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.
