By Jim Surowiecki
Friday, August 29, 1997
For the first time since a federal appeals court upheld the Securities and Exchange Commission's (SEC) decision to severely limit the scope of potential shareholder proxy resolutions, shareholders may be given a chance to help decide how the companies they own should be run. According to a recent report in the Wall Street Journal, the SEC plans a vote soon that could overturn crucial provisions in rule 14a-8, the rule that over the last decade has been used by companies to keep shareholder resolutions off proxy ballots.
The relevant clauses in 14a-8 allow a company to omit a proposed shareholder resolution if it "deals with a matter relating to a company's ordinary business" or if it is "not significantly related" to the company's business. Shareholders are thus in the curious position of being unable to vote on matters that are not ordinary because they are too minor, and of being able to vote on matters that are of overarching significance but not of everyday importance.
As a recent Rogue article suggested, the "ordinary business" clause serves a plausible purpose, insofar as one would hardly want shareholders voting on the salary of a particular vice president in charge of human resources or on the colors of the janitors' uniforms. And the "not significantly related" clause keeps companies from having their proxy ballots loaded up with questions that are tangential at best to the firm's operations.
The problem, though, is that management has proved too willing to use expansive interpretations of these clauses to keep shareholders from voting on questions that seem of central importance to any corporation. These questions include corporations' decisions to do business with repressive political regimes -- Amoco, for instance, blocked a shareholder resolution on doing business in Burma -- and, more broadly, employment issues of all stripes, including discriminatory hiring policies and the treatment of workers in foreign factories. A commonsense interpretation of rule 14a-8 might suggest that the decision to open a factory in Vietnam and pay workers a dollar a day is one that shareholders might like to approve or disapprove, just as the decision to discriminate openly against gay job applicants would be. But for the last 10 years these are precisely the decisions that shareholders have been prevented from making.
The SEC's decision to reconsider its stance on shareholder resolutions is the product of both internal and external pressure. Internally, SEC Commissioner Steven Wallman -- who has been a firm advocate of shareholder rights in every sense during his tenure -- has pushed the commission to adopt a new interpretation of 14a-8 and has filed a number of dissents in decisions dealing with the "ordinary business" clause. Wallman's tenure as a commissioner officially ran out three months ago, but he can actually remain in office until the end of next year unless a new appointment is made. He told the Journal he'd like to stick around to ensure that the changes are implemented.
The external pressure on the commission has come from both shareholder activists and Congress, which last year ordered the SEC to review the proxy resolution process and to produce a report containing possible revisions to existing policy. Given the way in which the existing interpretation has been used in the past, it was a bit surprising to see Congressional activity on this matter, but shareholder activists pushed hard, and Wallman's consistent advocacy helped legitimize the entire cause.
At the same time, the SEC had perhaps invited something of a backlash by adopting such a hard line against shareholder resolutions. In 1994, then-Commissioner Richard Roberts said that he saw rule 14a-8 "as a means by which shareholders have a voice concerning matters of economic significance to their investment, rather than merely a tool to champion good corporate citizenry." Here the distinction between "corporate citizenry" and "economic significance" is seen as starkly clear, rather than fuzzy (as it surely is), while the commission's authority to limit shareholders' access to the democratic machinery of the proxy process is unquestioned.
It was this perspective that lay behind the commission's support of Cracker Barrel when the company refused to include a shareholder resolution that would have prevented it from discriminating against gay job applicants. The SEC's staff called this an "ordinary business" matter, the commission voted in favor of that ruling, and then fought the case in court, finally winning on appeal.
One of the ways in which management justifies keeping resolutions of this kind off of proxy ballots is the belief that, as Dow Chemical put it, "most of [the stockholders] don't particularly care" about issues of this kind. Former Commissioner Roberts similarly suggested that we should not "allow a few shareholders to force the rest of the shareholders to pay for an airing of such issues..." There is a vicious circle formed here in which shareholders are judged incapable of casting meaningful votes on company policy, and then that judgment is excused by saying that shareholders don't care about company policy. Surely it's hard to expect shareholders to take their proxy votes seriously if the only thing they're allowed to use them for is to vote for directors, most of whom are hand-picked by management in the first place.
A revision in rule 14a-8, then, could be of potentially enormous importance. The new rule could open the door to a whole series of proxy resolutions on a wide array of corporate practices. These might include Unocal's decision to defy federal sanctions and continue to do business in Burma, Nike's employment practices in the Far East, or corporate hiring policies. One could easily imagine, for example, anti-affirmative-action resolutions being offered at major corporations. The substantive outcomes are not, in a sense, what matters most right now. Installing the principle of shareholder control at the center of the proxy resolution process is.
To be sure, it's far from certain that this new rule will be adopted. The SEC is still tilted away from support for shareholder rights, and the commission will undoubtedly feel considerable pressure from corporate management teams anxious to avoid public confrontation over these questions. On the other hand, the mere fact that this revision is being considered is a victory in itself and says something important about how far shareholder activism has come in the last five years. E-mail the SEC and let the commission know how important it is that it come further.