Republicans on a bank legislative committee are scheduled this week to approve a little-known provision in a broader bank deregulation legislation that would make it next to impossible for shareholders to submit proposals for consideration at U.S. corporations.

Institutional investor opponents of the measure argue that backers - led by the CEO lobby group the Business Roundtable -- should rethink their enthusiasm. They contend that the provision would have the unintended consequence of pushing more big and small shareholders to back activist hedge fund proxy contests.

"There are genuine concerns from investors, and if they can't use proposals that can be narrowly targeted, there will be other pressure points," Council of Institutional Investors president Ken Bertsch said. "More things will simmer without being crystalized, leaving more room for activists. And there will be increased reliance on hedge fund activists to push for needed corporate changes."

At issue is a measure in a bank deregulation bill, the Financial Choice Act, which would require shareholders seeking to submit proposals at publicly-traded U.S. corporations to hold 1% of their target company's shares for three years. That's a significant departure from the current system where a shareholder can submit a proposal when they own $2000 worth of shares for one year.

The provision would effectively end the practice that exists today where a broad range of shareholders, including retail and institutional investors, submit hundreds of proposals annually for consideration on a wide range of subjects, from the removal of anti-takeover protections to measures urging big banks to break up or companies to consider environmental policy issues.

The proposals typically aren't binding, in that the firm doesn't have to do what the shareholder is seeking. Nevertheless, corporations will fight them tooth and nail, including with lawsuits. And strong backing for proposals over the years has helped push companies to remove anti-takeover protections, install more independent directors and even move to eliminate workplace discrimination.

"There are hundreds of companies that today prohibit workplace discrimination on sexual orientation and gender identity in response to shareholder proposals," said Michael Garland, governance director for the New York City Pension Funds. "Over time it has changed the behavior of companies and created a more productive workplace."

Investors argue that eliminating this forum for shareholders to show displeasure with a company will have the effect of disconnecting boards and management teams from concerns raised by their investor base. They argue that boards and executives are already often insulated from shareholder concerns, partly because shareholders are reluctant to confront management face-to-face. As a result, a board might not make the smaller governance changes that rank-and-file institutional investors are seeking, all of which could drive them to support a more aggressive activist hedge fund campaign targeting their board down the road.

"It would have a chilling effect on shareholder-company engagement," said Aeisha Mastagni, governance investment officer at the California State Teachers' Retirement System.

Garland added that passage of the measure could make some institutional investors more sympathetic to any activist fund's board critiques. "We will look at the activist's complaints and the remedies they are suggesting and make an assessment of a company's existing performance and board," Garland said. 

Institutional investors also argue that in the absence of an activist investor or the ability to submit shareholder proposals, institutional investors will launch more so-called "just vote no" campaigns against incumbent directors in uncontested elections.

"Investor concerns will not evaporate, they'll find a new place to go - which will be board director votes," said Anne Simpson, governance director at the California Public Employees' Retirement System.

Garland argues that moving from a narrowly-focused shareholder proposal approach to a "just vote no" director campaign could result in more confusion about intentions. "A vote no [against a director] is a blunt instrument," Garland said. "Trying to remove directors is very different than making a specific case for reform, whether it is environmental, social or governance reform."

Such "just vote no" efforts already exist, but they aren't frequently employed. However, they are used on occasion. For example, a significant minority of shareholders opposed twelve of Wells Fargo & Co. (WFC) directors last month in an uncontested election, with the embattled megabank's chairman, Stephen Sanger, garnering just 56% of support.

The measure is just one small provision in the package of deregulatory bills, which are up for a vote in the House Financial Services Committee Tuesday, Wednesday and possibly Thursday. The measure on shareholder proposals is expected to be approved without the support of Democrats on the committee.

Jim Cramer and the AAP team takes a deep dive analysis into Alphabet (GOOGL) following last week's strong earnings report Find out what they are telling their investment club members. Get a free trial subscription to Action Alerts PLUS.

Meanwhile, over on Real Money, Cramer explains why Estee Lauder's CEO, Fabrizio Freda, has pulled off the impossible. Get his insights with a free trial subscription to Real Money.