Some corporations and lobbying organizations claim small shareholders (Chevedden, McRitchie/Young, and the Steiners) submit 40% of proposals, most fail and we are forcing companies to waste money. Actually, small shareholders are critical to democracy.
This is an old complaint. A 1947 hearing on proxy rules before a House Committee charged shareholder proposal rules would provide a “field day for crackpots.” [165 Com. & Fin. Chron. 273 (May 22, 1947)] A study of 286 shareholder proposals submitted between 1944 and 1951 found that 137, or 48% were submitted by the Gilbert brothers, the so-called crackpots of their day. In 1952, they owned from 5 to 324 shares in 118 companies.
Thankfully, the SEC sided with the “crackpots’ in enforcing its rules in the landmark case of SEC v TransAmerica (1948) when judge Biggs ruled, “a corporation is run for the benefit of its stockholders and not for that of its managers.” (see The SEC Proxy Proposal Rule: The Corporate Gadfly, by Frank D. Emerson and Franklin C. Latcham, University of Chicago Law Review, 1951)
The fact that 3 families submit 40% of the proposals is not historically unusual. We should learn from history. Without early gadflies like the Gilberts and Wilma Soss we wouldn’t have the right to file proposals, vote on auditors or have executive pay disclosed… and there would be even fewer women on boards.
If Not Small Shareholders, Who?
SEC rules continue to facilitate shareholder democracy. Ideas take time to take root. Banning the right of small shareholders to file proposals or raising the threshold for resubmissions would essentially ban the exchange of ideas that appear on ballots. (Almost all shareholder proposals are advisory and can be ignored…. as our winning votes have been ignored year after year at Netflix.)
We can’t depend on huge funds like BlackRock, Vanguard and State Street. They have never submitted any proposals to be voted by shareholders. Proposed law would require shareholders to own 1% of shares. That would lock out even the largest public, SRI and union funds from filing at the vast majority of companies. (see New Research Highlights The Value Of Shareholder Proposals From Small Investors)
Small Shareholders Critical to Democracy
Long before corporations became persons, reaffirmed and strengthened by the 2010 Supreme Court decision in Citizens United v. FEC, people were persons. Corporations are important mediating structures between the individual and societies but it is the ethics of individuals that shape our future.
Lewis Gilbert recognized that “we cannot have good political government unless we have good corporate governments,” since “our political leaders reflect the thinking of the corporate world.” (Lewis Gilbert’s Dividends and Democracy Still Timely) Banning small shareholders from the proxy proposal process would be like banning discussions in public elections to millionaire business leaders. Oligarchies are not democracies.
Shareholders in the 1940s and 1950s were able to beat back calls to exclude proposals by so-called gadflies. Of course, back then we had strong labor unions and a strong ally in the SEC. Will the SEC of today protect the rights of small shareholders or will they protect corporate management from small shareholders?