TCS Daily

Whether Right or Left: Always Wrong

By Stephen Bainbridge - April 11, 2006 12:00 AM

We're currently in the middle of proxy season -- the time of year during which public corporations hold their annual shareholder meetings. Most investors don't attend the annual meeting in person; instead, they vote by proxy, which is the corporate governance equivalent of an absentee ballot. Along with a proxy card on which to record their vote, the shareholders receive a proxy statement, in which the company's management makes extensive disclosures about the issues on which shareholders will be voting.

The typical proxy statement also includes one or more (often many more) proposals put forward by shareholders for a vote at the annual meeting. Some of these proposals relate to core economic issues, such as proposals to ban takeover defenses or to limit executive compensation. Indeed, left-leaning social activists have often used such proposals to advance their agenda. For example, in recent years, Wal-Mart annually has faced one or more shareholders proposals intended to facilitate unionization of Wal-Mart's employees.

Under Securities and Exchange Commission Rule 14a-8, a qualifying shareholder may submit a proposal and short supporting statement to be voted on at the next shareholder meeting and, more important, to be included in the corporation's own voting materials sent to shareholders. It is thus a cheap and easy way for activist shareholders to get their message out to a lot of other investors and get a vote.

Curiously, right-leaning social activists have not made use of the shareholder proposal process. If liberal shareholders were proposing that tobacco companies limit advertising, why weren't social conservatives proposing that media companies limit family unfriendly programming? If liberal shareholders were proposing divestment of defense-related lines of business, why weren't right-leaning shareholders proposing divestment of abortion-related lines of businesses and so on.

Perhaps the one-sided nature of the shareholder proposal system is changing. American Express recently reported receiving the following shareholder proposal:

"The Proposal requests that the Company 'form a committee to explore ways to formulate an equal employment opportunity policy which complies with all federal, state and local regulations but does not make reference to any matters related to sexual interests, activities or orientation.' The Proposal's supporting statement indicates that 'while the legal institution of marriage should be protected, the sexual interests, inclinations and activities of all employees should be a private matter, not a corporate concern.'"

The obvious intent of the proposer is to exclude sexual orientation as a protected class from AmEx's EEO policies. The company argued this would be potentially detrimental in terms of liability exposure and was an intrusion on management decision-making prerogatives:

"Companies manage risk through the implementation of various policies and procedures that specify the best accepted practices in many areas, such as environmental policy, quality assurance policy, health and safety policy and securities trading policies. Due to the complexity of federal, state and local employment laws, and the risk to the company of non-compliance, most prudent company managements develop policies to govern equal employment opportunity practices.

The Proposal seeks to take risk-management decisions regarding the Company's equal employment opportunity policy away from management and put them in the hands of shareholders. Specifically, the Proposal seeks to amend the policy to exclude reference to sexual interest, activities or orientation. ... Discriminating on the basis of sexual orientation or preferences is illegal in many states in which our Company has employees and does business .... The Proposal, if adopted, would expose the Company to increased risk of employment-related lawsuits from those who believe their employment at the company was terminated or refused due to their sexual orientation -- a situation which would be illegal in many jurisdictions. Should such an employment-related lawsuit be filed against the Company, the fact that the Company removed any reference to non-discrimination on the basis of sexual orientation from its equal employment opportunity policy would be a critical piece of evidence that the plaintiff could use against the Company. In fact, removal increases the Company's exposure to charges that it is implicitly sanctioning this discriminatory conduct."

The SEC nevertheless declined to authorize exclusion of the proposal from AmEx's proxy statement.

None of which is to say that I think anybody ought to be using the shareholder proposal rule to propose any such things. To the contrary, sound policy requires that the shareholder proposal rule -- if it is to exist at all, itself a debatable proposition -- should be limited to matters directly relating to corporate governance rather than social issues.

Think about your least favorite political cause. Do you really want companies in which you invest to have to provide a free platform for proponents of that cause to advance their agenda?

Yet, as we've seen, many proposals have less to do with a company's economic performance than with providing a soap-box.

To limit the use of the rule by social activists, the SEC ought to adopt a rule that would exclude shareholder proposals unless a reasonable shareholder of the specific corporation in question would regard the proposal as having material economic importance for the value of his shares.

This standard is based on the well-established securities law principle of materiality. It is intended to exclude proposals made primarily for the purpose of promoting general social and political causes, while requiring inclusion of proposals a reasonable investor would believe are relevant to the value of his investment. Such a test seems desirable so as to ensure that an adopted proposal redounds to the benefit of all shareholders, not just those who share the political and social views of the proponent.

Absent such a standard, the shareholder proposal rule becomes nothing less than a species of private eminent domain by which the federal government allows a small minority to appropriate someone else's property -- the company is a legal person, after all, and it is the company's proxy statement at issue -- for use as a soap-box to disseminate their views. Because the shareholders hold the residual claim, and all corporate expenditures thus come out of their pocket, it is not entirely clear why other shareholders should have to subsidize speech by a small minority.

If proposals like the one made at American Express become more common, maybe we'll finally have a bipartisan constituency for limiting the shareholder proposal rule once and for all.

The author teaches law at UCLA and writes a weekly column for



RE: focus on the money not the social agenda
I disagree with the author. Too frequently corporations are being influenced by a liberal take of social lifestyles. It is reflected in the advertising. Advertising influences more than sales, advertising also influences thought processes and moral acceptability. Marketing should be accomplished with the moral end in mind. It is mere foolishness if you think moral leftists are not capitalizing on marketing, moral conservatives deserve their input and shot!

Corporate autocracy
"To limit the use of the rule by social activists, the SEC ought to adopt a rule that would exclude shareholder proposals unless a reasonable shareholder of the specific corporation in question would regard the proposal as having material economic importance for the value of his shares."

Ah, but here's the rub. Who is to say what a "reasonable shareholder" would decide? Isn't the democratic way to allow all the shareholders to decide-- they do, after all, own the company-- and to let the majority rule? Your guideline would award autocracy over the process to some faceless board in the upper echelons of government or jurisprudence.

Also, by what principle do you decree that no guidelines toward shaping corporate policy may be allowed except those that bear solely on finances? Would it not be possible, for instance, to address a company making paper products to force them to also consider the environmental impacts of their business? It could be that a majority of shareholders would prefer that prime forest resources not be cut down to make Huggies, and that recycled products be their first source instead.

One would not know the answer to that question unless "reasonable shareholders decided among themselves the best direction THEIR company should take. In addition, one finds that "green" products quite often become new profit centers in their own right.

One is always free to vote to the contrary. But don't rig the game so that no vote can come up.

Usually nonsense
The shareholder proposals I have voted on are usually nonsense. They are irrelevant to operation of the corporation and are rejected by vote at the annual meeting, as is appropriate. The rejection can be colorful and entertaining.

Yes, the proposals are usually left-wing, and are really funny in how seriously they are worded. But, shareholders are smart people who have their own money invested in the stock of corporations in which they have confidence. They get to vote on the touchy-feely shareholder proposals; the coup de grace is worth the price of admission .

Green funds
You probably haven't noticed the rise in popularity of green funds. There do exist a fairly large number of environmentally responsible companies, and their profitability is respectable enough to make funds consisting exclusively of them among the better performers. Thus people who don't want to do harm while they are doing well have an alternative to choose from.

I can imagine however, your chortles of mirth when the very idea is mentioned. The notion that there exist companies that actually make a profit selling recycled paper must be beyond imagining.

On the contrary
If a corporation can become a credible business in the exciting world of recycling paper, more power to them. The objective of business is to return value to its shareowners (i.e., the thousands of people who own the business).

My objection to most shareowner proposals was that they were unconnected to business operation. Thus, a waste of time and effort for the thousands of owners having their own serious money invested in the companies. Most proposals are for Leftists who are concerned with other peoples' money, over which Leftists correctly have no control.

"Most proposals are for Leftists who are concerned with other peoples' money, over which Leftists correctly have no control."

Odd. My understanding of the process was that only shareholders got to submit proposals for consideration. Thus your "Leftists" wouldn't be too awfully different from "Rightists" in offering proposals that they felt affected their OWN money and the ends toward which it was invested.

Would you, for instance, refuse to consider a proposal that strove to create salary caps for the officers during periods of hard times?

Salary Caps?
It is exactly "during periods of hard times" that a corporation needs talented leadership. And, pay them enough to keep them.

Do you want the bosses to bail out when the economy is bad - like after a terrorist attack - and the stock price is plummeting? Or, do you want to keep talented people on board who know how to keep the company at least afloat until the economy revives?

We're not talking about bosses in government who can bail, when their policies cause a country to sink, like Richard Nixon.

Not quite what I meant
I was referring to when the company itself was enduring hard times, not the economy in general. When CEO's put their companies in a self-induced sling and then vote themselves a handsome nonperformance pay raise, I would like the flexibility to offer a recall vote, so the owners can decide on the option of getting rid of him. Often instead he ends up taking home money for himself while losing it for the stockholders. So I'm in favor of making shareholder initiatives as easy as possible, not restricting them.

In a world where the shareholder had no say in proposing an agenda, I would have to pull my money out. It would then be a rigged game.

The CEO's salary is set by the board. He can't just vote himself a raise.

Interlocking boards
Ever hear of them? The CEO's all sit on one anothers' boards. So they vote each other raises. You scratch my back, I'll scratch yours.

and they are illegal
show me that this is actually happening, and you will gain back a tiny fraction of the credibility you have lost on the other boards.

Otherwise I'll just assume that your paranoid gut is telling you what to think again.

Illegal? I think not
Interlocking boards of directors is a problem a great many people more informed than I have commented on-- at length. I'm sure you could google it up and find a wealth of information.

So I can't take the credit for the observation.

paranoia is frequently found amongst the economically illiterate
If you think companies have formed an interlocking board of directors, then inform the FEC.

Sorry, I see I haven't made my self clear. There are no companies with an interlocking Board, so far as I know. That would very likely be illegal, as you say. I've never heard the word used in that way.

However, the many Fortune 500 companies have interlocking Boards in the plural. Executive officers of one company will sit on the Boards of others. That way every time a proposal comes up to handsomely reimburse some deserving CEO, everyone will say "Sounds right to me", and pass it.

This arrangement serves the executives more than it does the shareholders. It has propelled executive comp into the ridiculous range, and decoupled it from performance, in countless instances.

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