Spring 2021 CorpGov.net Proxy Proposal results are in, as reported below. New SEC rules will delay needed ESG reforms, so we worked in cooperation with more groups and filed more proposals than ever. We still averaged more than a 50% vote in favor.
The new SEC rules include increasing the ownership and resubmission thresholds for Rule 14a-8 shareholder proposals to discourage participation by retail shareholders. Salvation is in the opposite direction, encouraging and empowering Main Street investors. I joined with the Interfaith Center on Corporate Responsibility (ICCR) and As You Sow in suing for relief. See Restore Shareholder Proposal Rights.
Spring 2021 CorpGov.net Proxy Proposal Results
During the last few proxy seasons, I have kept a spreadsheet of portfolio stocks, potential topics, due dates, etc. To the right is a much abbreviated clip from that ongoing file. A blank space under the column Vote Y means the annual meeting has not been held as of the time I post this or votes have not been reported.
Zero percent means we lost a no-action request or we did not present at the meeting because of an unexpected glitch. We reached an agreement in cases showing 100% vote.
As reported at the bottom of the spreadsheet, our proposals averaged just over 50% support. That is a little less than the last couple of years. The drop in support is because of four new initiatives.
Spring 2021 CorpGov.net: New Initiatives
New initiatives are usually difficult. Untested proposals are often challenged through the no-action process. New proposals are not covered by existing proxy voting policies. Investors too often default to the board’s recommendation (oppose).
Spring 2021 CorpGov.net: PBC
In conjunction with The Shareholder Commons (TSC), we filed proposals at nine companies asking them to convert to public benefit companies. Most of these companies had signed the Business Roundtable’s Statement on the Purpose of a Corporation. That “modernized” their corporate governance to reflect a “commitment to a free-market economy that serves all Americans,” not just shareholders.
We effectively called their bluff. See Was the Business Roundtable Statement on Corporate Purpose Mostly for Show? Where needed, we included provisions regarding dual-class shares to ensure conversion to a PBC could not be used by a controlling shareholder as a public relations cover. For example, the proposal to Facebook included the following:
contingent on our controlling shareholder converting sufficient Class B shares to Class A to ensure that at least 60% of the Company’s voting power is not beneficially owned or controlled by Mark Zuckerberg or his immediate family.
Results ranged from 1% at both Alphabet and Facebook, which have dual-class shares entrenching founders, to almost 12% at Twitter. Although Rhode Island’s treasurer voted in favor, other progressive public funds like CalPERS voted against it. Broadridge filed for no-action relief but TSC’s arguments are compelling. I expect the measure will be on the proxy.
Questions to readers: Why are progressive funds, such as CalPERS, voting against these proposals? Are we asking for too much? We are asking shareholders to vote in favor of yielding some of their power to other stakeholders. Is it realistic to expect them to do so?
In their book, Accountable: The Rise of Citizen Capitalism, O’Leary and Valdmanis propose that corporations “recharter around a deeper purpose.” They argue workers, investors, and other stakeholders are not inspired by the most common corporate purpose: “To do what is lawful in the state of Delaware.” Such rechartering “is the primary antidote to fiduciary absolutism.” Rechartering will facilitate more long-term focus, reinforcing social responsibility. The authors then go on to recommend holding companies accountable to their deeper purpose, once filed, and aligning their business models with that purpose. In my review, I ask, where is the enforcement mechanism?
A PBC’s stakeholders can potentially take them to court to enforce their deeper purpose. Even that mechanism seems weak to me. Going to court is like going to war without guns. Both actions are expensive. I would prefer stakeholders have the power to elect directors. It may be difficult to understand how that would work for suppliers, customers, etc. However, we can easily envision workers having board representation. Senator Warren’s “Accountable Capitalism Act” would reserve 40% of board seats for workers at the largest companies. Marc Steinberg, a preeminent securities law authority, recommends “a minimum of one board position should be allocated for employee representation.”
This measure would effectuate greater board diversity, bring different perspectives to the board, and likely improve employee morale. Indeed, many of the OECD countries mandate worker representation on corporate boards of publicly-held companies. This approach recognizes the significant contributions that an employee representative can make to enhance board deliberations and decisions. Further, as one source has posited, ‘there is a conviction that in a democratic society, people in power should be accountable to those over whom power is exercised [encompassing] every social institution, including the corporation.
Steinberg also offers a milder, unenforceable approach than direct representation. Give stakeholders greater voice through “stakeholder advisory councils.” Examples cited include BP, Burger King, Coca-Cola, Nestle, Unilever, and Wells Fargo. (Rethinking Securities Law, 149)
Should we take a multi-step approach? Ask companies to reincorporate with a deeper purpose, then seek worker councils, stakeholder advisory councils, and then workers on boards? More discussion at Shareholder Proposals Requesting Conversion to Public Benefit Corporations: A Fleeting Trend or the Future?
Spring 2021 CorpGov.net: EX
Again, in conjunction with The Shareholder Commons (TSC), we filed proposals at five companies asking them to address issues around externalizing costs. At most, if not all, the top three holders were Vanguard, State Street, and BlackRock, which are generally indexed or otherwise broadly diversified. Like those huge funds, my wife and I also see ourselves as universal owners. Our investments are widely diversified, although not nearly as widely as the Big 3 or public pensions.
While individual companies may profit by ignoring costs they externalize, diversified shareholders will ultimately pay these costs. They have a right to ask what they are. Proxy advisors and governance professionals in the United States are prone to only consider the effect of proxy votes on individual securities. They ignore the effect votes at one company have on other companies held in the diversified portfolios of typical shareholders and beneficial owners. Apparently, both they and their clients are unfamiliar with the concept of universal owners, which I thought had been widely discussed since the publication of The Rise of Fiduciary Capitalism.
More than 20 years later, it is still apparently cutting edge thought. For example, in the case of JP Morgan Chase, SEC Staff wrote, “the Proposal does not transcend the Company’s ordinary business operations.” Externalizing costs is ordinary business.
I do not believe a majority of current SEC commissioners are sanguine about companies externalizing costs in the normal course of business. We may need to redraft this type of proposal. The SEC and proxy advisors will come to see their desirability. We are happy to receive advice from others concerning how to reframe proposals on this important topic in order to get through no-action challenges. Got any to offer?
Spring 2021 CorpGov.net: BODD
To Increase the diversity of director nominees (board of directors diversity, coded BODD) we filed proposals at 8 companies. This proposal aims to build off success in increasing gender and ethnic diversity on boards using a Rooney Rule strategy. As can be seen, results ranged from 5.9% support at Citigroup to 7.2% at Starbucks. We won 6.2% support at Walt Disney. ProxyInsight (subscription required) reports the Disney proposal received support from several international funds like BNP Paribas, Robeco, KLP Kapitalforvaltning, as well as SRI funds like Calvert, Domin, and Trillium. Louisiana State Employees’ Retirement System and the Rhode Island Treasurer supported it but public funds with workers on their own boards, like CalPERS, CalSTRS, and NYC pensions did not. Why not?
The ratio of the CEO’s annual total compensation to the median of the annual total compensation of all employees was reported by Disney as 293 to 1. However, Disney does not compare the median employee ratio to Robert Iger, who was only the CEO for 2 months but earned $21M. Instead, Disney compares the median employee to Robert Chapek, who was CEO for 10 months and earned $14M.
Compare the median pay of $51,000 to the total CEO pay for the year of $35M. That yields a pay ratio of 686:1. Yet, that is still too low of an estimate because Disney “annualized the pay for part- and full-time employees who were furloughed for any part of fiscal 2020.” In other words, in terms of that calculation, the economic pain of 30,000+ furloughed workers is ignored. Unfortunately, we don’t have an estimate of those losses. As a result, median pay looks higher than it was, and the pay ratio doesn’t look as bad. However, furloughed workers were not paid. Disney just calculated median pay as if we were all in Fantasyland. A recent report by Rosanna Landis Weaver, The 100 Most Overpaid CEOs, named Walt Disney in the top 5 of those overpaid.
Disney argued “diversity” only applies to race, ethnicity, gender, gender preference, etc., not occupation or, by implication, economic class. Mary Barra, as a woman, ensures some degree of diversity on the Disney Board. However, she earns over $21M a year at GM and over $300,000 a year at Disney. How well can she relate to the median Disney employee who earns $51,000? And that figure stands only by pretending furloughed employees kept getting paid. How connected is she to the worldview of the typical Disney customer? She is likely to share a similar perspective on many issues as other Board members. Disney employees might bring fresh insights.
Disney matches the charitable contributions of Board members up to $50,000 a year. So directors can turn $50,000 into $100,000 to give away to charity, while employees earn $51,000 only by pretending Disney actually kept paying furloughed employees. In other words, it is very charitable to Board members but not to its employees. It is fully within the right of shareholders to encourage Disney to start with a more diversified slate of candidates, even if the Board ultimately nominates others.
Our proposal was an opening move. We would have withdrawn it if the Board had agreed to any significant step to increase workers’ voice. For example, the Board could have appointed a formal workforce advisory panel or designated a director to liaise with workers. They could have set up a substantive employee stock ownership plan (an ESOP), with voting rights held by employees or elected trustees.
A worker on the Board, a workforce advisory panel, or a designated director could institutionalize ongoing dialogue. An ESOP, with trustees elected by employees, could have a real influence on Board composition. Any of these changes would engage and empower workers, leading to a better place to work.
As mentioned above in the section discussing PBC proposals, should we seek workers councils, shadow boards, or other alternatives to achieve voice for workers? Instead of asking that workers be put in the candidate pool, would it be better to ask that candidates selected by workers be placed in the pool?
Another variant I have been considering would be to ask that proxy access provisions be modified. The vast majority of companies allowing proxy access limit groups filing such board candidates to 20 members. Some workers, such as those at General Electric, Procter & Gamble, and Clorox collectively own a substantial portion of their employer’s stock. Thousands of workers may collectively own well over the 3% held for 3 years requirement for proxy access. Eliminating group limits might encourage workers to join together with each other and sympathetic funds to place their own candidates directly on company proxies. What do you think? Other ideas? More at Worker Voice and the New Corporate Boardroom.
Spring 2021 CorpGov.net: Ads
We worked with Open MIC (Open Media and Information Companies Initiative) to address concerns around corporate ads. Current Open MIC initiatives include racial and gender diversity in the tech workforce; algorithmic accountability; hate speech and media manipulation; net neutrality; and online privacy. We are currently working on campaigns that target Amazon, Twitter, Google, and Facebook.
Our proposals requested independent third-party reports to ensure company advertising policies are not contributing to violations of civil or human rights. Unfortunately, we had some e-mail glitches that led to poor no-action responses. I hope we can work on these important issues next season without such problems.
Most of our 9 proposals on proxy access also did well. As discussed above under BODD, we may try taking this to another level next season by focusing on the rights of workers as shareholders.
Spring 2021 CorpGov.net: More Traditional Initiatives
We obtained higher votes on more traditional topics. One written consent (WC) proposal out of 5 won over 50% support. The others all demonstrated substantial support.
We filed 11 proposals on special meetings by shareholders and won over 50% support at 5. Both proposals asking for the elimination of supermajority vote (SMV) provisions won well over 50%.
Our proposal at NCR requesting that shareholders be able to remove directors (RD) without cause was poorly researched since it conflicted with the law in Maryland.
Our 4 proposals requesting better political disclosures won majority support or board implementation. We have already filed a couple of proposals for next year that aim to move us a little further down the road. Many thanks to the Center for Political Accountability. Working with them on these issues has been a real pleasure.
We only filed one proposal aimed at increasing female diversity on the board and were able to reach an agreement on implementation at PetMed Express. Although monitoring continues, most of the companies in our portfolios appear to be making progress.
We filed 22 proposals requesting unopposed directors be elected by a majority vote (DMV). This feels like a baby step to good corporate governance.
We only filed one proposal requesting disclosure of lobbying expenditures (DLE). Success in this area is tracking behind the disclosure of political expenses but equally important. We may file more next year.
Last, we filed four requests for the annual election (AE) of directors. We can count on support on these even from the huge index funds, so wins are almost certain where the company does not have a dual-class structure or there is no controlling shareholder. As in many other areas, Tesla is a special case.
Tesla is wheeling out what amounts to a Trojan Horse. In 2020 my Tesla proposal to eliminate supermajority requirements won 56% of the vote, a majority. Like most shareholder proposals, it was advisory. This year, it is on the ballot as a management proposal and needs 67% support to pass. We are unlikely to get it because it looks like Elon Musk is opposing it… although the board’s official position is neutral. He, his relatives, and close friends hold enough shares to prevent more typical shareholders from winning the vote.
I have a proposal to declassify the board (move from 3 years to 1-year terms). Two-year terms look like the Board is trying to meet us ½ way. If supermajority requirements remain in place, because the proposal to eliminate it fails to get 67%, both declassify proposals will also fail. It looks like a lesson in how to be a dictator but look like a nice fellow.
What other types of proposals would you like for us to submit? Ideas and strategies are welcome. If you actually read to the bottom of this post, you should sign-up for our public interest group: Corporate Accountability Fall 2021 Online Forum. Discuss these issues and more with some of the most brilliant people concerned with environmental, social, and governance.