Protect Fundamental Shareholder Rights

Robust shareholder rights ensure that investors are treated fairly and equitably, that management and boards are accountable to owners and that market participants have confidence in the integrity of the capital markets.

Strong public company boards of directors are the first line of defense for shareholders. The board has a fiduciary duty to see that senior managers run the company in the long-term interest of its owners. But holding directors accountable to shareholders is inherently challenging in today’s public companies, where equity ownership is dispersed among thousands of owners. Balanced rules ensure that shareholders have fundamental safeguards, including a meaningful vote, a level playing field in director elections and effective tools to engage management and the board.

Fair rules for shareholder votes
When a company goes to the capital markets to raise money from the public, public shareholders are entitled to vote in proportion to their equity ownership. This “one share, one vote” principle has been a core focus for CII from the 1980s and it is viewed widely as a fundamental shareholder right.

Multi-class capital structures with differential voting rights that favor company insiders tend to entrench management and make senior managers less responsive to public shareholders. While some studies point to a valuation premium for multi-class companies with unequal voting rights in the early years after initial public offering (IPO), there is solid evidence that such structures damage shareholder value over the longer term.

For that reason, CII believes stock exchanges should require companies seeking to list with weighted voting rights to “sunset” them—that is, convert to a one-share, one-vote structure—within seven years.

Click here for more information about multi-class stock.

Fair rules for electing directors
Majority voting for directors: Shareholders, the company’s owners, should have the power to elect and remove directors. In uncontested elections for board seats, directors should be elected by majority vote. And directors who fail to receive majority support should step down from the board and not be reappointed. CII believes federal and/or state laws should require the majority vote standard in uncontested director elections. While most U.S. large-cap companies use the majority vote standard in uncontested board elections, many smaller companies use the plurality standard, which permits boards to ignore owners’ wishes even if a majority of owners oppose a director-nominee.

At the very least, there should be clarity about the vote standard the company uses. Too often, shareholders are in the dark about how votes for director are counted. CII has urged the SEC to finalize its proposal to require companies to provide clear disclosure in proxy statements of the voting standard used in uncontested director elections.

Click here for more on majority voting for directors.

Universal proxy cards: When there is a contest for board seats, shareholders should be able to vote their shares on a “universal” proxy card that lists all director nominees. Universal proxies would fix a long-standing flaw in the U.S. proxy system that prevents a shareholder who votes by proxy—the vast majority of shareholders—from having the same voting options for board nominees as a shareholder who votes in person at an annual meeting. Currently, shareholders have no practical way through proxy voting to “split their ticket” and vote for the combination of shareholder and management nominees that they believe best serve their economic interests.

Click here for more on universal proxy cards.

Fair rules for shareholder proposals
Shareholder proposals are an essential tool for investors, individually and collectively, to express their views to management and boards on major governance and other issues. 
  • The vast majority of shareholder proposals are strictly advisory; even if they pass, companies can choose whether to act on them.
  • Shareholder proposals have encouraged many companies to adopt governance policies that today are viewed widely as best practice. For example, electing directors by majority vote, a radical idea a decade ago when shareholders pressed for it in proposals, is now the norm at 90% of large-cap U.S. companies. Similarly, norms such as independent directors constituting a majority of the board and annual elections for all directors got a boost from shareholder proposals.
  • Critics contend that shareholder proposals are a growing burden on companies. But data on shareholder proposals filed between 2004 and 2017 refute that notion. See this FAQ for details.
  • Companies exaggerate the cost of shareholder proposals. The cost is largely their choice; it is the cost of trying to exclude the proposal from the proxy. The cost to put a proposal on the proxy ballot is de minimus.
  • What has changed is that support for shareholder proposals has grown and represents a significant proportion of investors.
    • In 2016, 61 percent of proposals that came to a vote received at least 25 percent support from shareholders, up from 31 percent in 2000 (source: ISS Voting Analytics).
  • The SEC oversees a robust appeals process, under Rule 14a-8, that allows companies to exclude proposals from the proxy card that do not meet certain procedural and/or substantive hurdles. SEC staff has a well-earned reputation for deliberating fairly. In 2013-2015, companies challenged nearly one-third of shareholder proposals and about half were omitted from the proxy.
Nov. 8, 2018 CII letter to SEC on the proxy system
Nov. 8, 2018 CII-REF Publication: Clearing the Bar: Shareholder Proposals and Resubmission Thresholds
November 2017  An Investor Response to the U.S. Chamber’s Proposal to Revise SEC Rule 14a-8
June 2, 2017 Joint Statement on Defending Fundamental Shareholder Rights
Fair rules for independent proxy research
Proxy voting and dialogs with portfolio companies are critical ways that shareholders hold public company executives and boards accountable. Institutional investors engage proxy advisory firms to obtain cost-effective, independent research to help inform their proxy voting and their discussions with portfolio companies.
CII opposes legislation that would foist a new regulatory scheme on proxy advisory firms that would be unduly costly and burdensome, and would bias them in favor of corporate management—with no clear benefit to institutional investors who are the paying clients of the firms. The legislation, H.R. 4015, would require proxy advisory firms to share their research reports and voting recommendations with the companies that are the subject of their reports and recommendations before they share them with their institutional investor clients. Giving companies the right to review proxy advisors work before it goes to actual clients would give companies undue influence over the reports and recommendations.
The bill is based on the false premise that proxy advisory firms dictate proxy voting results. There is no compelling empirical evidence to support that assumption. In fact, the influence of the proxy advisory firms has declined significantly in recent years as asset managers, pension funds and others have taken greater interest in proxy voting and engaging companies directly, and have developed in-house expertise to address proxy-related issues.
Investor independence is clear in voting statistics. While Institutional Shareholder Services (ISS), a leading proxy advisory firm, recommended voting against “say on pay” proposals (advisory shareholder votes on executive compensation) at 13.8% of Russell 3000 companies in the ifrst half of 2018, just 2.3% of those proposals received less than majority support from shareholders. Similarly, although ISS recommended voting against the election of 11.5% of director-nominees in 2018, but just 0.2% failed to win majority support.
For more information, read this letter to Senate leaders from CII and 48 investors and investor groups.