WALL STREET JOURNAL.
SEC’s Clayton Urges Review of Shareholder Voting
regulator questions activist investors’ use of proxy system
Securities and Exchange Commission Chairman Jay
Clayton testifies during a House Financial Services Committee on
Oct. 4, 2017. PHOTO: BILL CLARK/ZUMA PRESS
Updated Nov. 8, 2017 11:41 a.m. ET
NEW YORK—The Trump
administration’s top securities regulator on Wednesday urged a review
of how shareholders weigh in on public companies’ executive pay
proposals, board of director nominees and contentious issues raised by
Securities and Exchange Commission Chairman Jay Clayton told a
New York legal conference that retail-investor participation in such elections
is so low that it “may be a signal that our proxy process is too cumbersome and
needs updating.” Mr. Clayton, who took over the commission in May, said he would
seek public input on how to overhaul the proxy-voting system.
Mr. Clayton, a political independent, called out one particular
weapon in the proxy tool kit: shareholder proposals. Under SEC rules,
shareholders who own at least $2,000 worth of company stock can submit
corporate-governance proposals for a vote. Stock-exchange operator
Nasdaq Inc. and many public companies say
that low threshold allows dissident shareholders and critics to impose proposals
on the entire investor base.
“Shareholder proposals can gain traction and lead to corporate
governance changes that better track the long-term interests of Main Street
investors,” Mr. Clayton said at the annual Institute on Securities Regulation
event. “They also create costs, including out-of-pocket costs and the use of
board and management time that otherwise could be devoted to operation of the
Proxy voting is also used by activist hedge-fund managers seeking
to shake up the strategies or boards of firms whose shares they own. William
Ackman, for instance,
lost his bid this week for three seats on
the board of
Automatic Data Processing Inc., as ADP
investors on Tuesday re-elected the entire 10-person board at its annual
While fights between activist investors and companies capture the
attention of institutional investors, retail participation in many corporate
elections is low. While retail investors own 30% of all shares issued by public
companies, less than a third of those shares voted, Mr. Clayton said Wednesday.
Votes on shareholder proposals are only advisory, yet companies
have long resented small shareholders’ ability to draw attention to pet issues.
“The current shareholder proposal process is dominated by a
limited number of individuals who file common proposals across a wide range of
companies but own only a nominal amount of shares in the companies they target,”
the Business Roundtable wrote in a report this year.
Nasdaq Chief Executive Adena Friedman, in a
Wall Street Journal op-ed earlier this year
said the proposals are a costly hassle to public companies. She wrote that
Nasdaq supports a legislative provision written by House Republicans that would
raise the threshold to 1% of a company’s shares.
Last year, 36% of all shareholder proposals that got a vote were
sponsored by individual shareholders—the type of investor whose activity would
most clearly be affected by the Choice Act—according to data from ISS Analytics,
the data arm of Institutional Shareholder Services Inc.
Many of the proposals are sponsored by so-called gadflies—critics
who often use small stakes to push for changes at companies—and the measures
often pass. Individual investor John Chevedden, for instance, has sponsored 91
proposals since 2007 that garnered more than 50% support, ISS data shows. The
average rate of support for his proposals was 39%.
The SEC hasn’t weighed in on the Republican proposal to raise the
bar to 1%. Mr. Clayton said he supports rules that allow shareholder proposals
but acknowledged the debate divides investors and companies. He is “searching
for a way to reconcile the multiple positions and find common ground,” he said.
Mr. Clayton said the SEC is separately looking at ways to improve
disclosures that investors receive from mutual funds and brokers about
transaction and advice fees. The SEC has recently brought enforcement cases
SunTrust Bank and other companies for
selling more expensive mutual-fund share classes to investors when cheaper
options were available.
Dave Michaels at