June 15, 2017
Authored by: Steven Poplawski
The Financial CHOICE Act introduced in the House this spring has largely garnered attention because of its rollback of Dodd-Frank, but the bill would also significantly change the rules governing shareholder resolutions for public companies. Currently, the restrictions are relatively modest, requiring that investors have at least $2,000 in stock or one percent of the stock at a company in order to be eligible to file resolutions. In contrast, the CHOICE Act would limit eligibility for proposing shareholder resolutions to investors that have held at least one percent of the company’s stock for a minimum of three years. This change would drastically limit who can file resolutions, given that one percent of the shares of larger companies could translate to millions or billions of dollars.
The timing of the proposed change potentially reducing shareholder engagement contrasts with recent shareholder decisions approving shareholder resolutions, as demonstrated by votes at Occidental Petroleum and ExxonMobil. Shareholder majorities at those companies, exercising their rights as owners, required Occidental and Exxon to disclose the risks climate change poses to their businesses and how the companies are preparing to respond to those risks. Although these votes were historic, they are not entirely surprising; surveys show that investors are significantly interested in the business impact of regulation and are dissatisfied with current disclosure practices when it comes to environmental and climate change risks. Moreover, some research shows that corporations that adopt the kinds of disclosure practices demanded by shareholders are better at managing long term risk and adapt to changes more quickly.
The United States’ recent withdrawal from the Paris Climate Agreement arguably heightens the significance of the CHOICE Act’s restriction on shareholder engagement. In the wake of U.S. withdrawal, investors who want to use shareholder resolutions to encourage continued private sector engagement and disclosure on climate change may find themselves unable to propose such resolutions if the CHOICE Act’s shareholder restrictions are enacted, even though majorities of shareholders at two major energy companies have recently found such resolutions persuasive.
The CHOICE Act passed a vote in the House on June 8, although it is not expected to pass the Senate in its current form. As a result, it is unclear how the shareholder resolution restrictions will fare in the Senate.