Costco ESG momentum has improved. I submitted a shareholder proposal to help keep it on that path. The proposal would eliminate a corporate governance anomaly Costco has by virtue of being incorporated in the state of Washington, which allows articles of incorporation to provide that directors cannot be removed without cause by shareholders.
Costco ESG Momentum: Recent
Truvalue Labs parses news, ESG data, analytics and artificial intelligence to evaluate factors often missed by stock analysts, such as Costco’s widely discussed human capital advantage.
Last October, Costco made the 10 Top S&P companies for ESG Momentum compiled by Truvalue Labs after Costco announced compostable coffee pods, a new chemicals policy, and–like Home Depot–investment in solar panels.
Costco ESG Momentum: Governance Reforms
Earlier this year, Costco declassified its board. That came after earlier reforms we worked on like adopting proxy access, allowing special meetings, adopting a simple majority vote standard, etc. Although Costco now has a declassified board and adopted a special meeting right for shareholders, that right is practically useless if shareholders cannot remove and fill board seats. Why hold a special meeting if you cannot remove and replace directors?
Costco ESG Momentum: Further to Go
Sustainalytics’ ESG Ratings measure how well companies proactively manage the environmental, social and governance issues that are the most material to their business and provide an assessment of companies’ ability to mitigate ESG risks. The ESG Rating is a quantitative score on a scale of 1-100, based on a balanced scorecard system. According to Sustainalytics, Costco still has further to go. I will be looking over the measures of Sustainalytics, Truevalue Labs and others in the years to come to better determine how to further drive long-term shareholder value at Costco in the future.
Costco ESG Momentum: Right to Remove Directors
If Costco were incorporated in Delaware the company would be legally required to provide the right of removal to shareholders. The VAALCO Energy decision invalidated provisions that directors could only be removed for cause. Unfortunately, Costco is incorporated in Washington State.
In order to correct the anomaly, filed the following shareholder proposal to be voted at the January 2020 shareholder meeting asking the board to “undertake such steps as may be necessary to permit removal of directors by a majority vote of shareholders with or without cause”:
Shareholder Right to Remove Directors
Resolved: Shareholders ask our board to undertake such steps as may be necessary to permit removal of directors by a majority vote of shareholders with or without cause.
Supporting Statement: Best corporate governance practice is to allow shareholders, by majority vote, to elect their directors and allow for the removal of directors with or without cause by a majority vote of shares voted and against directors.
In December 2015, the Delaware Court of Chancery (the “Court”) issued a decision, In Re VAALCO Energy, Inc., in which the Court interpreted Section 141(k) of General Corporation Law of the State of Delaware and held that if a company does not have (i) a classified board of directors or (ii) cumulative voting in election of directors, then such company may not provide in its certificate of incorporation or bylaws that its directors may be removed only for cause. Prior to the VAALCO decision, it was unclear whether Section 141(k) prohibited allowing director removal only for cause when a company did not have classified board or did not allow for a cumulative vote.
Although Costco Wholesale Corporation (Costco) is incorporated in Washington State, not Delaware, the Delaware ruling would suggest review of organizational and governing documents is prudent, particularly at companies such as Costco, which recently declassified its board. Washington Business Corporation Act (RCW 23B.08.080) provides “shareholders may remove one or more directors with or without cause unless the articles of incorporations provide that directors may only be removed for cause.”
To obtain a board majority between annual meetings in an emergency situation, shareholders must be able to create vacancies and be able to fill them. Although Costco allows shareholders to call a special meeting, the main purpose of calling a special meeting is to change the board between annual meetings.
The current right of shareholders to call a special meeting can accomplish little if directors cannot be removed without cause. See The Never-Ending Quest for Shareholder Rights: Special Meetings and Written Consent by Emiliano Catan and Marcel Kahan, November 2018 at https://corpgov.law.harvard.edu/2019/05/31/the-never-ending-quest-for-shareholder-rights-special-meetings-and-written-consent/.
Shareholder rights to call a special meeting and to act by written consent are two complimentary ways to bring an important matter to the attention of both management and shareholders outside the annual meeting cycle. Costco shareholders have no effective right to act by written consent because such consents must be unanimous. Similarly, our right to call a special meeting is constrained by allowing removal of directors only for cause.
Increase Shareholder Value
Vote for Shareholder Right to Remove Directors