Want More IPOs? Reform Broken Shareholder Proposal Process

The last year has been an exciting one for investors. In 2017, the Dow had 70 record closes, the NASDAQ had 72, and the S&P 500 had 62, leading to the headline that 2017 “set a record for setting records.” The S&P increased a whopping 21.7 percent for the year. 

Critics have been quick to try to find some bad news amidst all of this – lamenting that not everyone has benefited from this rising tide, despite the fact that unemployment is at a 17-year low.  They miss the point, as do the cheerleaders.  Rather than looking for the beneficiaries of the boom, or those allegedly left behind, the proper approach should be one of fostering an environment conducive to even more growth so that it is felt as widely as possible.

One possible way to achieve such a goal would be for the Securities and Exchange Commission to introduce much-needed reforms to the badly broken shareholder proposal process.  When the SEC first created the process 70 years ago, it was so shareholders could communicate their concerns to corporate boards and investors, and request timely action on important issues. But in recent years, the process has become increasingly bogged down in bureaucratic entanglements, leading many companies and investors to side-step it whenever possible.

The current shareholder proposal process has contributed to a major decline in new domestic stock listings, which are down fully 50 percent from two decades ago.  The aforementioned decline is not helpful to the every-day investor. 

It isn't because IPOs are one of the most profitable sources of investment for them. IPOs averaged a return above 20 percent in four of the last five years, according to Fidelity Research, and reached a whopping 40.8 percent in 2013.

A decline in IPOs doesn’t mean that fewer companies are starting up; it just means that retail investors have less access to them. More companies are raising capital privately from high net-worth investors and sovereign funds, rather than in public markets. The result is that the average investor using Ameritrade can’t attain exposure to a company in its early years. 

This barrier means the chance to invest shifts from Main Street investors to private equity, sovereign funds, and angel investors: wealthy individuals who don’t need to worry too much about their retirement. Fixing the shareholder proposal process could make a meaningful difference in addressing this. Importantly, such a fix redounds to company and investor alike.  

Indeed, when the marketplace is the one providing judgement, public companies are better off by virtue of having up-to-the-minute access to the great voting booth that is the equity marketplace. At the same time, small investors benefit when they're able to expose themselves to young companies and their above-average average returns.

To reduce the barriers to public offerings, Rep. Sean Duffy (R-Wis.) introduced a bill that would reduce barriers to public offerings, while improving corporate governance of publicly-held companies. His bill requires proxy advisory firms to register with the SEC, disclose conflicts of interest, and release their methodologies for proxy recommendations and analyses. It’s got broad bipartisan support and has a very good chance of passing.

2017 was very profitable for investors. With common sense reforms like Duffy’s, we can make sure that the financial markets work for everyone.