Regulation & Public Policy

Why Weakening the Shareholder Proposal Process Hurts Companies

Brand Provided | By Dan Saccardi | Published 16 hours ago | About a 3 minute read

Image: Photo by Benjamin Child on Unsplash

For decades, the U.S. shareholder proposal process has provided companies and investors with a practical, efficient way to engage on important business issues, from risk management to governance and long-term strategy. It has helped companies hear concerns early, understand shareholder priorities, and resolve issues before they escalate into more costly and adversarial outcomes. This process functions as a low-cost, structured channel for dialogue, allowing companies to test investors’ sentiment and build transparency without resorting to litigation or proxy fights.

That system is now at risk. The Securities and Exchange Commission is considering significant changes to the shareholder proposal process, and recent actions suggest the agency is already stepping back from its longstanding role as a neutral referee. Earlier this year, the SEC abruptly stopped issuing “no-action” letters, which provide guidance on whether proposals follow existing rules and whether the SEC is likely to act if a company excludes a proposal. Without that guidance, companies do not have the clarity and legal certainty they have relied on for decades.

We are already seeing the consequences. In the absence of SEC oversight, disputes that were once resolved through the no-action process are increasingly moving into the courts. Companies such as AT&T and PepsiCo faced lawsuits from shareholders after they excluded proposals, only to later settle and agree to include those proposals on their proxy ballots. What was once a predictable, rules-based process is quickly becoming more fragmented, costly, and time-consuming.

If this trend continues, companies should expect a more challenging and unpredictable relationship with their investors. Shareholder engagement is likely to become more contentious—including more aggressive campaigns targeting directors—with fewer opportunities to resolve issues collaboratively. Litigation risks will also increase, as shareholders turn to courts to seek disclosure or challenge exclusions. Over time, this could lead to a patchwork, state-by-state approach to governance disputes, governed in part by a company’s state of incorporation, creating additional uncertainty for businesses.

The current system is not perfect, but it evolved over decades through practical use and incremental improvement. It provides a shared framework that benefits both companies and investors by creating a clear path for raising concerns and reaching resolution. Weakening that framework does not reduce pressure on companies, it shifts that pressure into more disruptive channels, such as litigation, that are much harder to manage and very expensive and tedious to resolve.

Companies have a clear stake in maintaining a stable and predictable way of working with investors, and now is the time to act. Freedom to Invest is working to elevate the business voice on this issue—providing resources, coordinating outreach, and creating opportunities for companies to engage policymakers and the media. Business leaders can join these efforts by leveraging Freedom to Invest resources, participating in advocacy opportunities—including by making their voice heard within their trade associations—and helping make the case that preserving the shareholder proposal process is essential to effective corporate governance and long-term value creation.

Ensuring that policymakers understand the real-world business impacts of these changes will be critical to protecting a system that works for companies, investors, and the broader market.