Corporate America is quietly working to suppress the voices of small investors

Emily Cunningham, a user experience designer, is just one of 750,000 people who work for Amazon. Like most rank-and-file employees in corporate America, she doesn't have a direct line to the CEO; nor does she usually have much sway over what the company does.

But Cunningham does own more than $2,000 in Amazon stock, and at the company's annual shareholder meeting this May, that little slice of ownership entitled her to a voice. So she stood up to use it.

"I would like to ask for Jeff Bezos to come out on stage so that I can speak to him directly," Cunningham began, speaking into a cavernous auditorium in Seattle. She hadn't been able to get through the words during a practice session the night before, breaking down in tears every time she tried. This time, however, it came out smoothly, as she drew strength from a group of colleagues in the audience, all clad in white.

"Mr. Bezos will be out later," said the event's emcee, Amazon General Counsel David Zapolsky.

"Will he be hearing this speech?" Cunningham asked.

"I assume so," Zapolsky replied.

Cunningham never did find out whether Bezos had been there to hear her speech, which was about climate change — but it didn't matter. She and other Amazon employees had filed a formal shareholder resolution, asking Amazon to create a plan to cut its reliance on fossil fuels. The proposal secured support from 31% of the shares that were voted.

That may not sound like a win, but in the world of shareholder resolutions, in which votes are symbolic and not binding, it was a resounding result — the kind of message even a $900 billion company couldn't ignore. Four months later, amid growing scrutiny from shareholders and employees, Bezos announced a pledge to make Amazon carbon neutral by 2040.

Cunningham is just one person in a long line of shareholders who have used their stakes to push corporations to address social and environmental issues. But on Tuesday, the US Securities and Exchange Commission took a significant step to curtail their power.

Raising the thresholds

The rules around how shareholders engage with the companies they own are complicated and may seem arcane, but the stakes are high. It's a battle about the nature of capitalism and public markets, who controls the engines of commerce, and by what standards they should be judged.

On Tuesday, five SEC commissioners passionately debated those points in an open meeting. The regulators, led by Chairman Jay Clayton, voted 3-to-2 to propose new rules that, among other things, would make it harder for small investors to get a proposal on a shareholder ballot.

Corporate America was pleased. The Business Roundtable, US Chamber of Commerce and the National Association of Manufacturers all applauded the decision. The Chamber has in fact been banging this drum for more than a decade. "Shareholder activism that elevates one group's agenda over the goals of other investors doesn't just ruin companies — it ruins a country," Chamber CEO Thomas Donohue said in a speech in 2006.

Companies have been speaking out against shareholder rights for a long time, but recently, they've picked up the megaphone again. For the last year, companies in the oil and gas industry, along with conservative think tanks, the NASDAQ stock exchange and pro-business lobbying groups have been pressuring the SEC to make changes that could dampen shareholder rights.

Why now? Shareholders have been filing more environmental and social proposals than ever before.

The power of a proposal

Over the years, small investors have used shareholder proposals as a tool to advocate for change on many issues, ranging from board nominations and executive compensation to social and environmental causes. Among them: General Motors' exit from apartheid South Africa. The phaseout of styrofoam cups at McDonald's. The end of assault rifle sales at Walmart.

Since the 1940s, shareholders have had the right to pose questions and propose changes to the directors of public companies, and to put those proposals up for a vote by their fellow investors. And the bar to propose a resolution has been relatively low. Since 1998, it's been set at just $2,000 in stock or 1% of a company's shares — whichever is lower. (For most publicly-traded companies, $2,000 is, by far, the lower threshold.) Currently, a shareholder must own at least that much stock, continuously, for at least a year to qualify.

The proposals, which are sometimes called "proxies" because shareholders can delegate their votes to others, come from a variety of sources: individual investors, large asset managers, labor unions, public pension funds, or activist Catholic nuns.

For Natasha Lamb, it's a job. As managing partner of Arjuna Capital, a socially-oriented investment fund, she's leveraged shareholder proposals to push for gender equality at companies ranging from Facebook to Citigroup, and prompted meaningful change.

After an Arjuna-backed campaign between 2016 and 2018, 22 companies agreed to disclose the pay gap between their male and female employees, adjusted for job titles.

Those wins came when a resolution didn't earn the majority of votes.

That's because shareholder proposals are not won by a majority. In fact, they're not really won at all — even if a proposal earns a majority of votes, the company is generally not required to make a change. But they are meaningful in a symbolic way, serving as both a battle cry and negotiating tool from shareholders who want to agitate for corporate accountability.

That's because companies know that if the shareholders don't feel heard, they can wield power in other ways: they can oust members of the board, vote down executive pay packages and, ultimately, divest from the company. To keep them happy companies have to pay attention to what they want.

Sometimes, wins can be achieved even when the proposal didn't make it onto a shareholder ballot. Lamb has at times found that just the threat of a high-profile shareholder battle can prompt a company to preemptively make changes behind closed doors. For the companies, negotiating with activist shareholders behind the scenes can keep the shareholders' complaints out of the news and potentially stave off a public relations crisis.

"The shareholder proposal itself is a critical piece on the board, if you think about it in terms of chess," Lamb said. "But the win is if you have a productive dialogue with the company ... that's success."

Lamb sees shareholder proposals as a way to guide companies toward better returns, noting that Arjuna encourages companies to act within their "enlightened self interest." After all, Arjuna Capital manages clients' money, and higher financial returns are the goal. She sees equal pay and climate change initiatives as a way to boost those returns.

Shareholder resolutions can be used to advance a wide range of positions — not just traditionally liberal causes. Justin Danhof, general counsel for the National Center for Public Policy Research, has used them to try to push companies to the political right, leading a team that took "the model of liberal shareholder activism and did a 180."

He has filed a number of proposals urging companies like Starbucks, Apple, Amazon and Facebook to consider adopting "true diversity." In his view, this means adding conservative directors to corporate boards.

Danhof targets corporations because they're "much more amenable to pressure than most politicians," he explained. "I consider filing a shareholder resolution the opening salvo in a negotiation."

Sounding the alarm

Companies have never loved dealing with their shareholders. But for some, the last two years of mounting activism have been downright alarming.

As asset managers like BlackRock, State Street and Vanguard have become increasingly willing to throw their considerable heft behind environmental and social resolutions, companies have started seeing proxy votes as threats. In 2019, average overall support for environmental and social shareholder resolutions reached an all-time high of 28%, buoyed in part by "yes" votes from institutional investors, noted an analysis from the EY Center for Board Matters. Once shareholder resolutions achieve 30% support, the report explained, companies tend to pay attention. If a proposal reaches 50%, and investors feel that the company hasn't sufficiently responded, they tend to consider voting directors out.

This year, Amazon alone received 14 shareholder resolutions — more than any other company, according to a count by Alliance Advisors. Though a couple were either withdrawn by their proponents or excluded with the permission of the SEC, 12 measures on issues ranging from food waste to hate speech made it onto ballots.

Corporate America has had enough — and it's using its full toolkit to fight back.

In addition to negotiating behind the scenes and asking the SEC to exclude shareholder resolutions from proxy ballots, corporations are pressing for changes in laws and regulations that could stop troublesome shareholder campaigns before they start.

That's where Tuesday's SEC meeting comes in.

The regulator proposed that shareholders be required to hold at least $25,000 in a company's stock if they want to file a resolution after just one year of ownership.

Smaller shareholders with just $2,000 in stock would have to own it for at least three years before they become eligible to file a resolution.

That higher threshold could shut small investors out. SEC Commissioner Allison Herren Lee, who dissented against that change, noted the $25,000 threshold is prohibitive for most retail investors, who have a median stock portfolio of $27,700.

"Main Street investors would generally have to invest virtually their entire portfolio into one company — something we strongly discourage — to enjoy the same rights as Wall Street investors, or they would have to wait three years to catch up to them," she said.

Large companies, however, argue that small shareholders should not be allowed to exert an outsized influence. The Business Roundtable has said that shareholders may use proposals as a form of "social commentary or to advocate for a social aim, regardless of the proposal's financial impact on the company." Corporations also say they end up racking up significant legal costs to respond to each proposal — ExxonMobil, for example, notes that it incurs more than $100,000 in costs per proposal, adding that "our experience is that the costs can greatly exceed this amount based on the significant board and senior management time dedicated to each proposal." (Assuming a cost of about $100,000 per proposal, even a dozen proposals, amounting to $1.2 million, wouldn't put much of a dent in the company's budget — Exxon reported $21 billion in earnings in 2018.)

Companies also don't like that just a handful of particularly-active shareholders — four people in total — file more than a quarter of shareholder proposals every year.

Other rule changes proposed by the SEC would make it harder for shareholders to resubmit repeat proposals and could make proxy advisory firms that vet shareholder resolutions more beholden to the companies they analyze. It can take time for shareholders to raise awareness and build support for an issue that eventually hits the main stream, like pay parity, and higher resubmission thresholds could shut out meaningful proposals as they gain steam.

It's hard for experts to predict exactly what changing the ownership threshold and rules around resubmission would do to shareholder activism. What's clear is that tighter regulations could very well shut people out, and make it easier for companies to ignore their shareholders — possibly to the detriment of other stakeholders.

Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, noted that restrictions on shareholder rights could end up hurting companies, as well.

"If you try to attempt to limit [shareholder resolutions], in one way or another, inadvertently you may remove from consideration a resolution that has greater core significance to the company," he said. "A rule that is less restrictive is probably the better rule."

The updates are now subject to a 60-day open comment period, which means the public can push for fewer restrictions — and that corporate America can ask for more.

Acting like an owner

At Amazon's shareholder meeting, Cunningham wasn't the only one asking uncomfortable questions about climate change. During the Q&A session, when Bezos actually had come out on stage, another audience member asked why the company wasn't moving faster to reduce its carbon emissions.

"It's hard to find an issue that is more important than climate change. The science is super compelling on this, there's no doubt," Bezos said. "There are a lot of initiatives underway, and we're not done. We'll think of more, we're very inventive."

That kind of public commitment can re-order a company's priorities, changing environmental impact from a side concern to one that could pose a real risk to the company's stock price. In September, Amazon released an analysis of its carbon footprint — an effort that had been requested by three successive shareholder resolutions in the early 2010s — and the Amazon employees say they'll be back next year.

For them, it's a way of literally living up to the company's "leadership principles," which emphasize acting like an owner.

"Fighting climate change seems like ownership in spades," said Maren Costa, a member of the group who has worked at Amazon since 2002. Doing it through her stock portfolio, rather than simply internal pressure, "was a real lightbulb for me," Costa said in an interview in May. "I wish we'd been doing this forever."