September 24, 2025 • 32 mins
Shareholders aren’t financial investors, but actual owners of a company. They have several tools at their disposal to push corporate leaders to focus on long-term sustainability of the business: electing the board of directors, voting on routine matters, or even submitting proposals for other shareholders to vote on. But are these shareholder rights a strength of capitalism, or are executives spending too much time engaging with a wide range of shareholders and not enough time on their day jobs? On this week’s episode of ESG Currents, Bloomberg Intelligence Senior ESG Analyst Rob Du Boff speaks with Sanford Lewis, director and founder of the Shareholder Rights Group and a leading national expert on shareholder proposals.
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Episode Transcript
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Speaker 1 (00:09):
ESG is constantly evolving. Over the years, it has shifted
from socially responsible investing to impact to sustainable finance. While
the terminology continues to change, but hasn't changed are the
underlying science, market pressures, and tangible physical and financial impacts
of the climate crisis, increasing regulatory scrutiny, and rising consumer expectations.
(00:31):
We aim to filter out the noise by speaking with
industry experts to identify what is really driving value. Welcome
to ESG Currents. I am Rob Dubof, Senior ESG analyst,
your host for today's episode. We've done several episodes now
on investment stewardship. This idea that shareholders are not just
financial investors in a business, but are actually owners. That is,
(00:54):
it's in their best interest to want managers to focus
not only on next quarter's earnings, but on the long
term health of the business. And as a shareholder, they
usually have the right to elect the board of directors,
vote on routine matters, or even submit proposals for other
shareholders to vote on. But are these shareholder rights as
strength of capitalism or are corporate managers spending too much
time engaging with a wide range of shareholders and not
(01:17):
enough time on their day jobs, as many business leaders
and the Trump administration now claim. Joining us this week
to discuss is Sandford Lewis. He's director and founder of
the Shareholder Rights Group, a leading national expert on shareholder
proposals and corporate duties of disclosure of environmental and social issues,
and securities filings. He's an attorney with over forty years
(01:38):
of experience in public policy related issues, including environmental law,
securities law, and public policy campaigns. Thank you for joining us.
Speaker 2 (01:47):
Thanks very much for having me honored to be here.
Speaker 1 (01:49):
Let's start with a basic question, why are shareholder rights important?
Does it really matter as long as the stock just
goes up?
Speaker 2 (01:56):
Well, the right to file and vote onareholder proposals is
an important right of investors as owners of public companies.
It's one of the main ways, especially on ESG matters,
that investors can provide focused feedback to their companies. So
you know, you mentioned that shareholders have a right to
of course vote on board elections, and that's an up
(02:20):
and down vote on individual directors. In contrast, votes on
shareholder proposals let companies know what issues sholder their shareholders
believe are important whether it's effective governance or future fitness,
and what forms of improvement are needed, such as better
disclosure or targets or policy changes. Proposals have actually been
(02:40):
a leading tool for advancing governance and boardroom accountability on
oversight of environmental and social issues and led to widespread
adoption of sustainability reporting, governance reforms like independent board chairs,
and improving the ability of shareholders to call special meetings.
An important opportunity for shareholders to present a five hundred
(03:03):
word proposal to fellow shareholders, but there are numerous obstacles
that stand in shareholders ways to do so that we
can get into more as we discuss.
Speaker 1 (03:12):
Yeah, so I was going to say that the last
decade or so, I've really seen a surgeon shareholder proposals,
particularly those focused on environmental and social issues. By our account,
proposals were up almost fifty percent from twenty twenty to
twenty twenty four when we looked at the Russell three thousand.
But then we started to hear complaints things went too far.
(03:33):
We went from seeing high level proposals on sustainable business
strategy to calls for very specific actions. Jamie Diamond, for example,
is constantly calling them a nuisance and shareholder meetings a
waste of time. So what do you say.
Speaker 2 (03:47):
To that, Well, we are hearing attacks and you know,
this is a cyclical process. It's happened over the years.
There are always complaints about the process by some of
the business trade associations and corporate lobby groups. Currently, the
typical mantra that he here is that the process is
being hijacked by activists or that it's forcing companies to
(04:10):
take public positions on so called political issues. But you know,
shareholders who vote in favor of the proposals are the
best gauge. And the truth is that market data as
well as the voting outcome show that there still is
a substantial amount of support for the shareholder proposal process
(04:33):
and for particular proposals.
Speaker 1 (04:36):
So can you explain for our listeners exactly what role
does the SEC play in determining how many shareolder proposals
actually reach the proxy?
Speaker 2 (04:44):
You know, the SEC has a long process, has gone
through a long process since the nineteen forties in developing
and refining this process for shareholder proposals. Back in the forties,
any shareholder with one share could fly a shareholder proposal.
Then years later it went up to one thousand dollars
(05:06):
and shares held for a year, and then two thousand
dollars held for a year. And so the SEC periodically
revises its rules, and the SEC also has you know,
staff legal bulletins that provide guidance on how to interpret
its rules. But there are you know, there are a
set of thirteen different exclusions that can trip up proposals,
(05:29):
things like is the proposal relevant to the company, is
it based on a personal grievance, does it micromanage, does
it duplicate other proposals, et cetera, does it violate state
law for instance? So there are lots of different aspects
of the SEC rules that that can can block a proposal.
Speaker 1 (05:50):
So then maybe walk us through what happens so far
this year at the SEC and how it affected corporate proxies.
Speaker 2 (05:57):
Well, I think actually it might help to backwards because
you were talking about that the growth of proposals from
twenty twenty to twenty twenty four. And it's true that
under Chairman Gensler ESG proposals were somewhat encouraged by a
prior staff Lego Bolton staff Lego Bolton fourteen L and
then under the current administration, they basically repealed that staff
(06:22):
legal bolton in a new bulletin fourteen m and this
bulletin was adopted in the middle of the proxy season,
which meant that the shareholder proposals had already been written
and presented and the rules were changed mid season, which
was kind of shocking to the proponents, and as a result, companies,
(06:46):
based on the new bulletin that was issued in February,
companies started to submit a bunch more no action requests.
They were up thirty four percent from the prior from
twenty two twenty four and as a result, there was
I think probably a record number of exclusions allowed. It's
(07:10):
actually the same rate of exclusion fifty five percent exclusion,
but of the requests made, about fifty five percent were granted.
Let me give you a couple examples of how the
new interpretations changed the rules in ways unfavorable to proposals.
A proposal at PEPSI that focused on serious human rights
(07:31):
issues in the supply chain of its India franchises was
blocked this year because PEPSI didn't deny the serious concerns
about coarse labor or forced hysterectomies in the workforce of
sugar suppliers, but instead said that these issues are managed
by India franchisees and it shouldn't affect the parent company
(07:53):
with its arms length or relationship. It seems to me
there are a lot of historical analogies that show that
such concerns can indeed to implicate the parent but in
any event, the SEC allowed the proposal to be excluded.
Another example is that the rule. The rule itself says
that shareholders should ask as clearly as possible what actions
(08:14):
they want a company to take in their proposals, but
the new interpretation of micromanagement tells shareholders to be quite differential.
Asking a company to align its emissions with the Paris
Agreement or eliminate deforestation in supply chains, you would phrase
the proposal as whether and how they will do so.
(08:37):
The trouble is, once a company has more or less
stated that it doesn't intend to align with Paris or
eliminate deforestation, that formulation whether and how won't survive a
substantial implementation challenge because they've already said they don't intend to.
But there were so many more requests made because they
were sending a clear signal that they were open to
(08:59):
excluding proposals, So so that did to a bunch more exclusions.
Most of them were excluded as ordinary business being the
typical exclusion, and you know under next under that was
procedural type of exclusions.
Speaker 1 (09:18):
Yeah, so I guess first clarifying the so the no
action letters, those are for those who don't know, that's
the process by which the you know, a company can
go to the the SEC and ask them to kind
of weigh in on whether whether the proposal violates those
thirteen rules we talked about. And then you know, certainly
(09:39):
the ordinary business I think, you know, the crux of
that is really as I understand it is, you know,
there's only so much a proponent can can weigh in on.
I mean, you can't go to, you know, a restaurant
company and say you need to start serving this right,
it has to be can't be impeding on ordinary business.
(09:59):
But where that line is is really kind of an
uncertain area.
Speaker 2 (10:04):
It's always been an area that's been subject to a
great deal of debate. There's really two parts to it.
One is is the subject matter one that transcends ordinary business,
So you know, climate change being an example of a
subject matter that transcends ordinary business. And then secondly, does
it try to micromanage the company? Is it too specific
(10:25):
in regrest so yet I'm on climate change, but maybe
you know, asking a company to install low flow shower
heads to address a part of their impact on climate
change or environment would be too detailed or too prescriptive,
and ask got it?
Speaker 1 (10:44):
And then one trend I've observed recently is the rise
of so called anti ESG proposals. Is this a new phenomenon.
Speaker 2 (10:52):
It's not a new phenomenon. There have been as long
as I've been in this field, and it's been a
while now. They've always been a few proposals filed by
individuals trying to make the counter argument to the ESG proposals.
They very seldom gain any real support. But the what
(11:17):
what has happened is there's been a more organized effort
by the anti ESG proponents in the last few years
to file way more such proposals. So, so that is new,
the the growth in the number of proposals that are
being filed that take this anti ESG approach.
Speaker 1 (11:38):
Yeah, I think you know, the kind of the share
of proposals has you know, just risen astronomically in the
last couple of years. And then how does that tie
into what we've been talking about, is the fact there,
let's say flooding the zone. Has that had it any
bearing objections regarding the Shaholder proposal process.
Speaker 2 (11:57):
Well, I think it does. It helps to I think,
you know, it might be the reason for doing it.
They're trying to make it seem like the process is
politicized and by by filing these proposals, even though their
proposals you know, typically are getting like one and a
half percent support, not a big amount of support from
(12:19):
the market, but then they can I think flooding the
zone is a good way to talk about it. They
are creating enough noise that then the companies can say,
look how annoying this process is. And you know, I'd
be the last to say that they don't have a
right to file those proposals. I think it's important to
have a diversity of perspectives, and sometimes they come up
(12:41):
with proposals that you know, can win broader support. But
you know, if you look at if you look at
their it depends on how you're doing the math, how
you think about so Like I've seen some reporting that said, well,
the votes on es G proposals have gone down. They're
(13:02):
ten percent. But then you read you you look beneath
the data, and you realize that they're actually saying that
they haven't that they included the anti ESG proposals, So
it brings the average way down, whereas other reporting that
couts those separately, it would be twenty percent support typical
(13:24):
support for ESG proposals, which is still a substantial amount
of support. It's that's twenty percent is basically the amount
of support that you know, there's general agreement. If a
proposal is getting twenty percent support, it's something for management
to look at.
Speaker 1 (13:40):
Yeah, we've definitely noticed that skew, and you know, I
would concur that maybe that skew is part of the
point in submitting these.
Speaker 2 (13:47):
Yeah, maybe they're just trying to exhaust, you know, I
mean I think they're I think they're also just trying
to exhaust investors and companies with these anti ESG proposals.
Speaker 1 (13:57):
Frankly, Yeah, and a lot of them are also awarded
very particularly to maybe trip up someone who's not reading
too closely. Although to your point, you know, there were
a few of them that I think were kind of
more reasonable I don't know, maybe not reasonable as the
right term, but kind of how broader support around you know,
we saw some around AI this year.
Speaker 2 (14:18):
Online child sexual abuse is one that I think I
voted for myself. And there were some general corporate governance
proposals filed by some of the anti ESG proponents got.
Speaker 1 (14:33):
It moving on a little bit. We talked about what
the SEC is doing, But what other challenges are you seeing,
particularly from Congress or Republican States. Are you seeing a
lot of pushback on shareholder proposals and stewardship more broadly?
Speaker 2 (14:48):
Well, certainly there is you know, a pattern of attacks
on ESGE, of which you know, since the shareholder proposal
process is kind of a leading edge for moving ESG
issues forward. Uh uh, these various efforts are are you know,
(15:10):
attacking the shareholder proposal process as well? So you know
there are efforts in the courts. There have been these
letters to the asset managers from the State Financial Officers Foundation,
which is the Republican UH States Financial Officers. There have
been Congressional hearings. There was a hearing last week in
(15:33):
Congress on the shareholder proposal process. And they're all making
it seem like this interest in the long term and
in systemic risk in particular. These they want to make
it seem like these are not appropriate concerns for investors,
and investors shouldn't be looking to the long term, shouldn't
(15:53):
be looking to systemic risk. Things that are very much
part of the shareholder proposal process. And so it's it's
it's it's creating a challenging dynamic.
Speaker 1 (16:03):
It's what do they just say, it's just woke politicization
of the shareholder process. But I would concur that a
lot of it is focused on long term value of
a business. And I know, I think, you know, speaking
of Republican states, I know Texas is in particularly has
taken a very aggressive tack. I know, you know they're
(16:24):
trying to attract companies from Delaware. Can you maybe talk
about that that's so called dexit.
Speaker 2 (16:32):
Yeah, Well, the part that I'm most familiar with is
that there are two laws that were passed this year
in Texas. One of them allows a company that's both
incorporated in Texas and headquartered there or traded on a
Texas approved stock exchange to set a higher threshold for
(16:54):
filing shosals. Uh, you know, the existing threshold is two
dollars held for three years, or fifteen thousand held for
two years, or twenty five thousand held for a year.
That's the existing SEC thresholds. The threshold under the Texas
(17:16):
logan be a million dollars in order to be able
to file a proposal. And then there's another Texas law
that is directed toward proxy advisors that basically says that
any time you're and again it's like this is a
definitional thing that's happening in all of these laws is
that they're basically trying to define a way anything that's
long term, if it's uncertain, you know, investment risk, long
(17:40):
term investment risk. They're basically saying you can't take account
of that, and if you are, you have to say
that that's not financial, not literally not a pecuniary consideration.
So you know, there was just a temporary injunction issue
food against that in a lawsuit filed by Iss and
(18:04):
Glass Lewis over the proxy advisor's law. And you know,
it's very poorly written law.
Speaker 1 (18:11):
So I understand why smaller activists are not happy with
these actions and this pushback. But what about the big
ass managers which which may not be nearly as impacted.
I mean you mentioned the million dollar threshold. I imagine,
you know, a company like a large ass manager has
you know, million dollar stake in a lot of companies,
have they have they reacted to the explosion shareholder proposals
(18:34):
first of all, and are they concerned about the recent
efforts to curb them.
Speaker 2 (18:37):
Well, they don't file shareholder proposals, so they don't need
to because they have access to the companies first of all. Secondly,
they're under enormous pressure from the Republican states to vote
against shareholder proposals and and that pressure is working, so
so they, you know, are part of the backlash against
(18:59):
Shaholder proposal. At this point, they they don't say, oh,
we're doing it because we're voting against the proposals because
of the pressure that we're under, which would be maybe
too much of a concession for them. So instead they
say that the proposals are becoming too prescriptive or low quality.
And I don't think that's well, I think there's a
(19:22):
reason why proposals are maybe looking more prescriptive or more
specific these days, and we could talk about that, but
that's kind of the way it has gone. And certainly,
the top votes on sharold proposals have gone down because
these are big blocks of voting shareholders who are now
not supporting a lot of VSG proposals.
Speaker 1 (19:45):
Yeah, I'd love to be able to dig into that
idea of a more prescriptive proposal. I mean, certainly, some
of it's just a more natural evolution. If you know,
if you're first you're pushing a company disclose their Scope
one emissions, maybe you start asking for Scope three. But
then you know, I've certainly seen a few that are
maybe more prescriptive around things like you know, serving meatless
(20:08):
vegan meats in hospitals, for example, to reduce impact of
climate change. I mean, do you think some of them
have gotten more prescriptive?
Speaker 2 (20:17):
That one you just described sounds like one that might
be arguably more prescriptive and that you know, could be
at risk of exclusion by the SEC. I mean, the
SEC does have a micromanagement rule. So the reality is
that you have to be more specific in order to
keep a proposal alive given the range of SEC rules.
(20:41):
So on the one hand, there's a rule called the
substantial implementation rule, which is a rule that looks at
the company says, look, we've basically already done what this
proposal asks, and then micromanagement. This proposal is too specific.
So if you want to ask, if you ask just
(21:05):
for the company to do better on greenhouse gases, and
you aren't specific as to what exactly the problem is
at the company, whether it's you know, ignoring the supply
chain or not being clear about what the pathway is
that it's going to get to its net zero goals,
that's not going to make it through. So you have
(21:26):
to be specific in order to survive a substantial implementation challenge.
That's that's a needle that shareholders always have to thread.
So a lot of these proposals that are being called
more prescriptive are are in that category. But the one
you you know, the example you gave, I agree, that
could be, that could be the kind of thing that
(21:48):
that but I don't think I don't, I don't really
think that's a majority of what they're referring to is
more prescriptive. It's actually this other category of things where yes,
we've moved the company to a certain point and now
we need to be a little bit more specific to say,
but you know, yes, you're doing good on your scope
one and two. But what are you doing about your
(22:09):
supply chain where most of the emissions are?
Speaker 1 (22:12):
And I'm curious about your thoughts on so called shareholder
choice or pass through voting. We're an asset managers now
allowing their clients to vote their own proxies. On the
one hand, you could certainly argue this is a step
forward for shareholder democracy, but I think on the flip side,
it's hard not to see this as just investment professionals
maybe passing the buck to avoid some of those political headaches.
Speaker 2 (22:34):
Well, I think it does help them avoid the political
headaches for sure. There was some early sign that given
voting choice, a significant portion of investors would choose an
ESG type option, So you know, that's that's you know,
it's interesting. I don't know that it necessarily means that
(22:58):
the that the votes will go down. They might go
up some if there was more voting choice, and if
the choices include you know, a proactive, long term value
kind of perspective that I think many people will inherently
agree with.
Speaker 1 (23:15):
That's interesting. Let's put it all together. How have all
these developments affected the voting outcomes for shareholder proposals? Whether
it's you know, these accusations of being too perscriptive, whether
it's more meddling by politicians. You know, where do you
see kind of from the ten thousand from view.
Speaker 2 (23:34):
Well, the voting outcomes on shareholder proposals show that shareholders
can still discern looking at proposals, they can discern whether
or not they support a particular type of proposal, and
(23:55):
so you see variation between the different types of proposals.
Even you know, can issue like climate change, asking for
a climate change report, the voting outcomes have actually gone
up a bit, whereas asking for scope three reduction, the
voting outcomes went down. To give you another example, DEI.
(24:19):
So of course, the anti esg anti DEI proposals, they're
doing terrible. You know, companies shouldn't be paying attention to
DEI they get like less than two percent support, or
they should.
Speaker 1 (24:31):
Be worrying about the risk that there might be discriminating
against white men in the workforce.
Speaker 2 (24:36):
That's right, those proposals are not doing well. But if
you file a proposal at a company that you ask
them to publicly disclose their EEO data, the data that
they already have generated that they file with the government.
But don't necessarily have published publicly on their website that
gets that average thirty three percent support this year, So
(24:58):
it shows that investors are a able to discern a
positive value, you know, the you know, there's a significant
portion of the market that is really committed to the
long term value perspective. A third of the market is
either in you know, either considers itself you know, sustainability
(25:22):
oriented or at least has a stewardship program. So that's
big portion of the market that is very aligned with this.
And you know, looking at you know, investment analysts, eighty
five percent of CFA members have you know already look
at governance or environmental and social issues, So you know,
(25:45):
a big portion of the market is still committed to
these issues. And I think that there still is a
strong future for share holder proposals as a result, so
voting support cuts across the whole market, with traditionally broader
support for governance proposals than environment or social proposals. Yet
(26:07):
a very big and still growing portion of the market
continues to demand better ESG data, including through the shareholder
proposal process. Even with the biggest asset managers succumbing to
legal and political pressure to drop their support, which is
indeed a large loss of a large voting block. Environmental
(26:29):
and social proposals still continue to average around twenty percent support,
and that's enough voting support for many companies to stand
up and take notice, especially where the requests are for
better disclosure sought by that many investors at relatively low cost.
In terms of the question of who files the proposals
(26:52):
that are voted on, the SEC has always had the
intent to keep filing thresholds low to allow smaller retail
investors to file their own proposals, and the rules are
written in plain English to encourage shareholders to exercise those rights.
But at the same time there's technical trip wires and
(27:15):
procedural hurdles, and new filers can always expect to make
some mistakes along the way. So as a result of
those kind of challenges, there's a small group of entities
that file most of the proposals, and so the top
filers includes individuals, faith based investors, registered investment advisors who
file on behalf of client's pension funds, unions, service providers
(27:39):
who support investor engagement and proposal filing, so they don't
represent a single ideological perspective. They are investors who have
invested in learning the process. They include anti ESG proponents.
A few years ago, the anti ESG folks had a
lot of proposals thrown out after failing meet the technical
(28:00):
proof of ownership requirements. But after a few years of
trial and error, they developed a more sophisticated approach in
some of their proposals, so the barriers are not insurmountable.
So these specialized proponent organizations develop more in depth familiarity
with companies on material issues like climate risk or digital safety,
(28:22):
or diversity or proxy access, and the deeper familiarity makes
for stronger proposals, highlighting strengths and weaknesses of particular companies
in a way that the market benefits from when shaped
into five hundred words of a proposal. Now, there are
always a few proponents who are not driven or disciplined
by the business case and investment considerations and could be
(28:44):
characterized as activists, but that's a very small portion of
the activity in the space. But to label as activists
the advisors, the funds, and the investors who have filed
most of the proposals, it's just the latest way of
casting shade on they're carefully developed expertise and groundwork in
this space. Now, the other thing that I mentioned that
(29:06):
some critics say is that proposals are becoming a political referendum.
The rule doesn't really allow that a proposal has to
relate significantly to the company's operations. So take an issue
like immigration policy. It may or may not make sense
for a proposal to ask a company to take a
position on current deportation policies, but it would certainly seem
(29:29):
appropriate for a proposal to ask how US deportation efforts
may affect the estimates and assumptions underlying financial statements on
the suppli or cost of relevant labor or commodities.
Speaker 1 (29:42):
That makes sense. You know, we talk about outcomes from
voting outcomes, but in terms of taking that s up
further actual real world outcomes. Do you think these shareholder
proposals are producing more efficient markets or are they creating
inefficiencies or distractions for companies?
Speaker 2 (29:56):
Forty percent of proposals are withdrawn because they lead to
productive dialogue. That's already a high degree of efficient productivity
of the process. From my perspective, it's private ordering that
leads to better disclosure and information to the market, and
also going through the no action process is far more
efficient than resolving these issues in the courts. Well, let
(30:21):
me give you an interesting little anecdote from the recent
congressional hearing that I think it was telling. One of
the Republican witnesses said that they noted that companies are
routinely including more information on their proxy statement in order
to avoid receiving Sharlder proposals. I can't think of a
more efficient way for the market to work and for
(30:45):
the shareholder proposal process to work. Then for a company
to acknowledge that there's enough demand, as expressed through the
sharloader proposal process that they might as well just voluntarily
provide information. That's an incredibly efficient way to increase information
to the market.
Speaker 1 (31:03):
So are there any common sense reforms to the shareholder
proposal process you think really are needed?
Speaker 2 (31:10):
In general? I don't think there's I think the process
was well refined by the Commission over so many years.
They keep tweaking the rules every few years, you know,
there's always going to be some tweaks around the edges.
I think that companies could be required to reach out
to proponents prior to filing those no action requests that
(31:31):
could actually reduce the number of no action requests. And
another thing is that when they adopted those twenty twenty
rule amendments with the twenty five thousand dollars threshold for
shares held for a year, they didn't allow shareholders to
aggregate in order to reach that threshold, So you have
(31:53):
to be one shareholder with twenty five thousand rather than aggregating.
I'd certainly like to see shareholders be able to aggregate
to reach that threshold.
Speaker 1 (32:03):
Great Sandford, thank you so much for your time. Interesting
to hear what the next proxy season has for us
and for our listeners. You can find more information on
proxy voting and investment stewardship issues on BI space ESG
go on the Bloomberg terminal. If you have an ESG
quandary you'd like to ask bi's expert analysts or learn
more about our research, send us an email at ESG
(32:24):
Currents at bloomberg dot net. And if you're like this episode,
please subscribe on Apple, Spotify, or your favorite podcast platform.
ESG is constantly evolving. Over the years, it has shifted
from socially responsible investing to impact to sustainable finance. While
the terminology continues to change, but hasn't changed are the
underlying science, market pressures, and tangible physical and financial impacts
of the climate crisis, increasing regulatory scrutiny, and rising consumer expectations.
(00:31):
We aim to filter out the noise by speaking with
industry experts to identify what is really driving value. Welcome
to ESG Currents. I am Rob Dubof, Senior ESG analyst,
your host for today's episode. We've done several episodes now
on investment stewardship. This idea that shareholders are not just
financial investors in a business, but are actually owners. That is,
(00:54):
it's in their best interest to want managers to focus
not only on next quarter's earnings, but on the long
term health of the business. And as a shareholder, they
usually have the right to elect the board of directors,
vote on routine matters, or even submit proposals for other
shareholders to vote on. But are these shareholder rights as
strength of capitalism or are corporate managers spending too much
time engaging with a wide range of shareholders and not
(01:17):
enough time on their day jobs, as many business leaders
and the Trump administration now claim. Joining us this week
to discuss is Sandford Lewis. He's director and founder of
the Shareholder Rights Group, a leading national expert on shareholder
proposals and corporate duties of disclosure of environmental and social issues,
and securities filings. He's an attorney with over forty years
(01:38):
of experience in public policy related issues, including environmental law,
securities law, and public policy campaigns. Thank you for joining us.
Speaker 2 (01:47):
Thanks very much for having me honored to be here.
Speaker 1 (01:49):
Let's start with a basic question, why are shareholder rights important?
Does it really matter as long as the stock just
goes up?
Speaker 2 (01:56):
Well, the right to file and vote onareholder proposals is
an important right of investors as owners of public companies.
It's one of the main ways, especially on ESG matters,
that investors can provide focused feedback to their companies. So
you know, you mentioned that shareholders have a right to
of course vote on board elections, and that's an up
(02:20):
and down vote on individual directors. In contrast, votes on
shareholder proposals let companies know what issues sholder their shareholders
believe are important whether it's effective governance or future fitness,
and what forms of improvement are needed, such as better
disclosure or targets or policy changes. Proposals have actually been
(02:40):
a leading tool for advancing governance and boardroom accountability on
oversight of environmental and social issues and led to widespread
adoption of sustainability reporting, governance reforms like independent board chairs,
and improving the ability of shareholders to call special meetings.
An important opportunity for shareholders to present a five hundred
(03:03):
word proposal to fellow shareholders, but there are numerous obstacles
that stand in shareholders ways to do so that we
can get into more as we discuss.
Speaker 1 (03:12):
Yeah, so I was going to say that the last
decade or so, I've really seen a surgeon shareholder proposals,
particularly those focused on environmental and social issues. By our account,
proposals were up almost fifty percent from twenty twenty to
twenty twenty four when we looked at the Russell three thousand.
But then we started to hear complaints things went too far.
(03:33):
We went from seeing high level proposals on sustainable business
strategy to calls for very specific actions. Jamie Diamond, for example,
is constantly calling them a nuisance and shareholder meetings a
waste of time. So what do you say.
Speaker 2 (03:47):
To that, Well, we are hearing attacks and you know,
this is a cyclical process. It's happened over the years.
There are always complaints about the process by some of
the business trade associations and corporate lobby groups. Currently, the
typical mantra that he here is that the process is
being hijacked by activists or that it's forcing companies to
(04:10):
take public positions on so called political issues. But you know,
shareholders who vote in favor of the proposals are the
best gauge. And the truth is that market data as
well as the voting outcome show that there still is
a substantial amount of support for the shareholder proposal process
(04:33):
and for particular proposals.
Speaker 1 (04:36):
So can you explain for our listeners exactly what role
does the SEC play in determining how many shareolder proposals
actually reach the proxy?
Speaker 2 (04:44):
You know, the SEC has a long process, has gone
through a long process since the nineteen forties in developing
and refining this process for shareholder proposals. Back in the forties,
any shareholder with one share could fly a shareholder proposal.
Then years later it went up to one thousand dollars
(05:06):
and shares held for a year, and then two thousand
dollars held for a year. And so the SEC periodically
revises its rules, and the SEC also has you know,
staff legal bulletins that provide guidance on how to interpret
its rules. But there are you know, there are a
set of thirteen different exclusions that can trip up proposals,
(05:29):
things like is the proposal relevant to the company, is
it based on a personal grievance, does it micromanage, does
it duplicate other proposals, et cetera, does it violate state
law for instance? So there are lots of different aspects
of the SEC rules that that can can block a proposal.
Speaker 1 (05:50):
So then maybe walk us through what happens so far
this year at the SEC and how it affected corporate proxies.
Speaker 2 (05:57):
Well, I think actually it might help to backwards because
you were talking about that the growth of proposals from
twenty twenty to twenty twenty four. And it's true that
under Chairman Gensler ESG proposals were somewhat encouraged by a
prior staff Lego Bolton staff Lego Bolton fourteen L and
then under the current administration, they basically repealed that staff
(06:22):
legal bolton in a new bulletin fourteen m and this
bulletin was adopted in the middle of the proxy season,
which meant that the shareholder proposals had already been written
and presented and the rules were changed mid season, which
was kind of shocking to the proponents, and as a result, companies,
(06:46):
based on the new bulletin that was issued in February,
companies started to submit a bunch more no action requests.
They were up thirty four percent from the prior from
twenty two twenty four and as a result, there was
I think probably a record number of exclusions allowed. It's
(07:10):
actually the same rate of exclusion fifty five percent exclusion,
but of the requests made, about fifty five percent were granted.
Let me give you a couple examples of how the
new interpretations changed the rules in ways unfavorable to proposals.
A proposal at PEPSI that focused on serious human rights
(07:31):
issues in the supply chain of its India franchises was
blocked this year because PEPSI didn't deny the serious concerns
about coarse labor or forced hysterectomies in the workforce of
sugar suppliers, but instead said that these issues are managed
by India franchisees and it shouldn't affect the parent company
(07:53):
with its arms length or relationship. It seems to me
there are a lot of historical analogies that show that
such concerns can indeed to implicate the parent but in
any event, the SEC allowed the proposal to be excluded.
Another example is that the rule. The rule itself says
that shareholders should ask as clearly as possible what actions
(08:14):
they want a company to take in their proposals, but
the new interpretation of micromanagement tells shareholders to be quite differential.
Asking a company to align its emissions with the Paris
Agreement or eliminate deforestation in supply chains, you would phrase
the proposal as whether and how they will do so.
(08:37):
The trouble is, once a company has more or less
stated that it doesn't intend to align with Paris or
eliminate deforestation, that formulation whether and how won't survive a
substantial implementation challenge because they've already said they don't intend to.
But there were so many more requests made because they
were sending a clear signal that they were open to
(08:59):
excluding proposals, So so that did to a bunch more exclusions.
Most of them were excluded as ordinary business being the
typical exclusion, and you know under next under that was
procedural type of exclusions.
Speaker 1 (09:18):
Yeah, so I guess first clarifying the so the no
action letters, those are for those who don't know, that's
the process by which the you know, a company can
go to the the SEC and ask them to kind
of weigh in on whether whether the proposal violates those
thirteen rules we talked about. And then you know, certainly
(09:39):
the ordinary business I think, you know, the crux of
that is really as I understand it is, you know,
there's only so much a proponent can can weigh in on.
I mean, you can't go to, you know, a restaurant
company and say you need to start serving this right,
it has to be can't be impeding on ordinary business.
(09:59):
But where that line is is really kind of an
uncertain area.
Speaker 2 (10:04):
It's always been an area that's been subject to a
great deal of debate. There's really two parts to it.
One is is the subject matter one that transcends ordinary business,
So you know, climate change being an example of a
subject matter that transcends ordinary business. And then secondly, does
it try to micromanage the company? Is it too specific
(10:25):
in regrest so yet I'm on climate change, but maybe
you know, asking a company to install low flow shower
heads to address a part of their impact on climate
change or environment would be too detailed or too prescriptive,
and ask got it?
Speaker 1 (10:44):
And then one trend I've observed recently is the rise
of so called anti ESG proposals. Is this a new phenomenon.
Speaker 2 (10:52):
It's not a new phenomenon. There have been as long
as I've been in this field, and it's been a
while now. They've always been a few proposals filed by
individuals trying to make the counter argument to the ESG proposals.
They very seldom gain any real support. But the what
(11:17):
what has happened is there's been a more organized effort
by the anti ESG proponents in the last few years
to file way more such proposals. So, so that is new,
the the growth in the number of proposals that are
being filed that take this anti ESG approach.
Speaker 1 (11:38):
Yeah, I think you know, the kind of the share
of proposals has you know, just risen astronomically in the
last couple of years. And then how does that tie
into what we've been talking about, is the fact there,
let's say flooding the zone. Has that had it any
bearing objections regarding the Shaholder proposal process.
Speaker 2 (11:57):
Well, I think it does. It helps to I think,
you know, it might be the reason for doing it.
They're trying to make it seem like the process is
politicized and by by filing these proposals, even though their
proposals you know, typically are getting like one and a
half percent support, not a big amount of support from
(12:19):
the market, but then they can I think flooding the
zone is a good way to talk about it. They
are creating enough noise that then the companies can say,
look how annoying this process is. And you know, I'd
be the last to say that they don't have a
right to file those proposals. I think it's important to
have a diversity of perspectives, and sometimes they come up
(12:41):
with proposals that you know, can win broader support. But
you know, if you look at if you look at
their it depends on how you're doing the math, how
you think about so Like I've seen some reporting that said, well,
the votes on es G proposals have gone down. They're
(13:02):
ten percent. But then you read you you look beneath
the data, and you realize that they're actually saying that
they haven't that they included the anti ESG proposals, So
it brings the average way down, whereas other reporting that
couts those separately, it would be twenty percent support typical
(13:24):
support for ESG proposals, which is still a substantial amount
of support. It's that's twenty percent is basically the amount
of support that you know, there's general agreement. If a
proposal is getting twenty percent support, it's something for management
to look at.
Speaker 1 (13:40):
Yeah, we've definitely noticed that skew, and you know, I
would concur that maybe that skew is part of the
point in submitting these.
Speaker 2 (13:47):
Yeah, maybe they're just trying to exhaust, you know, I
mean I think they're I think they're also just trying
to exhaust investors and companies with these anti ESG proposals.
Speaker 1 (13:57):
Frankly, Yeah, and a lot of them are also awarded
very particularly to maybe trip up someone who's not reading
too closely. Although to your point, you know, there were
a few of them that I think were kind of
more reasonable I don't know, maybe not reasonable as the
right term, but kind of how broader support around you know,
we saw some around AI this year.
Speaker 2 (14:18):
Online child sexual abuse is one that I think I
voted for myself. And there were some general corporate governance
proposals filed by some of the anti ESG proponents got.
Speaker 1 (14:33):
It moving on a little bit. We talked about what
the SEC is doing, But what other challenges are you seeing,
particularly from Congress or Republican States. Are you seeing a
lot of pushback on shareholder proposals and stewardship more broadly?
Speaker 2 (14:48):
Well, certainly there is you know, a pattern of attacks
on ESGE, of which you know, since the shareholder proposal
process is kind of a leading edge for moving ESG
issues forward. Uh uh, these various efforts are are you know,
(15:10):
attacking the shareholder proposal process as well? So you know
there are efforts in the courts. There have been these
letters to the asset managers from the State Financial Officers Foundation,
which is the Republican UH States Financial Officers. There have
been Congressional hearings. There was a hearing last week in
(15:33):
Congress on the shareholder proposal process. And they're all making
it seem like this interest in the long term and
in systemic risk in particular. These they want to make
it seem like these are not appropriate concerns for investors,
and investors shouldn't be looking to the long term, shouldn't
(15:53):
be looking to systemic risk. Things that are very much
part of the shareholder proposal process. And so it's it's
it's it's creating a challenging dynamic.
Speaker 1 (16:03):
It's what do they just say, it's just woke politicization
of the shareholder process. But I would concur that a
lot of it is focused on long term value of
a business. And I know, I think, you know, speaking
of Republican states, I know Texas is in particularly has
taken a very aggressive tack. I know, you know they're
(16:24):
trying to attract companies from Delaware. Can you maybe talk
about that that's so called dexit.
Speaker 2 (16:32):
Yeah, Well, the part that I'm most familiar with is
that there are two laws that were passed this year
in Texas. One of them allows a company that's both
incorporated in Texas and headquartered there or traded on a
Texas approved stock exchange to set a higher threshold for
(16:54):
filing shosals. Uh, you know, the existing threshold is two
dollars held for three years, or fifteen thousand held for
two years, or twenty five thousand held for a year.
That's the existing SEC thresholds. The threshold under the Texas
(17:16):
logan be a million dollars in order to be able
to file a proposal. And then there's another Texas law
that is directed toward proxy advisors that basically says that
any time you're and again it's like this is a
definitional thing that's happening in all of these laws is
that they're basically trying to define a way anything that's
long term, if it's uncertain, you know, investment risk, long
(17:40):
term investment risk. They're basically saying you can't take account
of that, and if you are, you have to say
that that's not financial, not literally not a pecuniary consideration.
So you know, there was just a temporary injunction issue
food against that in a lawsuit filed by Iss and
(18:04):
Glass Lewis over the proxy advisor's law. And you know,
it's very poorly written law.
Speaker 1 (18:11):
So I understand why smaller activists are not happy with
these actions and this pushback. But what about the big
ass managers which which may not be nearly as impacted.
I mean you mentioned the million dollar threshold. I imagine,
you know, a company like a large ass manager has
you know, million dollar stake in a lot of companies,
have they have they reacted to the explosion shareholder proposals
(18:34):
first of all, and are they concerned about the recent
efforts to curb them.
Speaker 2 (18:37):
Well, they don't file shareholder proposals, so they don't need
to because they have access to the companies first of all. Secondly,
they're under enormous pressure from the Republican states to vote
against shareholder proposals and and that pressure is working, so
so they, you know, are part of the backlash against
(18:59):
Shaholder proposal. At this point, they they don't say, oh,
we're doing it because we're voting against the proposals because
of the pressure that we're under, which would be maybe
too much of a concession for them. So instead they
say that the proposals are becoming too prescriptive or low quality.
And I don't think that's well, I think there's a
(19:22):
reason why proposals are maybe looking more prescriptive or more
specific these days, and we could talk about that, but
that's kind of the way it has gone. And certainly,
the top votes on sharold proposals have gone down because
these are big blocks of voting shareholders who are now
not supporting a lot of VSG proposals.
Speaker 1 (19:45):
Yeah, I'd love to be able to dig into that
idea of a more prescriptive proposal. I mean, certainly, some
of it's just a more natural evolution. If you know,
if you're first you're pushing a company disclose their Scope
one emissions, maybe you start asking for Scope three. But
then you know, I've certainly seen a few that are
maybe more prescriptive around things like you know, serving meatless
(20:08):
vegan meats in hospitals, for example, to reduce impact of
climate change. I mean, do you think some of them
have gotten more prescriptive?
Speaker 2 (20:17):
That one you just described sounds like one that might
be arguably more prescriptive and that you know, could be
at risk of exclusion by the SEC. I mean, the
SEC does have a micromanagement rule. So the reality is
that you have to be more specific in order to
keep a proposal alive given the range of SEC rules.
(20:41):
So on the one hand, there's a rule called the
substantial implementation rule, which is a rule that looks at
the company says, look, we've basically already done what this
proposal asks, and then micromanagement. This proposal is too specific.
So if you want to ask, if you ask just
(21:05):
for the company to do better on greenhouse gases, and
you aren't specific as to what exactly the problem is
at the company, whether it's you know, ignoring the supply
chain or not being clear about what the pathway is
that it's going to get to its net zero goals,
that's not going to make it through. So you have
(21:26):
to be specific in order to survive a substantial implementation challenge.
That's that's a needle that shareholders always have to thread.
So a lot of these proposals that are being called
more prescriptive are are in that category. But the one
you you know, the example you gave, I agree, that
could be, that could be the kind of thing that
(21:48):
that but I don't think I don't, I don't really
think that's a majority of what they're referring to is
more prescriptive. It's actually this other category of things where yes,
we've moved the company to a certain point and now
we need to be a little bit more specific to say,
but you know, yes, you're doing good on your scope
one and two. But what are you doing about your
(22:09):
supply chain where most of the emissions are?
Speaker 1 (22:12):
And I'm curious about your thoughts on so called shareholder
choice or pass through voting. We're an asset managers now
allowing their clients to vote their own proxies. On the
one hand, you could certainly argue this is a step
forward for shareholder democracy, but I think on the flip side,
it's hard not to see this as just investment professionals
maybe passing the buck to avoid some of those political headaches.
Speaker 2 (22:34):
Well, I think it does help them avoid the political
headaches for sure. There was some early sign that given
voting choice, a significant portion of investors would choose an
ESG type option, So you know, that's that's you know,
it's interesting. I don't know that it necessarily means that
(22:58):
the that the votes will go down. They might go
up some if there was more voting choice, and if
the choices include you know, a proactive, long term value
kind of perspective that I think many people will inherently
agree with.
Speaker 1 (23:15):
That's interesting. Let's put it all together. How have all
these developments affected the voting outcomes for shareholder proposals? Whether
it's you know, these accusations of being too perscriptive, whether
it's more meddling by politicians. You know, where do you
see kind of from the ten thousand from view.
Speaker 2 (23:34):
Well, the voting outcomes on shareholder proposals show that shareholders
can still discern looking at proposals, they can discern whether
or not they support a particular type of proposal, and
(23:55):
so you see variation between the different types of proposals.
Even you know, can issue like climate change, asking for
a climate change report, the voting outcomes have actually gone
up a bit, whereas asking for scope three reduction, the
voting outcomes went down. To give you another example, DEI.
(24:19):
So of course, the anti esg anti DEI proposals, they're
doing terrible. You know, companies shouldn't be paying attention to
DEI they get like less than two percent support, or
they should.
Speaker 1 (24:31):
Be worrying about the risk that there might be discriminating
against white men in the workforce.
Speaker 2 (24:36):
That's right, those proposals are not doing well. But if
you file a proposal at a company that you ask
them to publicly disclose their EEO data, the data that
they already have generated that they file with the government.
But don't necessarily have published publicly on their website that
gets that average thirty three percent support this year, So
(24:58):
it shows that investors are a able to discern a
positive value, you know, the you know, there's a significant
portion of the market that is really committed to the
long term value perspective. A third of the market is
either in you know, either considers itself you know, sustainability
(25:22):
oriented or at least has a stewardship program. So that's
big portion of the market that is very aligned with this.
And you know, looking at you know, investment analysts, eighty
five percent of CFA members have you know already look
at governance or environmental and social issues, So you know,
(25:45):
a big portion of the market is still committed to
these issues. And I think that there still is a
strong future for share holder proposals as a result, so
voting support cuts across the whole market, with traditionally broader
support for governance proposals than environment or social proposals. Yet
(26:07):
a very big and still growing portion of the market
continues to demand better ESG data, including through the shareholder
proposal process. Even with the biggest asset managers succumbing to
legal and political pressure to drop their support, which is
indeed a large loss of a large voting block. Environmental
(26:29):
and social proposals still continue to average around twenty percent support,
and that's enough voting support for many companies to stand
up and take notice, especially where the requests are for
better disclosure sought by that many investors at relatively low cost.
In terms of the question of who files the proposals
(26:52):
that are voted on, the SEC has always had the
intent to keep filing thresholds low to allow smaller retail
investors to file their own proposals, and the rules are
written in plain English to encourage shareholders to exercise those rights.
But at the same time there's technical trip wires and
(27:15):
procedural hurdles, and new filers can always expect to make
some mistakes along the way. So as a result of
those kind of challenges, there's a small group of entities
that file most of the proposals, and so the top
filers includes individuals, faith based investors, registered investment advisors who
file on behalf of client's pension funds, unions, service providers
(27:39):
who support investor engagement and proposal filing, so they don't
represent a single ideological perspective. They are investors who have
invested in learning the process. They include anti ESG proponents.
A few years ago, the anti ESG folks had a
lot of proposals thrown out after failing meet the technical
(28:00):
proof of ownership requirements. But after a few years of
trial and error, they developed a more sophisticated approach in
some of their proposals, so the barriers are not insurmountable.
So these specialized proponent organizations develop more in depth familiarity
with companies on material issues like climate risk or digital safety,
(28:22):
or diversity or proxy access, and the deeper familiarity makes
for stronger proposals, highlighting strengths and weaknesses of particular companies
in a way that the market benefits from when shaped
into five hundred words of a proposal. Now, there are
always a few proponents who are not driven or disciplined
by the business case and investment considerations and could be
(28:44):
characterized as activists, but that's a very small portion of
the activity in the space. But to label as activists
the advisors, the funds, and the investors who have filed
most of the proposals, it's just the latest way of
casting shade on they're carefully developed expertise and groundwork in
this space. Now, the other thing that I mentioned that
(29:06):
some critics say is that proposals are becoming a political referendum.
The rule doesn't really allow that a proposal has to
relate significantly to the company's operations. So take an issue
like immigration policy. It may or may not make sense
for a proposal to ask a company to take a
position on current deportation policies, but it would certainly seem
(29:29):
appropriate for a proposal to ask how US deportation efforts
may affect the estimates and assumptions underlying financial statements on
the suppli or cost of relevant labor or commodities.
Speaker 1 (29:42):
That makes sense. You know, we talk about outcomes from
voting outcomes, but in terms of taking that s up
further actual real world outcomes. Do you think these shareholder
proposals are producing more efficient markets or are they creating
inefficiencies or distractions for companies?
Speaker 2 (29:56):
Forty percent of proposals are withdrawn because they lead to
productive dialogue. That's already a high degree of efficient productivity
of the process. From my perspective, it's private ordering that
leads to better disclosure and information to the market, and
also going through the no action process is far more
efficient than resolving these issues in the courts. Well, let
(30:21):
me give you an interesting little anecdote from the recent
congressional hearing that I think it was telling. One of
the Republican witnesses said that they noted that companies are
routinely including more information on their proxy statement in order
to avoid receiving Sharlder proposals. I can't think of a
more efficient way for the market to work and for
(30:45):
the shareholder proposal process to work. Then for a company
to acknowledge that there's enough demand, as expressed through the
sharloader proposal process that they might as well just voluntarily
provide information. That's an incredibly efficient way to increase information
to the market.
Speaker 1 (31:03):
So are there any common sense reforms to the shareholder
proposal process you think really are needed?
Speaker 2 (31:10):
In general? I don't think there's I think the process
was well refined by the Commission over so many years.
They keep tweaking the rules every few years, you know,
there's always going to be some tweaks around the edges.
I think that companies could be required to reach out
to proponents prior to filing those no action requests that
(31:31):
could actually reduce the number of no action requests. And
another thing is that when they adopted those twenty twenty
rule amendments with the twenty five thousand dollars threshold for
shares held for a year, they didn't allow shareholders to
aggregate in order to reach that threshold, So you have
(31:53):
to be one shareholder with twenty five thousand rather than aggregating.
I'd certainly like to see shareholders be able to aggregate
to reach that threshold.
Speaker 1 (32:03):
Great Sandford, thank you so much for your time. Interesting
to hear what the next proxy season has for us
and for our listeners. You can find more information on
proxy voting and investment stewardship issues on BI space ESG
go on the Bloomberg terminal. If you have an ESG
quandary you'd like to ask bi's expert analysts or learn
more about our research, send us an email at ESG
(32:24):
Currents at bloomberg dot net. And if you're like this episode,
please subscribe on Apple, Spotify, or your favorite podcast platform.
Host
Eric Kane
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