New SEC Rules Would Quash Shareholder Complaints

They say that actions by shareholders, such as urging corporations to divest in South Africa during the apartheid era and calling on Union Carbide to compensate victims of the deadly chemical spill in Bhopal, India, would not be possible under rule changes proposed by the Securities and Exchange Commission (SEC).

"Shareholders in the United States, currently, can wield enormous impacts upon their corporate policy, but these changes destroy shareholder rights to have a say in what their corporate boards are doing," says Tim Smith, executive director of the human rights group, Interfaith Center on Corporate Responsibility, a human rights group.

"Rule changes, such as the ability of corporations to exclude any resolution that represents $10 million or less, will enable corporate boards to discard many progressive resolutions. This would include (resolutions on) such issues as child labor and employment discrimination that cannot be measured easily in economic terms," he said

"It will be a tragedy if these changes become law because they will drastically weaken any shareholder attempt to hold accountable corporations such as Shell in Nigeria," Michael Fleshman, trade union and human rights coordinator for the Africa Fund, a rights group that was involved in divestment in South Africa during apartheid.

Former SEC commissioner Steve M.H. Wallman criticized the proposed changes. "I believe that this proposal may not have sufficient benefits for the shareholder community to outweigh the detriments...and therefore, may not be balanced," he said when the changes were announced late September.

"We aimed to maintain a balance between both shareholders and corporate management," SEC spokesman Duncan King told IPS. The changes are designed to "make it easier for shareholders to include a broader range of proposals in companies' proxy materials and provide companies with clearer ground rules and more flexibility to exclude proposals that failed to attract significant shareholder support in prior years."

Acknowledging the controversy involved in these changes, however, SEC commissioners now have asked for public comments on the proposal. One of the main bones of contention is the call for an expansion of the personal grievance exclusion.

Under current rules, one of the ways in which a resolution can be thrown out is for a company to prove to the SEC that the proposal deals with a "personal grievance" and is not an issue of company policy. Under the new rules, the company itself gets to decide what is a "personal grievance" and the definition of this term can be effectively broadened to "special interests."

"Special interests can be construed as environmental proposals, labor unions' workplace proposals, and even religious groups' special moral interests," says Michelle Chan-Fishel of the Washington-based Friends of the Earth, an environmental group.

"Shareholder resolutions are a key way in which concerned shareholders can prod management into dialogue, raise public awareness about issues, and bring some semblance of democracy into corporate policy-making," says Chan-Fishel. "Expanding the personal grievance exclusion takes away the power of shareholders to bring up such issues."

Groups also say the SEC is attempting to cut down on proposals by excluding those on issues which represent less than 10 million or three percent in annual revenues, whichever is larger. Many issues, such as child labor or employment discrimination that cannot be measured easily in terms of economic impact would be cut out, says Smith.

While rights and environmental groups also say some progressive shareholder concerns fall under the $10 million limit and would therefore be excluded, the New York-based American Society of Corporate Secretaries (ASCS), a corporate advocacy group, says that this limit should be made higher.

"For the most part we find the total package of changes balanced, but we believe that, among other things, the relevance exclusion should be higher because anything lower usually does not concern most shareholders," Michael Goodman, an ASCS spokesman told IPS.

Another part of the SEC's proposed changes involves increasing the percentage of votes which a resolution must receive to be resubmitted the second and third year. Currently, a proposal can be resubmitted year after year if it receives a minimum of three percent of the vote in year one, six percent in year two, or 10 percent in year three. The proposed rule would boost these minimum requirements to six percent, 15 percent, and 30 percent, respectively.

"This would make it impossible for shareholders to raise many issues more than once," says Chan-Fishel. "Usually progressive resolutions need years of public education and receive only a very small percentage of votes. A 10 percent vote is already considered a very strong message to management."

One of the seemingly more progressive of the SEC changes calls for the repeal of the 1992 "Cracker Barrel" case, in which a shareholder resolution that would have prohibited discrimination based on sexual orientation was disallowed. The SEC claimed that employment issues in general are matters of "ordinary business," and should be dealt with at a management, not at a shareholder/policy level.

The proposed rules aim to repeal the Cracker Barrel case, again allowing employment issues to be put on the ballot.

"Clearly, repealing Cracker Barrel is a step in the right direction," says Chan-Fishel. "However, the SEC can still throw out other labor issues, such as sweatshops or living wage initiatives, on a case-by-case basis. By repealing Cracker Barrel, it would take until 1999 before this policy change would go into effect."

Even Wallman, the former SEC commissioner, says, "The SEC should end its policy of exclusion on employment issues immediately, rather than waiting until 1999."