want to be held accountable would be the ones to opt-out,” says Tim Smith, chairman of the Social Investment Forum, a nonprofit organization whose members include hundreds of banks, mutual fund companies, analysts, and other financial professionals and institutions.

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