Raising the SEC's Resubmission Thresholds: 'Zombie' Proposals and the Need to Modernize an Outdated System

Summary of Study

Bottom Line: The shareholder proposal system, which was constructed to allow shareholders to propose ideas to management of public companies, needs to be reformed. It is dominated by a small minority of activists who repeatedly push social and political proposals. Proxy advisor support of these "zombie" proposals compounds this problem. The Securities and Exchange Commission (SEC) should raise the "resubmission thresholds" that determine whether proposals that receive low shareholder support can be resubmitted.  

The shareholder proposal system has become largely dominated by a small minority of activists that increasingly target American businesses over parochial agendas which are uncorrelated to enhancing the long-term value of public companies. For instance, from 2006 to 2016, Fortune 250 companies received 445 proposals dealing with political spending disclosures. Only one of these proposals during that time frame received majority backing.

Yet current SEC rules allow proposals that have received very low support to be resubmitted year after year, even if a vast majority of shareholders continually vote against them. Current SEC rules can allow proposals that received nearly 90 percent opposition in multiple years to be continuously resubmitted.

This system allows the “tyranny of the minority” to prevail at the expense of Main Street investors. It poses enormous costs not just in terms of corporate resources spent to deal with proposals every year, but also in terms of the distractions they create for management and boards, which have a duty to focus on the long-term best interests of the company. Main Street investors have also demonstrated an aversion to bringing social and policy issues into corporate governance. 

Proxy advisors, such as ISS and Glass Lewis, which have come under increased scrutiny for their influence on the voting process, compound the zombie proposal problem with their persistent support. Research shows that: 

  • ISS has recommended voting “for” 79 percent of zombie proposals at least one of the times they have appeared on the ballot. 
  • In 2018, ISS supported 95 percent of the zombie proposals examined.

The most meaningful reform the SEC could undertake to address zombie proposals would be to raise the “resubmission thresholds” that determine when proposals that receive a low amount of shareholder support may be resubmitted in a subsequent year.

Read the full report here.