As the press release from Boston Common Asset Management below reports, Cisco Systems made a deceptive announcement of vote results because they used two different methods to calculate proxy results announced at the annual meeting. They reported their own proposals as a simple ratio of those voting but included not only abstentions in the ratio for proposals put forward by shareowners, but all outstanding shares.
Of course, that is different than the simple formula used by the SEC to determine if a proposal is eligible for resubmission and it makes it look like shareowner proposals have much less support than they actually do. The deception moved support for a Boston Common proposal down from 34% to 19%. I’ve reported on similar deceptions by other companies previously. (Hat tip to Adam Kanzer of Domini. I had earlier reported Cisco had only included abstentions, not all outstanding shares… a huge difference, when reporting the vote on shareowner proposals.)
The SEC adopted new rules recently requiring that voting results be reported on a Form 8-K within four business days after the end of the AGM or other meeting where vote are held. Item 5.07 of that form doesn’t require companies to include voting percentages, so one reading would allow companies to report the voting percentages to the public as they wish, as long as they report the raw voting data as required.
Unfortunately, it appears that shareowners, including us, were asleep with regard to this issue during the rulemaking process. None of the questions asked by the SEC in its proposing release addressed the issue of reporting ratios consistently. According to Broc Romanek at theCorporateCounsel.net, nor did any comments from shareowners, at least not to his knowledge.
Complicating the matter further is the fact that state laws govern how to calculate whether a proposal is passed (some require counting those “present,” including abstentions) and a company’s bylaws can also come into play. (An Emerging Hot Topic? Whether to Disclose Voting Result Percentages, theCorporateCounsel.net/Blog, 5/5/2010) But “passage” actually has little consequence for most shareowner proposals, since they aren’t binding and I’m relatively certain no state laws require reporting voting results on management proposals using a different formula than reports on shareowner proposals.
Cisco is obviously trying to influence the perception of shareowners, particularly individual shareowners and small institutional investors who don’t subscribe to proxy advisory services.
Large institutional investors are unlikely to be fooled. Risk Metrics, for example, reports vote results under the formula use by the SEC in Rule 14a-8(i)(12) to determine eligibility for resubmission. That method is FOR/FOR + AGAINST without counting abstentions or broker votes in the denominator. They use the same formula when applying their policy to recommend a withhold-against vote against directors who fail to respond to two majority-supported proposals. See 2011 US Audit/Board Policy: Frequently Asked Questions (Question 1 under the Board Responsiveness). Hat tip to Ted Allen for informing me of their policies.
However, Risk Metrics doesn’t have a policy to withhold support from directors at issuers that report vote results one way for management and another way for shareowner proposals. Those who subscribe to their services may want to propose such sanctions in the future.
The Council of Institutional Investors has a policy that “Boards should take actions recommended in shareowner proposals that receive a majority of votes cast for and against. If shareowner approval is required for the action, the board should seek a binding vote on the action at the next shareowner meeting.” Therefore, they are looking at the percentage as a percentage of cast votes, excluding abstentions. Again, members of CII might want to urge some sanction on deceptive reporting practices, such as those used by Cisco.
One could argue that reporting voting results of management and shareowner proposals using differently formulas could be considered a misleading statement under Rule 10b-5 that is arguably material, since it may influence vote decisions in subsequent years. If the company’s spin could be considered making false statements in order to drive up or sustain share prices we might have a case.
However, I’m reminded of Soviet reporting (or was it simply our own propaganda on their reporting?). The story I heard as a kid was that Pravda reported that the USSR placed second in a race, whereas the US place next to last (There were actually only two in the race. The US came in first; the USSR second.)
They may be deceptive but Cisco’s statements aren’t false. However, As Glyn Holton indicates in the press release below, Cisco’s actions speak “volumes about management’s attitude towards their own shareowners.” (Disclosure: The publisher of CorpGov.net, James McRitchie, holds investments in Cisco Systems.)
Boston Common Asset Management, LLC has divested of its holdings in Cisco Systems, Inc. stock (NYSE: CSCO) due in part to the company’s weak human rights risk management and poor response to investor concerns. Cisco’s deceptive announcement of vote results on proxy items at the 2010 annual shareholder meeting has raised further alarm about the company’s commitment to transparency.
Since 2005 Boston Common has led a growing coalition of investors, representing over 20 million Cisco shares, in asking Cisco management to ensure its products and services do not stifle human rights. Cisco has testified before federal law makers twice since 2006 over questions on its human rights record, including its marketing of equipment to the Chinese Ministry of Public Security.
“Boston Common’s decision to divest comes after years of campaigning Cisco for greater transparency and accountability on key human rights and business development concerns,” stated Dawn Wolfe, associate director of environmental, social, and governance research at Boston Common Asset Management. “Freedom of expression, privacy, and personal security are all critical elements in maximizing network traffic. Politically and socially repressive policies related to speech and privacy has a chilling effect on users and violates universally recognized human rights. When pressed for details on how Cisco addresses these risks, they come up short.”
At the November 18, 2010 annual meeting of shareholders, Cisco did not answer yet another request for engagement with shareholders. This followed a September 30, 2010 letter to independent board member and Stanford president John Hennessy requesting his assistance in establishing a meaningful dialogue between Cisco and shareholders on human rights. Similar to previous attempts to engage the Board as a whole, Hennessy did not respond to the request.
“As technology becomes more prevalent in the world, we expect human rights related concerns will become more, not less prominent,” said Nevin Dulabaum, president of Church of the Brethren Benefit Trust, a long-time shareholder of Cisco Systems and active participant in the investor-driven human rights campaign. “For all its talk about the ‘human network’ and adherence to the United Nations Universal Declaration of Human Rights, Cisco has not demonstrated in any concrete way that it fully recognizes its potential impact on human rights around the world.”
Boston Common’s ESG Team recommended the removal of Cisco Systems from its portfolios because of strong reservations about its human rights performance and poor shareholder engagement on the issue.
Deceptive Vote Tallying Behind Proxy Results Announced at Annual Meeting
In an apparent attempt to downplay votes in favor of shareholder sponsored proposals on the proxy ballot, Cisco used two different methods to calculate proxy results announced at the annual meeting—one for proposals put forward by its own management and a second for proposals sponsored by Cisco shareholders which served to dilute support.
“If management is reporting votes one way for their own proposals and another way for shareowner sponsored proposals, that is deceptive. It speaks volumes about management’s attitude towards their own shareowners — a flashing red light. Ignore it at your peril,” stated Glyn Holton, executive director, United States Proxy Exchange.
Boston Common’s human rights proposal was supported by 34% of voted shares when calculated using the standard SEC method, the one Cisco used to calculate support for its own proposals, including the advisory vote on pay.
If Cisco used the same method based on all outstanding shares to calculate support for its own proposals, not just those sponsored by shareholders, its executive compensation package would have received support from just over half of its shareholders.
“The voice of shareholders fall on deaf ears at Cisco,” stated Wolfe. “About a third of Cisco Systems shareholders voting their proxies have supported our proposal over the years, voting in favor of greater disclosure on issues of censorship and privacy. Cisco’s deceptive tallying practices in 2010 do not change that. The investor coalition will march ahead, and perhaps one day Cisco will wake-up and realize how dedicated these shareholders are to the company’s success. Until then, significant questions remain about its ability to manage risks it is reticent to recognize.”
Dawn Wolfe, Associate Director of ESG Research, 617-720-5557. firstname.lastname@example.org
About Boston Common Asset Management
Boston Common Asset Management is an investment manager specializing in sustainable and responsible equity and balanced strategies. We pursue long-term capital appreciation by seeking to invest in diversified portfolios of high quality, socially responsible stocks. Through rigorous analysis of financial, environmental, social, and governance (ESG) factors we identify attractively valued companies for investment. As shareholders, we urge portfolio companies to improve transparency, accountability, and attention to ESG issues. Our focus is global; we manage U.S. and international portfolios, customized to the needs of institutional and individual investors.