The Securities and Exchange Commission should have a diminished role in corporate governance and, likewise, activist investors should have less influence over proxy voting, says SEC Commissioner Daniel Gallagher.

“It's time we asked whether the shareholder proposal system as currently designed is a net negative for the average investor,” Gallagher said during a March 27 speech at Tulane University Law School. The stock ownership threshold for submitting shareholder proposals should increase from an “absurdly low” $2,000 to as high as $2 million, he suggested. Other changes could include extending the length of the current stock holding requirement, banning the practice of “proposal by proxy,” and new rules to clarify and tighten the SEC's exclusion criteria.

Gallagher lamented the “increased federalization of corporate governance." The Dodd-Frank Act, for example, mandated SEC rulemaking to facilitate a shareholder vote on executive compensation and force public companies to compare median worker pay as a ratio to executive compensation. Other SEC rules bound for shareholder meetings pertain to compensation clawbacks in the event of an accounting restatement, pay for performance, and employee and director hedging of company stock.

One area where the SEC's “incursions into corporate governance” have had a particularly negative effect is shareholder proposals, Gallagher said. The SEC's rules permit qualifying shareholders to require a company to publish certain proposals in the company's proxy statement, which are then voted upon at the annual meeting. Currently, a proponent can bring a shareholder proposal if they have owned $2,000 or 1 percent of the company's stock for one year, so long as the proposal complies with “a handful of substantive—but in some cases discretionary—requirements.”

“Activist investors and corporate gadflies have used these loose rules to hijack the shareholder proposal system,” he added. In 2013, organized labor was behind approximately 34 percent of shareholder proposals; social activists and religious institutions accounted for 25 percent; and 40 percent were brought by “corporate gadflies.”

Among Gallagher's proposed fixes:

Increasing the stock ownership requirement to submit proxies from $2,000 to either $200,000 or $2 million.  His preferred alternative, however, is to scrap flat dollar tests in favor of a percentage-based threshold.

Banning the practice of “proposal by proxy,” where the proponent of a resolution acts on behalf of a shareholder that meets the threshold.  An alternative would be to require a proponent acting on behalf of one or more shareholders to meet a higher percentage threshold of outstanding shares.

Extending the length of the holding requirement from the current one year.

Reviewing the rule which permits the exclusion of proposals that are contrary to the Commission's proxy rules, including proposals that are materially false and misleading or that are overly vague. In a 2004 staff legal bulletin, SEC Staff curtailed the use of this exclusion, forced issuers to use their statement in opposition to take issue with inaccuracies or vagueness. “The burden to ensure that a submission is clear and factually accurate should be placed on the proponent, not the company,” Gallagher said.

Revising resubmission thresholds and taking a “three strikes and you're out” policy. If a proposal fails in its third year to garner majority support, the proposal would be excludable for the following five years. 

Gallagher also urged his SEC colleagues to reevaluate their oversight of what issues proponents are able to raise. For example, the ordinary business exclusion has been “perennially problematic,” he said. It permits exclusion of a proposal that deals with the company's “ordinary business operations,” unless it raises significant policy issues.  These terms are not defined, however, and the Commission has offered no guidance, “leaving staff to fend for itself in determining whether to issue no-action relief.”