Back in March,
RiskMetrics reported:
This is the second year that activist shareholders have waged a campaign for universal health care. In 2007, a coalition of church groups and the Nathan Cummings Foundation, with advice from the AFL-CIO, proposed a resolution asking seven companies to report on ?the implications of rising health care expenses and how it is positioning itself to address this public policy issue without compromising the health and productivity of its work force.? Only two of those resolutions went to a vote.
The 2008 campaign, which includes 28 resolutions from the AFL-CIO and church groups, is considerably larger. The proposals? resolved clauses list five Institute of Medicine principles, which state that health care coverage should be universal, continuous, and affordable. Church groups submitted proposals at CVS Caremark and other health care firms that focus on corporate lobbying efforts to maintain the status quo. The AFL-CIO and church groups also filed proposals that stress the impact of health care costs on the U.S. economy at Wendy?s International and other corporations outside the health care industry.
A typical proposal is that submitted at
Boeing:
RESOLVED: Shareholders of The Boeing Company (the "Company") urge the Board of Directors (the "Board") to adopt principles for health care reform based upon principles reported by the Institute of Medicine:
1. Health care coverage should be universal.
2. Health care coverage should be continuous.
3. Health care coverage should be affordable to individuals and families.
4. The health insurance strategy should be affordable and sustainable for society.
5. Health insurance should enhance health and well being by promoting access to high-quality care that is effective, efficient, safe, timely, patient-centered, and equitable.
The NYT recently reported:
The Securities and Exchange Commission, shifting its position, has told companies they must allow shareholders to vote on a proposal for universal health insurance coverage.
Shareholders, including religious groups and labor unions, have offered the proposal in an effort to draw the nation?s largest corporations deeper into a debate over the future of health care, fast emerging as one of the most important issue in domestic policy.
The S.E.C. has told Boeing, General Motors, United Technologies, Wendy?s International and Xcel Energy over the last several months that they may not omit the health care proposal from their proxy materials.
Larry Ribstein comments:
... the SEC has decided that companies must allow shareholders to vote on a proposal for universal health insurance coverage ? yet another shift in position on the types of shareholder proposals firms must allow.
This sort of proposal was allowed in NYCERS v. Dole Food Co., Inc. 795 F. Supp. 95 (SDNY), dismissed as moot, 969 F.2d 1430 (2d. Cir. 1992). The issue makes for a great law school hypothetical on the shareholder proposal rule. Health care is, of course, quite significant for most firms, so it?s arguably not just a matter of general social policy, one of the exclusions under the shareholder proposal rule. That would also take it out of ?ordinary business.? Of course universal health care is beyond a company?s power to effectuate, but each company can take a lobbying position on this issue. But a company?s lobbying position would seem to get back to ordinary business. . . .
A better approach would seem to be common sense. Look, folks, this is no more a part of a shareholders? meeting than the Iraq war, right? But the whole business of shareholder proposals doesn?t really lend itself to common sense.
This use of Rule 14a-8 by the AFL-CIO, Lance E. Lindblom, President and CEO of The Nathan Cummings Foundation, and Rev. Michael H. Crosby, a 68-year-old Capuchin priest who has had discussions with nine companies on behalf of 20 Roman Catholic orders this year, is an astonishing abuse of the Rule to advance their personal political preferences. The SEC's willingness to insist that such proposals be included in corporate proxy statements illustrates just how badly broken the shareholder proposal process has become. It's also a deeply cautionary tale about the ways in which special interest shareholders are likely to abuse the powers shareholder activists like Lucian Bebchuk want to grant them. (See my article
Investor Activism: Reshaping the Playing Field?)
Rule 14a-8(i)(5) provides that a proposal relating to operations accounting for less than 5 percent of the firm?s assets, earnings or sales, and that is not otherwise significantly related to the firm?s business, may be omitted from the proxy statement. The principal problem here is deciding whether a proposal falling short of the various 5% thresholds is ?otherwise significantly related to the firm?s business.? The classic case is Lovenheim v. Iroquois Brands, Ltd. The defendant imported various food stuffs into the United States, including p?t? de foie gras from France. Lovenheim suspected that Iroquois Brands? French suppliers forced fed their geese, which produces larger livers, and which Lovenheim believed was a form of animal cruelty. Lovenheim proposed that Iroquois Brands form a committee to investigate the methods used by the firm?s suppliers in producing p?t? and report its findings to the shareholders.
Rule 14a-8(i)(7) allows the issuer to exclude so-called ?ordinary business matters.? The question here is whether a proposal is an ordinary matter for the board or an extraordinary matter on which shareholder input is appropriate. The answer hinges on whether the proposal involves significant policy questions. As for deciding whether a policy question is significant, most courts assume that Lovenheim-style ethical or social significance suffices.
So let?s look at the Lovenheim case. Iroquois Brands p?t? operations clearly did not satisfy Rule 14a-8(i)(5)?s five percent threshold tests. P?t? sales constituted a mere $79,000 per year, on which Iroquois Brands lost money, relative to annual revenues of $141 million and profits of $6 million. The result therefore turned on whether the p?t? operations were ?otherwise significantly related? to its business. Iroquois Brands contended that the phrase related to economic significance. Lovenheim contended that noneconomic tests of a proposal?s significance were appropriate.
The court agreed with Lovenheim, holding that while the proposal related ?to a matter of little economic significance,? the term ?otherwise significantly related? is not limited to economic significance. Rather, matters of ethical and social significance also can be considered. The court articulated four rationales for its interpretation: (1) the rule itself was ambiguous; (2) the SEC previously had required inclusion of important social policy questions even where less than 1% of the firm?s assets or earnings were implicated by the question; (3) in adopting the present 5% threshold tests, the SEC said proposals falling short of the thresholds still must be included if their significance appeared on the face of the proposal; (4) the earlier Medical Committee decision implied that proposals involving general political and social concerns were acceptable.
As evidence that Lovenheim?s proposal ?ethical or social? significance, the court observed that humane treatment of animals was one of the foundations of western civilization, citing various old and new statutes, ranging from the Seven Laws of Noah to the Massachusetts Bay Colony?s animal protection statute of 1641, to modern federal and state humane laws. Additional support came from the fact that ?leading organizations in the field of animal care? supported measures aimed at eliminating force feeding.
Query whether we want federal bureaucrats or even federal judges deciding whether a politically-charged proposal has enough ethical or social significance to justify its inclusion in the proxy statement. Think about your least favorite political cause. Under Lovenheim, can the firm omit a shareholder proposal about that cause? If so, on what basis can you justify omitting that proposal and requiring inclusion of the Lovenheim proposal? The issue is particularly troubling because many proposals have less to do with a company?s economic performance than with providing a soap-box for the proponent?s pet political cause. In Lovenheim, for example, plaintiff knew that his proposal had little economic significance. Instead, he wanted to make a political statement about animal cruelty.
Here then is a plausible alternative to the Lovenheim approach: Courts should ask whether a reasonable shareholder of this issuer 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.
Update:
Dealbreaker:
In one sense, the shareholder proposals urging universal health care seem less than useless. The companies cannot simply summon universal health care into existence, so it's a bit like adopting wishing for something as an official corporate policy.
What's more, asking shareholders to opine on health care policy threatens to unnecessarily complicate the process of corporate governance. It risks distracting shareholders from more fundamental management issues such as board membership. And it increases the cost of shareholding: now responsible corporate citizenship requires you bone up on health care policy too.
But, in another sense, these proposals might actually be dangerous. The capture of so many arms of our government--party machinery, congressional committees, regulatory agencies--by lobbyists for special interests is well-known, and is viewed by many as a serious threat to democratic legitimacy. Probably the beset that can be said is that completion between special interests often act as a kind of check-and-balance mechanism. These shareholder proposals about universal health are also likely to be captured by special interests, especially labor unions acting through labor dominated pension funds. Handing control of corporate lobbying efforts over to these interests could remove the check-and-balance aspect of corporate lobbying.
