Shareholder Advocacy: Changing the Rules of the Game

By Liz Levy, CFA, Managing Director of Investment Research

It goes without saying that the first few weeks of the second Trump administration have been a whirlwind of changes across broad swaths of Americans’ lives — or maybe a maelstrom is a better description. In the grand scheme of the wreckage of the last few weeks, trampling the rights of shareholders may seem minor, but it’s worth understanding.  

To begin with, our rights as shareholders come from the fact that as equity (or stock) investors, we are the owners of the companies we invest in. If a company goes bankrupt, its creditors —including bondholders that have loaned the company money in anticipation of being paid back a set amount — get paid back first. Equity investors who own the stock of the company get whatever is left over, if anything. In return for that extra risk, we get the opportunity to have a say in the governance of the company, as owners.

The way that we, as equity owners, engage with companies takes a variety of different forms, but two of these types of engagement are already at risk due to new guidance from the Securities and Exchange Commission (SEC).

According to the SEC’s own website, its mission is “protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.”

It’s hard to see where “protecting investors” comes into play in several of the early actions taken by Trump’s SEC — and I should note that this is being written at the end of February 2025, and only considers actions thus far. Although the details get technical and jargony quickly, there are a few changes that are important to note.

Limiting Shareholder Resolutions

Each year, we vote on behalf of our clients on matters at the annual general meetings of companies we invest in, such as voting for or against members of the board of directors or the management’s compensation package. We can also propose shareholder resolutions for inclusion in the list of issues that are voted on at the annual meeting, called the proxy statement — subject to certain rules. For example, there are rules that govern who can include resolutions, by requiring a certain dollar amount of stock to be held for a certain amount of time. And there are rules about what type of things can be included in resolutions; investors can’t micromanage or bring up issues that are not pertinent to a particular company, for example. Those types of rules are quite subjective, of course. There is a formal process by which companies can petition the SEC to exclude resolutions from their proxy statement.

In mid-February, the SEC put out Staff Legal Bulletin (SLB) number 14M to provide guidance on the shareholder proposal process. This notice essentially reverted the SEC to the stance of the first Trump era, letting a company exclude proposals that it determines are not relevant to its business; narrowing the scope of significant policy issues that a company must allow resolutions on; and limiting what shareholders can ask for under the guise of avoiding micromanagement.  

Most company annual meetings are held in the spring, and the deadlines for filing shareholder proposals are generally in the fall. During the winter, like right now, companies and proponents of resolutions use the SEC’s process to determine which proposals should be included in the proxy statement and which can be omitted. Shareholders writing proposals are careful to craft their proposals in line with the rules — no one wants to waste their time arguing with a company over a proposal that ends up being omitted. 

While we disagree with these changes, these new rules are similar to what was in place during the first Trump administration. But the new SLB takes a further step and allows companies to apply these new rules to protest inclusion of proposals that have already been submitted, including by allowing companies to submit supplemental arguments to proposals where the company has already submitted a request to the SEC to omit it.  Well then, surely investors who have proposed these proposals are allowed to submit supplemental materials too, or redraft their proposals in light of the new rules? Nope!  Only the companies have that right.

Restricting Dialogue

Filing proposals is an important tool in the shareholder advocacy toolbox, and one that is time sensitive. But just as important as this formal process is, engaging with companies through dialogue — a way for the equity investors to communicate our thoughts and concerns to company managements — is similarly useful. In mid-February, a separate SEC guidance document changed those rules too, by dramatically increasing reporting requirements for investors that engage with companies on topics like improving corporate governance to be more shareholder friendly, or by letting the company know how an investor intends to vote at an upcoming annual general meeting. This new guidance states that an investor who “exerts pressure on management to implement specific measures or changes to a policy” can be viewed as “influencing” control over the company, and therefore subject to increased reporting requirements. Many large investors, in particular, use this time before annual meetings to engage in dialogues with companies. Again, changing the rules in the middle of the game has meant that investors are left flat footed, trying to figure out how to comply.  And predictably, as a result, several large investors immediately paused their engagements with companies to avoid triggering the onerous reporting requirements, although one has since restarted. 

Protecting Investors?

It’s worth remembering that the first part of the SEC’s mission is protecting investors.

We strongly believe that limiting investors’ ability to give input and engage with managements is contrary to the notion of protecting investors.

It is hard to imagine that the changes limiting the ability of investors to give managements input and outside perspective meet the needs of either the investors or corporate managers. The mid-season timing of the changes,  paired with giving rights to managements that are denied to investors, make their intent seem even less benign.

We are part of several networks taking action to defend our clients’ rights as shareholders. In late February, several of these groups published a report, Shareholder Proposals: An Essential Investor Right, highlighting the importance of shareholder proposals, as well as a letter to the SEC calling for the new rules to at least not apply retroactively to previously filed resolutions.  In the meantime, we will keep voting client proxies in line with our guidelines and values this spring, and will continue engaging with the companies we invest in, pursuant to the new rules of the game.

Learn more about Shareholder Activism.