Last Wednesday, the House Financial Services Committee focused its attention on shareholder proposals in a hearing titled, “Proxy Power and Proposal Abuse: Reforming Rule 14a-8 to Protect Shareholder Value.” In his opening remarks, Committee Chairman French Hill set the table for the hearing:

Good morning. As our securities laws were being considered during the Great Depression and years after, corporate governance policymakers sought to ensure that stockholders had an active voice over any entrenched management, inattentive directors, or a controlling group.

The intent was that all stockholders could assert their ownership rights around key components of running the business and capital allocation.

Thus, while our proxy access process was originally designed to empower shareholders and provide them with a voice in company oversight, in recent years it has increasingly been co-opted by activist investors whose primary focus often lies, not in maximizing shareholder value, but in pushing narrow political, social, or personal agendas.

We have seen the shareholder proposal process diverted away from the critical business strategy and instead become a tool for advancing proposals that distract from companies’ missions, leading to an erosion of shareholder value and additionally costly burdens on companies that are working to navigate today’s complex business conditions and global competition.

As we examine the shareholder proposal process, we must also consider the role of proxy advisory firms on capital markets as a whole.

While these firms can offer some valuable perspective, over the past two decades, their influence on corporate governance and voting on particular shareholder proposals has grown significantly.

We must ask ourselves if these firms are fulfilling their intended purpose of serving in the best interests of shareholders or if they are distracting from the primary goal of enhancing long-term shareholder value.

Chairman Hill’s remarks went on to mention the SEC’s Staff Legal Bulletins 14L and 14M, noting how Staff Legal Bulletin 14L “shifted the focus of shareholder proposal review from the proposal’s relevance to a specific company to whether the proposed issue had broad societal impact.” The Committee issued a statement highlighting quotes from members of the Committee, as well as the witnesses that appeared before the Committee, which included: James Copland, Senior Fellow & Director of Legal Policy at the Manhattan Institute; Ferrell Keel, Partner, Jones Day; and Ron Mueller, Partner, Gibson Dunn & Crutcher LLP. Ron’s highlighted quote was as follows:

U.S. public companies of all sizes take shareholder relations seriously and welcome the opportunity to engage productively with their investors. But public companies also recognize that not all shareholders have the same priorities, and board of directors and company management have fiduciary responsibilities to act in the best interests of shareholders at large. Thus, one has to question why a single shareholder owning shares with a value of just $2,000 can initiate a process that imposes significant costs and, more importantly, diverts key company personnel, executives, and directors from other business activities, which costs and consequences are borne by all of the company’s shareholders. Moreover, the nature of shareholder proposals being submitted to companies in recent years have changed significantly from the proposals submitted in prior decades. Shareholder proposals no longer are primarily focused on corporate governance issues or on providing information or input on important business activities, but instead increasingly are crafted by special interest groups focused on narrow policy issues or specific outcomes, without regard to whether or how companies may already be addressing the issue, or to other considerations that may be more significant and consequential.

As John shared over a week ago, the SEC’s Spring 2025 Reg Flex Agenda includes a proposed rulemaking called “Shareholder Proposal Modernization.” It is unclear at this point what role Congress might play in Rule 14a-8 reforms or the SEC’s regulation of proxy advisory firms.

– Dave Lynn