Shareholder Proposals – Public Service or Nuisance?
Let us first remember that these additional proposals in a public company’s annual stockholder meeting proxy statement are “precatory;” meaning, they are not actually binding on company management if it recommended shareholders vote against such proposals (usually the case) and instead they passed. So, limiting their inclusion in a proxy statement as the current SEC regime seems to be promoting in most cases will NOT change how managements actually run public companies as much as it will, presumably, save managements the hassle and time spent fending off cries by “activist” shareholders – often small holders, sometimes large, or their spokespeople – for more treatment of things like political spending disclosure, environmental impact of the business’s operations, animal abuse allegations, etc. via the voting process at the annual stockholders meeting.
As part-time inspectors of election at stockholder meetings (550 inspected over 20 years) we feel there are both pros and cons with shareholder proposals….
Pros
- Even a small shareholder can potentially raise his voice “officially” within a high-visibility venue. It shows David still has his day in court against Goliath.
- As a corollary, in this age when most annual meetings are virtual, shareholder proposals partly substitute for what used to be the “fireworks” at meetings offered up by gadflies like Evelyn Y. Davis.
- Responding to shareholder proposals which made it onto the ballot through legal qualification make managements uncomfortable, which one could argue is part of management’s job – indeed, blowing off or “belittling” these proposals due to their non-binding nature is surely a BAD public relations posture.
Cons
- The reason shareholder proposals are precatory is you cannot have shareholders telling management how to run the business, commandeering their legal and fiduciary responsibilities, so if they are not “binding” why put everyone through the process of focusing and voting on them at the annual meeting?
- Taking this point further, such proposals do distract management (which has a finite amount of time and resources) away from resolving all the other challenges to the company while doing what it can to generate profits.
- Shareholder proposals are costly not only in terms of real money (outside counsel fees, additional proxy statement drafting charges, SEC filing fees, proxy solicitor fees, vote tabulator fees) but also due to the extra staff and third-party time required to deal with them – which time, as we all know, translates into yet more money.
What is happening now is the SEC is not objecting to companies refusing to add many shareholder proposals onto their proxy statements under Rule 14a-8(j), feeling the SEC supports their contention (“reasons”) the proposals do not adequately rise to the necessary level of appropriateness or applicability to the shareholder voting process. The shoe that hasn’t yet fallen is how numerous the lawsuits resulting from such refusals will be – among other consequences.
We are, frankly, torn on this whole topic between sympathizing with “noisy,” well-meaning shareholders just wanting to be heard on issues that are important to them (and to a lot of the U.S. and the world), and with company management which merely wants to run the company profitably with a limited number of distractions, so it can do it best. Debate on this issue will surely continue indefinitely.