By Juan Londoño
Since 2021, the SEC has amended various rules that govern shareholder proposals, board nominations, and proxy processes. With these changes, shareholders, even those with marginal investments, have more power to nominate and vote for board members or file a shareholder proposal. This has emboldened fringe shareholders, especially activist and political groups, to take advantage of these rules to disrupt business operations in some of the biggest companies in the country. These new rules also put an undo financial burden on companies, shifting resources from innovation and job creation while increasing prices.
Under normal circumstances, shareholders act as a strong overseer of a company’s business operations. As owners of company stock, they have a financial incentive to monitor and evaluate a company’s business model to ensure that the stock that they hold remains valuable. The board members they nominate or the policy proposals they bring forward are usually those that are best fit to maximize value creation for shareholders and consumers alike.
Shareholder oversight has become a valuable accountability mechanism that ensures that companies stay afloat, providing value to the American economy by providing valuable goods and services and employing individuals – as well as safeguarding their own investment into the company. However, SEC rules have thrown a wrench into this mechanism. Vigilant shareholders with skin in the game are being displaced by marginal investors who have almost nothing to lose and are seeking to advance political goals over financial returns.
The ramifications of these rule changes are already manifesting at some of the country’s biggest companies. For example, the Strategic Organizing Center (SOC), a coalition of trade unions, was able to nominate union-friendly nominees for Starbucks’s board of directors while owning only $16,000 worth of stock or 0.000015 percent of the company’s total market stock (yes, those are four zeros after the decimal point). If successful, the SOC nominees would have commanding power over a company worth over $100 billion.
This example shows the backwards incentive structure stablished by these rule changes. Investors with marginal positions in publicly traded companies now have the chance to amass enough power to nominate multiple board members. Shareholder groups that want to exert influence in a company’s business practices now have the power to introduce significant changes with a relatively low buy-in cost. Ultimately, those leading the charge for change are those with little to no stake in the company and who do not bear the financial consequences of their decisions. In the meantime, consumers, workers, and the whole economy will be harmed with a loss of jobs, wages, and value added by a company’s goods and services.
In the long-term, the impact of these new rules will be reflected in a future reduction of publicly traded companies. As the U.S. Chamber of Commerce notes, the number of publicly traded companies has already fallen by 50 percent in the last 30 years. Now that activists can weaponize the new proxy rules regime to sacrifice successful businesses to advance their political agenda, investors and entrepreneurs will think twice before granting them that power by going public. Without this valuable funding and investor reward mechanism on which smaller businesses and startups consistently rely, the American economy will see less value added, less innovation, and less competition.
The SEC should re-evaluate and reverse these rule changes to ensure that only those shareholders who hold a meaningful stake in publicly traded companies can participate in the proxy process. The current state of the rules defies economic and financial logic by allowing fringe shareholders to conduct major reforms in businesses to which they have few actual ties.
Every day that these rules continue to be in place, publicly traded companies are under the threat of seeing their successful business models upended by outsiders who do not face the financial consequences of the business decisions they enact.
Juan Londoño is a senior policy analyst at the Taxpayers Protection Alliance
