When investors lose confidence in the people overseeing their companies, they can submit proposals to try to effect the changes they think are necessary. Such proposals are voted on at companies’ annual meetings, and if a majority of the votes are cast in favor the requested changes, companies will very often put them into effect.
That is what happened at Wells Fargo in 2013. Then, as now, the New York City pension funds were among the bank’s shareholders. Unhappy about the company’s narrow policy on clawing back executive pay, Mr. Liu submitted a proposal urging the company to expand it. Under its policy at the time, Wells Fargo would recover executive pay if it had been received as a result of fraud or misconduct or had been based on materially inaccurate financial statements or performance measures.
Mr. Liu wanted to widen Wells Fargo’s clawback net. His office submitted a proposal to the bank that would require it to recoup pay from executives whose conduct caused financial or reputational harm to the company. The suggested policy also stated that recoveries would not be limited to those who committed the misdeeds; they would also reach up the line to superiors.
Wells Fargo agreed to change its policy in line with the comptroller’s proposal, so it was never put to a shareholder vote.
Fast-forward to 2016. After the bank had paid $185 million to settle investigations into the phony account-opening mess, the current comptroller, Mr. Stringer, wrote to the Wells Fargo board, urging it to recover pay from Mr. Stumpf and Ms. Tolstedt. The amount that should be clawed back, according to the comptroller? Combined earnings of $60 million.
Days later, the company secured precisely that recovery.
If the Financial Choice Act had been law — which it still is not, for now — it would have required any shareholder seeking to change a company’s policies to own far more shares than even a big institutional investor like New York City’s pension funds. Under the bill, a shareholder would have to own at least 1 percent of a company’s shares for three years to get a proposal on a proxy ballot. Currently, an investor must only own $2,000 worth of stock for a year or more.
One percent may not sound like much, but it can be enormous. Consider Exxon Mobil. It has 4.2 billion shares outstanding, so the 1 percent threshold would mean an investor would have to own 42 million shares, worth $3.4 billion, to be able to submit a proxy proposal.
Exxon Mobil has throngs of institutional investors, but only the top seven holders would meet the threshold. And many of these institutions — such as Vanguard, BlackRock and State Street — have been unwilling to challenge company management historically, exactly what submitting a shareholder proposal involves.
Even a shareholder with the clout of Mr. Stringer would be shut out of the proposal process: The pension funds he oversees typically hold 0.5 percent of a company’s shares at most.
Mr. Stringer said the Financial Choice Act is designed to silence shareholders. “Shareholder proposals have long been laboratories for reform,” he said in an email. “We’ve used them for decades to protect our investments by strengthening accountability, promoting diversity and protecting human rights. This bill undercuts investors’ ability to act, and it’s simply wrong.”
The Choice Act would make it downright impossible for small investors to be heard. And yet, their voices can identify important corporate problems that others have missed.
Cornish F. Hitchcock, a litigation and securities lawyer in Washington, cited the anti-apartheid efforts in the 1980s as an example. Back then, proposals put forward at United States companies doing business in South Africa pressed for the adoption of principles defining minimum human rights and employment standards.
“None of those proposals ever got more than about 20 percent of the vote,” Mr. Hitchcock said, “but the ability of small shareholders to raise the issue forced companies to look at what they were doing and to answer to their shareholders, as well as the general public.”
A new academic study confirms Mr. Hitchcock’s appreciation for the role that small shareholders can play in shaping corporate behavior. It shows that large investors often embrace the policy corrections proposed by smaller shareholders.
The paper, titled “What Else Do Shareholders Want? Shareholder Proposals Contested by Firm Management,” is by three academics at the Harvard Business School: Eugene Soltes, an associate professor of business administration; Suraj Srinivasan, a professor in accounting and management; and Rajesh Vijayaraghavan, a doctoral student. They studied nearly 5,000 shareholder proposals submitted from 2003 through 2015 that corporate managers had sought to suppress by excluding them from the agenda items investors would be voting on.
The 1 percent threshold for shareholder proposals in the Financial Choice Act implies that ideas submitted by smaller shareholders are less effective or successful, Mr. Soltes said in an email. But the research disproves that.
“Obviously, there are some frivolous proposals issued by some small shareholders,” he said. But “the idea that bigger shareholders create ‘better’ proposals is not supported by empirical data.”
More broadly, the study points to why the Choice Act, which aims to reduce financial regulation, focused on shareholder proposals. It concluded that “managers often seek to avoid the implementation of legitimate shareholder interests” and that larger companies with worse performance and fewer institutional investors are more likely to contest shareholder proposals.
At least one group is thrilled that the Choice Act will defang shareholders: the Business Roundtable, an association of big-company C.E.O.s. In a news release after the passage of the bill in the House, the group hailed the legislation’s “review and modernization of the shareholder proposal process.” This review, the Roundtable said, “will help companies concentrate more effectively on investment, innovation and economic growth.”
Listen to shareholders? Better to tune them out.
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