Public Comment Letter Opposing SEC's Proposed Restriction of Shareholder Rights

VIA ELECTRONIC DELIVERY TO: Rule-Comments@sec.gov

February 3, 2020

Vanessa A. Countryman
Secretary
U.S. Securities and Exchange Commission I00 F Street NE
Washington, DC 20549

Re: Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8                        

[Release No. 34-87458; File No. S7-23-19] Dear Ms. Countryman:

                       We write to provide comment on File No. S7-23-19 of the U.S. Securities and Exchange Commission (the “Commission” or “SEC”) in regard to proposed changes to Rule 14a-8 (the “Rule”) as contemplated in the Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-81 (the “Proposal” or “Release”) as submitted to the Federal Register on November 5, 2019.

                       Newground Social Investment2 (“Newground”) was the nation’s first Social Purpose Corporation and the country’s second exclusively SRI/ESG focused Registered Investment Advisor (“RIA”). Since 1994 we have served as a legal fiduciary in managing assets for individual and institutional investors; and over the course of twenty-five years we have filed many hundreds of shareholder proposals on behalf of individual clients. The undersigned is also a past Governing Board member of the Interfaith Center on Corporate Responsibility (“ICCR”), whose members represent more than $500 billion in invested capital.

                       Through its work on behalf of individual clients, Newground reviews the financial, social, and governance implications of the policies and practices of publicly- traded companies. In so doing, we seek insights that enhance profitability while also creating higher levels of environmental, social, and governance wellbeing. The data supports a view that good governance and enlightened social and environmental policies are hallmarks of the most profitable companies.

–––––––––––––––––

(A)
Overview

We are deeply concerned about this amendment proceeding because it appears that the Commission has been led into a process of evaluation under false pretenses. Specifically, the SEC’s review appears to be in response to the loud demands and errant assertions both made and orchestrated by the Business Roundtable (“BRT”), the U.S. Chamber of Commerce (“CoC”), and the National Association of Manufacturers (“NAM”) (or, collectively, the “Troika”).                        

Each of these entities acts with a demonstrable conflict of interest – both in regard to this matter, and in respect to the true Main Street constituency that the SEC is mandated to serve. To our knowledge, no request from any investor prompted this amendment process – which would make it solely the child of pressure to advance corporate interests to the detriment of investors both small and large.

As published 1/31/2020 by Jon Hale, the Global Head of Sustainable Investing Research at Morningstar:                        

Neither rule is being demanded by investors. Both emerged out of the right-wing DC swamp of corporate lobbyist/trade organizations that are closely allied with the three Republican SEC commissioners...³

Other than the shadowy swamp groups in the background, the rules are not being pushed by any identifiable group of investors, big or small.³

As an historical point of relevance, the BRT-CoC-NAM axis attempted a similar Rule 14a-8 coup in 2017, that time orchestrated through The Honorable Jeb Hensarling (R), Chairman, of the House Committee on Financial Services, then in the guise of the so- called Financial CHOICE Act of 2017, whose discredited “Section 844” took similar aim against the rights of small, individual, and Main Street investors as do the purported ‘reforms’ put forth in this Proposal.

Fortunately, reason prevailed in 2017 and the axis failed in their efforts; however, distasteful ideas die hard when they benefit a narrow class of moneyed elites bent on self-advantage, so we witness now the resurrection of these discredited and unsavory policy ideas.

 In this regard, the Troika and other proponents of these changes are like foxes that clamor for removal of the safe shelter of the hen house. Theirs are self- serving voices that should be looked at askance, if not dismissed outright.

In stark contrast to the Troika and their dependents, a preponderance of the individuals, academics, investors, institutions, and investor organizations who have thoughtfully contributed to the comment record4 of this Proposal have missions that are aligned with – and serve clients or members who actually are – the very Main Street investors that the SEC has a legal mandate to serve and protect.

These are the voices that need to be listened to. This Release ignores those voices, their legitimate concerns, and the mounting body of evidence that this Proposal is both ill-conceived and unwarranted.

(B)
Misleading Language

                       In this debate, an oft-repeated assertion is that the Rule is antiquated and in need of reform... alleged evidence being that it has not been substantively “revised” for some time. However, use of the word “revised” is misleading because it distorts and ignores the fact that the Rule has been repeatedly reviewed over the decades and always found: (a) to still serve a useful and vital purpose, and (b) to operate in an efficient and serviceable way – particularly in regard to the $2,000 ownership threshold, the 1-year length of ownership threshold, and the 3%-6%-10% resubmission thresholds.

                       The fact is that the Rule has been repeatedly evaluated and found to not require revision. Supporters of the proposed changes conflate the meaning of “review” with “revise”, and create a false impression that the Rule has never been examined or evaluated.

• In truth, the fact that the Rule has been the subject of frequent examination and review over the decades but not substantively revised is a source of both recurring and compelling evidence that, as it stands:
  • The Rule has utility, importance, and fulfils a necessary role.
  • The Rule’s operating structure and procedures are inherently sound.                        

                       There is no need to revise the existing rules that govern the shareholder engagement and proxy process. In so stating we concur fully with the Council of Institutional Investors (“CII”) who do not mince words about this ill-conceived Proposal:

                          CII strongly opposes the Release in its entirety.⁵

–––––––––––––––––

(C)
Benefits of the Current Rule 14a-8

                       The Rule 14a-8 shareholder engagement process is a key stockholder ownership right which, for the vast majority of investors, is the only practical means of communication – whether with a company or with other investors. The Rule is a nuanced, thoughtful, and highly polished set of processes and procedures that well serve its original, intended, and proper constituency. What’s more, it has faithfully and appropriately done so for quite a number of decades now.

                       In our capacity as an RIA, Newground has filed many hundreds of Rule 14a-8 stockholder proposals on behalf of clients. Historically, roughly two-thirds of those proposals were withdrawn and did not go to a vote because the company in question agreed with the value of our observations and, of their own volition, took constructive steps – steps that they deemed reasonable, profitable, and broadly beneficial.

                       The Proposal does not contemplate the value that these withdrawn proposals represent to the companies involved and to investors at large, and they are not one- time benefits, but contributions to corporate profitability that recur year-after-year.

Case Studies #1, #2: Starbucks | Proctor & Gamble

Case Study #3: McDonald's

                       A rough estimate of potential savings, though relating only to chemical inputs alone, is $6,534,389/year.9 While difficult to quantify precisely from a vantage point outside the company (though the SEC could readily approach McDonald's for details), this impressive figure leaves uncounted a massive array of additional distributed benefits that would naturally derive year-after-year as a result of reducing:

1. Farmworker exposure to toxic reagents, and lowering their associated healthcare costs.
2. Toxic runoff from fields into the environment generally, but especially into water aquifers which then necessitate the construction and ongoing maintenance of local and municipal purification plants and system.                           
3. Exposure to toxic chemicals for the roughly 62 million customers each day that visit McDonald's who (if they consume anything with potatoes, lettuce, tomatoes, onions, or apples) enjoy more healthy and life-prolonging meals than they did before Newground filed its shareholder proposal.                         

Let’s not be ridiculous. This won’t be a taking from our company (Newground represented shareholders, the rightful owners of DuPont), because no one is suggesting that those two pieces of dredge mill equipment go idle, simply that they be relocated to operate there for the next 50 years instead.

Now, Mr. Tebo, you say this project will generate hundreds of millions of dollars, but that’s over a 50-year span. Simple math: those earnings divided by fifty, in relation to our company’s $45 billion/year gross revenue, show the project to represent less than 2/100th of one percent of annual gross revenue – and that’s gross, not even net. Yet, because the Okefenokee is an internationally known gem, if you harm the Okefenokee it has the potential of damaging DuPont’s brand and reputation across every single one of our product lines.

So, you’re telling me that for 2/100ths of a percent you’re willing to risk DuPont’s entire brand reputation, across every single one of its product lines, when that 2/100ths can be earned elsewhere simply by picking up the equipment and moving it? As shareowners, that just doesn’t make good economic sense to us.

I added: “Critical to accomplishing this is to permanently retire the mining rights on the Trail Ridge so that this area is never mined in competition to our company.” 

                       Following that, Paul Tebo never attended another meeting. The company swiftly moved to donate 16,000 acres of land to conservancy, and relocated its strip- mining operation. Called “the largest land conservation gift in Georgia state history”, the outcome saved the Okefenokee and brought such repute to DuPont that the company voluntarily donated $5 million to create a world-class research and education center in Folkston, GA at the gates of the National Wildlife Refuge.

                       To conclude on the DuPont case study, this example highlights the benefits of not doing, versus doing. While it’s not possible to conclusively determine the extent of value generated by the shareholder proposal’s idea that DuPont should be seeking alternative outcomes, there are numerous examples where a PR disaster caused precipitous – even double-digit – percentage drops in a company’s stock price.

                       Even more troubling, reputational harm can lead consumers of all stripes to permanently avoid using a company’s products and services; think of Nike as just one prime example. If avoiding a highly negative Okefenokee-related incident prevented 1% of sales from going elsewhere, that equates to an ongoing $45.0 million per year benefit – involving a single company, on just one issue.                        

Case Studies: Conclusions

1. Rule 14a-8 shareholder engagement activities contribute – in purely financial terms – far more to companies, investors, and the U.S. markets than even the most inflated corporate/Commission estimate of the supposed ‘benefit’ of curtailing Rule 14a-8 activity.
2.                            
3. Because shareholder engagement contributes so vitally, it is clear beyond cavil that the U.S. capital markets should not be subjected to any curtailment of Rule 14a-8 shareholder engagement activity.                             
4.                            
5. The benefits of Rule 14a-8 engagement activity extend far beyond the dollar savings figures shown – they advance the wellbeing of workers, communities, the environment, and society at large.

–––––––––––––––––

38 Studies

                       A leading scholar and researcher in the space is Julie Gorte, Senior Vice President of Sustainable Investing, Impax Asset Management | Pax World Funds. At our request she identified 38 discrete studies, dating back to 2004, which have identified and cataloged the linkage between ESG and profitability, and between a company’s ESG characteristics and its ability to attract and retain top talent (studies listed in Exhibit B).

In previous work, we found that Glassdoor ratings were effective signals of social scores within an Environmental, Social and Governance (ESG) framework. Here we find that employee ratings can lead to better risk-adjusted returns. Stocks with high ratings would have outperformed those with low ratings by almost 5ppt per year from 2013 to 2018              

Extracting Alpha from Glassdoor (2019)
Savita Subramanian, Toby Wace, James Yeo, Jill Carey Hallo, Alex Makedon, Jimmy Bonilla and Ohsung Kwon (38)

Prior research provides evidence that gay-friendly corporate policies... improve employee recruitment and retention, make gay employees feel more welcome and accepted in the workplace, and enhance consumer perception. In addition, investors view the adoption of such policies positively.

...we find that (1) the presence of gay-friendly policies is associated with higher firm value and productivity, (2) firms implementing (discontinuing) these policies experience increases (decreases) in firm value, productivity, and profitability, and (3) the firm-value and profitability benefits associated with gay-friendly policies are larger for companies with demand for highly skilled labor.

Do Gay-Friendly Corporate Policies Enhance Firm Performance? (2013)
Janell L. Blazobich, Kirsten A. Cook, Janet H. Huston and William R. Strawser (14)

...companies with the highest percentage of engaged workers had a 19% increase in operating incomes and a 28% increase in earnings per share. On the other hand, over the same year period, companies with the lowest employee engagement rates showed a 33% decline in operating incomes and an 11% decline in earnings per share.

Engaged Employees Equal Increased Earnings (2007)
Anne Moore O'Dell (8)

“ESG Why It Matters” a Merrill Lynch treatise

Employee Activism on the Rise

(F)
Small Votes are Not Small Potatoes

                       By broadly eliminating or significantly postponing the right to file shareholder proposals, the Release would eliminate or condition the ability of essentially any shareholder to offer ideas to or posit valid observations about companies, their activity, the inadvertent risk that may attend their activities, or the opportunities they may be failing to capitalize on.

                       In more than two decades, not once has a Newground shareholder client owned a value in shares that remotely approached 1% of a company’s capitalization – even when the undersigned represented a $70 billion State pension system. Thus, every one of the hundreds of shareholder proposals we have filed on behalf of clients during the past quarter century were enabled by the $2,000 provision of the existing Rule.

                       This history demonstrates the efficacy of the Rule 14a-8 process and the highly generative nature of the ideas that have been brought to companies’ attention by the existing procedures and protocols that define shareholder engagement.

                       A key takeaway is that the quality of a shareholder’s ideas bears no relation to the size or value of their stockholding.

                       To assert otherwise (which this Proposal clearly does by restricting small while facilitating large investors) – that only the wealthy can have worthwhile opinions – flies in the face of common experience, common decency, and our country’s most revered democratic ideals and assumptions about the innate equality of persons.

                       Less obvious, a second key takeaway is that the quality of a stockholder proposal’s ideas bears little relation to the size of vote outcomes.

                       In essentially every instance our experience has been that companies have found merit in shareholder thinking, which resulted in their taking constructive steps – even when vote outcomes were quite low – though in roughly two-thirds of the filings a meeting of the minds eventually occurred and the proposal was withdrawn before ever going to a vote.

                       At DuPont for example, described in Case Study #4 above, during the three year period of that engagement the resolution went to a vote only once, in the first year, and the vote barely cleared the Rule’s 3% first-year threshold. Yet, that engagement went on to be mutually beneficial and highly productive.

                       Only once during a 25-year filing history so far have we achieved an outright majority vote; in fact, in the vast majority of instances proposals have earned only single-digit or low-to-moderate two-digit outcomes. Many, if not most, of Newground’s most celebrated outcomes (which the companies involved celebrate too) would not have been possible under the imbalanced, capricious, and arbitrary restrictions the Release will place on shareholders.                                                        

(G)
Structural Bias Against Shareholders

There are nine (9) structural biases against shareholders that always result in reduced vote outcomes. Rather than create protection and relief for small stockholders, the Proposal would add additional strictures that further handicap Main Street investors. The baked-in biases that lower votes on shareholder items include:

1.                             
2.                                 

   Management,founders,anddescendantsoffoundingfamiliesoftenown, control, or influence sizable portions of stock. And ESOP plans – though owned on behalf of employees – are voted by management, typically as AGAINST all shareholder proposals.

                               
3.                            
4.                                 

   Itisreportedthatamajorityofindependentshareholdersrecycletheirballots and do not vote at all, which means the concentrated shares of management weigh more heavily on the voting scale.

                               
5.                            
6.                                 

   Themajorproxyreportingservices(thesubjectofanequallyill-advised rulemaking proposal) routinely recommend AGAINST shareholder proposals in their first few years of introduction until they have a chance to become familiar with the new topic or issue.

                               
7.                            
8.                                 

   Proxyballotsoffermultipleopportunitiesto“votewithmanagementonall items” (which will be AGAINST any shareholder proposal). If a shareholder doesn’t do that, there is an additional management or Board exhortation at each individual item to vote AGAINST shareholder-sponsored items.

                                  

   Shareholders who don’t have time to study the proxy will often take the easy path and (conditioned by #7 below) side with management by default.

                               
9.                            
10.                                 

    Ifaninvestormarksanyoneitemontheproxybutleavesotheritemsblank, management will vote the blank items in its favor. If there’s anything the shareholder is unsure of or would like to ABSTAIN from or not express an opinion on, more often than not (because of this provision #5 in conjunction with #6 below) that vote will get counted as management wants.

                                
11.                            
12.                                 

    UnderDelawareStateLaw(andinotherStates),companiesareallowedto choose how votes are counted, i.e., which formula to use. When companies include ABSTAIN votes in the formula for shareholder proposals, it automatically lowers the vote outcome.

                                   

    Newground has studied nearly 100,000 votes taken since 2004 and found more than 100 proposals which won a true majority when just FOR and AGAINST were counted, but which ‘failed’ when under the company’s variant formula that included ABSTAIN votes in the tally.

                                                                            

    7.                             
    8.                                 

       Investorstypicallypurchasestockbecausetheytrustorhaveconfidencein management; thus, management enjoys a decidedly powerful ‘bully pulpit’ when it comes to recommending a vote AGAINST shareholder items.

                                      

       Only an intrepid or particularly dedicated shareholder will conduct enough study on a proposal or issue (especially if it’s a new topic) to actively support it in the face of management’s repeated recommendations to vote AGAINST.

                                   
    9.                            
    10.                                 

        Shareholders are strictly limited to 500 words in writing their shareholder proposals, whereas a company is not limited at all in the length of its Statement in Opposition.

                                       

        This presents shareholders with limited access to information on the FOR side, but essentially an unlimited amount of information available on the AGAINST side. This asymmetry of information flow works to disadvantage shareholders.

                                    
    11.                            
    12.                                 

        Companies,beingprivytothecountasproxiescomein,caninitiateadditional proxy solicitations (at shareholder expense) to boost their edge.

                                       

        These go to shareholders who have not yet responded, who are the ones most likely to be busy or disinterested, and the ones most likely to choose marking a single box to vote with management on all items.

                                       

        In light of the numerous factors like these that inexorably work to hold

                                    
    13.                         

                           

    shareholder votes down, a seemingly small vote may in reality be deemed to be much larger – considering the factors above and how few shareholders are both independent and fully informed.

                           

     Votes that are consistently and systematically diminished due to a myriad of structural inequities such as these should not be doubly handicapped by the imposition of the unreasonably large ownership and resubmission thresholds this Proposal contemplates.

                           

                              –––––––––––––––––

                           

    (H) Representation and Agency

                           

    As a co-author and signatory to a January 27, 2020 letter on “Proposed Limitations on Representation of Shareholders”16 submitted jointly by Boston Trust Walden, the Treasurer of the State of Illinois, the New York City Comptroller, SHARE, As You Sow, Mercy Investment Services, the AFL-CIO, and Newground Social Investment17, we will not reiterate here all that was so ably presented in that comment letter, and commend it to the Commission for close scrutiny.                        

    However, we will add that throughout the investing marketplace investors necessarily, and by right, rely on and delegate to an array of agents the responsibility for implementing their intentions.

                           

    The ability to appoint an agent is a matter of state law. As such, it would constitute an inappropriate and gross overreach were the Commission to encroach on state law by placing artificial constraints on the wide latitude a property owner righty enjoys to appoint others in the disposition of his or her interests. The Commission’s design, as outlined in the Proposal and if implemented, could clearly be defined as an act of tortious interference.

                           

     What is absurd, imbalanced, and grossly unfair about the Release’s proposed limitations on shareholder agency is that companies are granted a free hand to hire outside counsel or agents – of any description, in any number, at any time, for any purpose, and at any cost (while spending shareholder dollars to do so).

                           

                              –––––––––––––––––

                           

    (I)
    In Closing

                           

    We appreciate the opportunity to comment, and stand ready to provide further input or to answer questions that may arise.

                           

    Shareholder proposal Rule 14a-8 was established by the SEC to allow individual investors to participate in corporate governance matters involving the companies they own. The process has evolved over seven decades to represent an important element of value in the bundle of rights that are associated with share ownership.

                           

    The Rule was created to support the ownership interests of all shareholders – but especially those of minority shareholders. It has created an efficient means by which shareholders can communicate with each other, and for corporate management teams and Boards to hear from and to address shareholder concerns as they may relate to sustainability, risk mitigation, equity, and good-governance issues.

                           

    The Rule can be viewed as a pinnacle of collective achievement which reflects many years of SEC and other stakeholder deliberation, guidance, and use. It now stands as an important, well-functioning, and integral process for ensuring corporate democracy.

                                                           

13. 
    

                                                                            

    In stark contrast, this Release represents a radical and dramatic departure from these established, vetted, and well-functioning norms. It would impose capricious and arbitrary new rules that would interfere with critical shareholder rights, hobble the existing Rule, and dim its high purpose and investor-focused intent. It would limit company share owners – especially small Main Street investors – in the free exercise of fundamental rights that should rightly attach to their share ownership.

                           

    In addition, the Proposal would constrict the future free flow of a panoply of benefits that historically have served a wide array of stakeholders. The existing proposal process has catalyzed thousands of constructive engagements with companies – engagements whose tangible benefits have accrued to shareholders, corporations, and society at large.

                           

    Multiple aspects of the Release would radically and dramatically interfere with important shareholder rights and significantly weaken the role investors now play in the good governance of U.S. companies. This, in turn, could jeopardize long-term value-creation, and undermine the collaborative relationship of trust that exists between capital providers and capital recipients – perhaps eroding support for the capital markets themselves.

                           

    Therefore, in light of all this, we respectfully urge the Commission to reject the Release, and to oppose any attempt to modify, limit, supplant, or weaken the SEC shareholder proposal rule, Rule 14a-8. Thank you.

                                                                                                                    

    S

                                                                   

    i

                                                                   

    nc

                                                                   

    e

                                                                   

    r

                                                                   

    e

                                                                   

    l

                                                                   

    y

                                                                   

    ,

                                                                                                   

    S

                                                                                                   

    i

                                                                                                   

    n

                                                                   

    c

                                                                                                   

    e

                                                                                                   

    r

                                                                   

    e

                                                                   

    l

                                                                                                   

    y

                                                                                                   

    ,

                                                                                                                                     

    Br

                                                                   

    u

                                                                   

    c

                                                                   

    e

                                                                   

    T. H

                                                                   

    e

                                                                   

    r

                                                                   

    be

                                                                                                   

    B

                                                                   

    r

                                                                   

    u

                                                                   

    ce

                                                                   

    T

                                                                   

    H

                                                                   

    er

                                                                   

    b

                                                                   

    r

                                                                   

    t

                                                                   

    ,A

                                                                                                   

    F

                           

    PS: I commend to the Commission’s attention two additional items:

                           

                                
    •                                 

        An in-depth briefing document: The Business Care for the Current SEC Shareholder

                                     

      Proposal Process18 and:

                                  
                               
    •                                 

        A joint letter19 from organizations representing $65 trillion in assets who oppose making any changes to SEC Rule 14a-8. The letter was written during an earlier assault on these very same Main Street investor rights by the very same cohort of actors: the Business Round Table, the U.S. Chamber of Commerce, and the National Association of Manufacturers.

                                  
                            

                           

    enc: Exhibit A, Exhibit B

                           

    cc: The Honorable Jay Clayton, Chairman
    The Honorable Robert J. Jackson, Jr., Commissioner The Honorable Hester M. Peirce, Commissioner
    The Honorable Elad L. Roisman, Commissioner
    The Honorable Allison Herren Lee, Commissioner