CII raises concerns over governance proposals

May 31, 2018
Lawmakers considering changes in areas such as shareholder proposals and reporting

The Council of Institutional Investors (CII) has criticized measures that would potentially limit shareholder proposals, the use of interactive data in company disclosures and quarterly filings.

In a letter sent to the congressional subcommittee on capital markets, securities and investment ahead of a recent hearing, CII opposes efforts to curb shareholder proposals, arguing that they have been instrumental in advancing corporate governance standards.

One of the bills before the committee would raise the regulatory hurdles for shareholder proposals. At present, a shareholder can refile a proposal only if it has received at least 3 percent of the vote on its first submission, 6 percent on the second and 10 percent on the third. The proposed measure would raise those thresholds to 6 percent, 15 percent and 30 percent, respectively.

‘Those higher hurdles could knock out many important governance proposals that, if adopted, could enhance long-term shareowner value,’ CII general counsel Jeffrey Mahoney writes. It often takes several years for a proposal regarding an emerging issue to gain enough traction with investors to attract double-digit votes, although such proposals in many cases eventually receive substantial support, leading to widespread adoption by companies, he says.

‘The current thresholds provide a reasonable amount of time for emerging issues to gain support among investors while ensuring that only those proposals that garner meaningful support remain on the ballot for multiple years,’ he adds. ‘Resubmission of proposals receiving less than 20 percent support for a third or fourth time is very rare.’

CII quotes ISS data indicating that, since 2010, shareholders resubmitted environmental and social issue proposals in only 35 instances after receiving votes under 20 percent for two or more years, affecting only 26 companies.

‘Restricting the shareholder proposal process is likely to reduce corporate accountability to shareholders, and could create greater conflict between shareowners and public companies,’ CII states. ‘For example, restricting shareholder proposals is likely to lead to shareowners more often availing themselves of the blunt instrument of votes against directors, and increased reliance on hedge fund activists to push for needed corporate changes.’

The council points to the following as among the improvements in governance practices arising from shareholder proposals:

  • Having a majority of independent directors on boards
  • Electing directors in uncontested elections by majority – rather than plurality – vote
  • Proxy access.

CII also opposes efforts to limit the use of data tagging in public companies’ regulatory filings. Another of the bills under consideration by the committee would require the SEC to exempt certain issuers from having to format their filings with the agency using machine-readable XBRL. The bill would create a permanent exemption for ‘emerging growth companies’ and a temporary exemption for companies with less than $250 million in annual gross revenue.

The council believes the bill, if enacted, would mean 60 percent of public companies would not have to comply with XBRL tagging requirements. CII agrees with SEC investor advocate Rick Fleming, who has stated that such a change ‘would seriously impede the ability of the SEC to bring disclosure into the 21st century.’ It would, Mahoney writes, ‘lessen the value and usefulness to investors of the data provided in public company filings.’

The SEC has since 2009 required companies to submit financial statements in XBRL as exhibits and to post these on their websites. Early last year, the commission proposed rule amendments aimed at improving the quality and accessibility of data submitted by public companies and mutual funds using XBRL by requiring them to use Inline XBRL.

CII also raises concerns about a discussion draft before the committee that would give publicly listed companies the option to file Form 10Q or file a quarterly press release that includes earnings results. The discussion draft would not only reduce redundant disclosures, but would also ‘appear to eliminate the timely reporting of a significant volume of potentially critical information to investors,’ Mahoney writes.

He adds that it appears the changes being considered would eliminate quarterly required information about matters such as:

  • The income statement for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the corresponding periods of the preceding fiscal year
  • Changes to quantitative and qualitative information about market risks
  • Material developments relating to legal proceedings
  • Material changes in risk factors
  • Sales during the quarter of unregistered securities and use of proceeds that have not been previously reported
  • Conclusions of the registrant regarding the effectiveness of its disclosure controls and procedures as of the end of the period and any change in internal control over financial reporting that occurred during the quarter.
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