Proposals on corporate responsibility issues also called "social issues" proposals have been among the most high-profile applications of the shareholder proposal rule. Ralph Nader used the shareholder proposal rule in Campaign GM, which targeted General Motors' safety record.[fn1] In the 1980s, shareholders used the resolution process to urge companies to stop doing business in South Africa, in order to pressure the South African government to abolish apartheid.[fn2] And in 2000, employees of IBM took their fight with the company over the conversion of their pension plan to shareholders using the shareholder proposal process.[fn3]

Corporate responsibility proposals cover a wide variety of subjects, from global climate change to soft-money donations to child labor. The common thread, though, is that all of these proposals highlight the ways in which the company's behavior whether aimed at employees, communities, consumers or the environment has the potential to harm the company's long-term performance. Proponents of corporate responsibility proposals generally believe that sustainable long-term success cannot be based on opportunistic or exploitative conduct toward one or more corporate constituencies and sponsor proposals reflecting this approach.

[fn1] See Maria O'Brien Hylton, "`Socially Responsible' Investing: Doing Good Versus Doing Well in an Inefficient Market," 42 Am. U. L. Rev. 1, 11 (1992).

[fn2] See Cynthia Williams, "The Securities and Exchange Commission and Corporate Social Transparency," 112 Harv. L. Rev. 1197, 1311 (1999).

[fn3] See Sanford M. Jacoby, "Employee Representation and Corporate Governance: A Missing Link," 3 U. Pa. J. Lab. & Emp. L. 449, 488 (2001).

§ 30.02 A Note on Corporate Governance Guidelines

With the exception of social investment funds, which are often sponsors of corporate responsibility proposals, most institutional investors' corporate governance guidelines cover corporate responsibility issues in much less detail than other types of corporate governance issues. Increasingly, though, activist shareholders are coming to view corporate responsibility issues as part of, rather than separate from, corporate governance.

In 2001, the Council of Institutional Investors adopted prefatory language to its Core Policies supporting shareholder initiatives aimed at improving corporate responsibility: "The Council supports corporate governance initiatives that promote responsible business practices and good corporate citizenship. The Council believes that the promotion, adoption and effective implementation of guidelines for the responsible conduct of business and business relationships are consistent with the fiduciary responsibility of protecting long-term investment interests."[fn3.1]

TIAA-CREF's Policy Statement on Corporate Governance states:

TIAA-CREF believes building long-term shareholder value is consistent with directors giving careful consideration to social responsibility issues and the common good. Boards of both U.S. and international companies should develop policies and practices to address the following issues:

The environmental impact of the corporation's operations and products.

Equal employment opportunities for all segments of the population.

Employee training and development.

Evaluation of corporate actions that can negatively affect the common good of the corporation's communities and its constituencies.

Each company should avoid the deliberate and knowing exploitation of any of the non-shareholder constituencies and should establish open channels of communication permitting employees, customers, suppliers, and the community to express their concerns.[fn4]

The Business Roundtable's Statement on Corporate Governance provides:

It is in the long-term interests of stockholders for a corporation to treat its employees well, to serve its customers well, to encourage its suppliers to continue to supply it, to honor its debts, and to have a reputation for civic responsibility. Thus, to manage the corporation in the long-term interests of the stockholders, management and the board of directors must take into account the interests of the corporation's other stakeholders.[fn5]

The Global Proxy Voting Principles of the California Public Employees' Retirement System (CalPERS) state:

The Board expects those who manage the companies whose equity securities are held in the Fund's portfolio to conduct themselves with propriety and with a view toward responsible corporate conduct that is consistent with practices and policies including, but not limited to, those articulated in the Global Sullivan Principles of Corporate Social Responsibility and the MacBride Principles. A level of performance above minimum adherence to the law is generally expected. . . . If a company operates in a country or environment where serious human rights violations occur, the Board expects to see maximum progressive practices toward elimination of these violations. For employees who are disadvantaged because of such violations, the Board expects the companies to persist in availing themselves of every reasonable and legally permissible means to ensure that all of their employees and their families have what they need to pursue a life of dignity and personal well-being.[fn6]

[fn3.1] See www.cii.org/corp governance.htm.

[fn4] TIAA-CREF Policy Statement on Corporate Governance (undated and unpaginated) (available at www.tiaa-cref.org/libra/governance/index.html).

[fn5] The Business Roundtable, Statement on Corporate Governance 3 (1997).

[fn6] California Public Employees' Retirement System, Global Proxy Voting Principles 2-3 (2001) (available at www.calpers-governance.org).

§ 30.03 Global Labor Standards and Human Rights

Over the last few decades, U.S. firms have increasingly purchased from and outsourced their manufacturing to companies operating abroad, often in countries whose laws do not provide the same level of protection to their citizens as U.S. law does.[fn7] For example, many countries have no minimum wage or maximum work week; do not guarantee workers the right to associate freely and collectively bargain with their employers; do not protect workers against physical and mental abuse, including sexual harassment; and do not effectively prohibit child, forced or prison labor.

Several manufacturers and retailers have been targeted by campaigns aimed at exposing the use of "sweatshop" labor, including child labor, in the manufacture of their products. For example, in 1996, talk-show host Kathie Lee Gifford was tarred with the charge that apparel bearing her name was manufactured in a Honduran sweatshop.[fn8] College students have undertaken an effort to ensure that licensed goods bearing their schools' names are not manufactured under sweatshop conditions.[fn9]

Shareholders have responded by sponsoring a variety of proposals on global labor standards and human rights urging U.S. companies to use their leverage as purchasers of foreign-produced goods to ensure that workers enjoy basic rights. One group of proposals asks companies to adopt a code of conduct, or amend an existing code of conduct, to extend these protections. Several different benchmarks, including principles formulated by the U.N.-affiliated International Labor Organization, have been used. Some such proposals also ask companies to report to shareholders on their activities.

Another group of proposals targets companies with operations, investments or supplier relationships in particular countries and seeks withdrawal or divestment from those countries, or a report on the activities there (or both). A third group of proposals asks companies to conduct a review of their international operations and address particular issues in a report to shareholders, while a few proposals focus on the way in which a company's code of conduct is monitored.

[fn7] Gary Minda, "Aging Workers in the Postindustrial Era," 26 Stetson L. Rev. 561, 566-67 (1996).

[fn8] Vinay Menon, "World Inc. Under Siege," Toronto Star, July 29, 2001, at B1.

[fn9] Charlotte Houghteling, "Sweat and Tears," Harvard International Review (Fall 1999).

§ 30.03[A] Typical Proposals

§ 30.03[A][1] Code of Conduct Based on International Labor Organization Principles

RESOLVED: The shareholders of Unocal Corporation urge the Board of Directors to adopt, implement and enforce a code of conduct based on the International Labor Organization's ("ILO") Conventions on Workplace Human Rights, including principles on freedom of association, collective bargaining, nondiscrimination against and access for worker representatives, discrimination and harassment, forced labor and child labor.[fn10]

[fn10] Definitive Proxy Statement of Unocal Corporation filed on Apr. 9, 2001.

§ 30.03[A][2] Review of International Operations

RESOLVED, the shareholders request the Board of Directors to review or amend, where applicable, its code or standards for its international operations and report a summary of this review to shareholders by October 2001. . . . [including] a description of policies which are intended to protect human rights . . . a report of efforts to ensure that the company does not employ children under the age of fifteen, or younger than the age of completing compulsory education in the country of manufacture where such age is higher than fifteen. . . . a report of company policies ensuring that there is no use of forced labor. . . . [and] establishment of consistent standards for workers' health and safety practices for handling hazardous wastes and the protection of the environment, as well as promoting a fair and dignified quality of life for workers and their communities.[fn11]

[fn11] Definitive Proxy Statement of Alcoa Inc. filed on Feb. 22, 2001.

§ 30.03[B] The Debate Over Codes of Conduct

Sponsors of proposals regarding corporate codes of conduct argue that companies must address issues related to foreign working conditions not only because companies should be good corporate citizens, but also because the consequences reputational harm and consumer-led actions such as boycotts threaten to harm profitability. Proponents cite a survey showing that "two in three citizens want companies to go beyond their historical role of making a profit, paying taxes, employing people and obeying all laws; they want companies to contribute to broader societal goals as well."[fn12] Similarly, proponents point to a 1996 survey in which 79% of respondents stated that they would avoid shopping in a store if they were aware that the store sold goods made under sweatshop conditions.

Most companies at which these proposals are submitted already have adopted codes of conduct. However, proponents often attack the generality of companies' codes. For example, a proposal submitted at Caterpillar complained that the company's code failed to "[m]ove from principles to measurable policy."[fn13] Likewise, a proposal at Mattel stated, "Investors and consumers want to know the precise standards which the actual working conditions must meet and, most importantly, what concrete improvements are made by the management."[fn14]

The three substantive areas about which proponents and companies most frequently disagree are wages, the right to organize a union and bargain collectively and the way in which codes of conduct are monitored. Although proposals do not usually mention wages for fear of omission under the "ordinary business" exclusion, some proposals do explicitly mention wages,[fn15] while others are less direct. Regardless of the precise wording, a primary objective of proposals on global labor standards is to provide a "living wage," one sufficient to ensure that workers can meet their own and their families' needs. However, companies are generally willing to agree only to abide by local minimum-wage and overtime laws, which offer little protection in many nations.[fn16]

The second substantive issue dividing proponents and companies is the right to associate freely which encompasses the right to organize a union and the right to bargain collectively. Proponents, as well as the International Labor Organization, regard these as fundamental rights. Companies will normally commit only to permit union organizing to the extent provided for under local law; indeed, most companies do not mention these rights at all in their codes and statements in opposition.[fn17]

Finally, proponents and companies disagree on how to monitor compliance with codes of conduct. Most proposals ask that companies use independent, third-party monitors sometimes specifying local human rights, religious or other non-governmental organizations[fn18] while companies frequently rely on consulting firms with other ties to the company or on in-house inspection programs.[fn19]

[fn12] Definitive Proxy Statement of Delphi Automotive Systems filed on Mar. 16, 2001.

[fn13] Definitive Proxy Statement of Caterpillar Inc. filed on Mar. 2, 2001.

[fn14] Definitive Proxy Statement of Mattel, Inc. filed on Apr. 9, 2001.

[fn15] See, e.g., Definitive Proxy Statement of Nordstrom Inc. filed on Apr. 11, 2001; Definitive Proxy Statement of Delphi Automotive Systems filed on Mar. 16, 2001.

[fn16] See, e.g., Definitive Proxy Statement of Nordstrom Inc. filed on Apr. 11, 2001.

[fn17] See, e.g., Definitive Proxy Statement of Caterpillar Inc. filed on Mar. 2, 2001; Definitive Proxy Statement of Unocal Corp. filed on Apr. 9, 2001.

[fn18] See Definitive Proxy Statement of General Electric Corporation filed on Mar. 9, 2001.

[fn19] See, e.g., Definitive Proxy Statement of Ball Corporation filed on Mar. 14, 2001 ("Ball Corporation carefully controls its own conduct in these areas. . . .").

§ 30.04 Equal Employment Opportunity, The "Glass Ceiling" and Discrimination

As companies such as Texaco, Home Depot and Coca-Cola have settled multi-million dollar employment discrimination lawsuits, shareholder interest in issues related to equal employment opportunity has grown. Shareholders have submitted proposals asking companies to disclose information regarding the composition of their workforces, to expand the coverage of their non-discrimination policies and to describe how they are dealing with similar issues, such as the "glass ceiling" obstacles preventing the advancement of women and minorities to the top levels of corporations. Shareholders also seek to address the problem of religious discrimination in Northern Ireland by urging companies to adopt the MacBride Principles.[fn20]

[fn20] The MacBride Principles ask companies to: 1) increase the representation of individuals from underrepresented groups in the workforce; 2) provide adequate security for the protection of minority employees both at the workplace and while traveling to and from work; 3) ban provocative religious or political emblems from the workplace; 4) advertise all job openings publicly and make special efforts to attract applicants from underrepresented religious groups; 5) ensure that layoff, recall and termination procedures do not favor any particular religious group; 6) abolish job reservations, apprenticeship restrictions and differential employment criteria, which discriminate on the basis of religion or ethnic origin; 7) develop training programs that will prepare substantial numbers of current minority employees for skilled jobs; 8) establish procedures to assess, identify and actively recruit minority employees with potential for future advancement; and 9) appoint a senior management staff member to oversee the company's affirmative action efforts and to establish timetables for carrying out such efforts. Definitive Proxy Statement of Baker Hughes Inc. filed on Mar. 16, 2001.

§ 30.04[A] Typical Proposals

§ 30.04[A][1] EEO Data Disclosure

Therefore be it resolved: The shareholders request that the Board expand Home Depot's annual Social Responsibility Report, at reasonable cost and omitting confidential information, to be made available by October, 1999, to include:

A chart identifying the percentage of employees by gender and race in each of the nine major Equal Employment Opportunity Commission defined job categories for the previous five years (1994-1998).
A summary description of policies and initiatives to advance equal opportunity for women and minorities into sales, managerial positions and other job classifications where they are found to be underutilized.
A summary of any material litigation in which the company is involved concerning race, gender, religion, or the physically challenged.[fn21]

[fn21] Definitive Proxy Statement of Home Depot Inc. filed on Apr. 19, 1999.

§ 30.04[A][2] Discrimination Policies

RESOLVED: The Shareholders request the Board of Directors to amend ExxonMobil's written equal employment opportunity policy to explicitly prohibit discrimination based on sexual orientation and to substantially implement that policy.[fn22]

[fn22] Definitive Proxy Statement of Exxon Mobil Corp. filed on Apr. 18, 2001.

§ 30.04[A][3] MacBride Principles

RESOLVED, Stockholders request the Board of Directors to . . . make all possible lawful efforts to implement and/or increase activity on each of the nine MacBride Principles.[fn23]

[fn23] Definitive Proxy Statement of Baker Hughes Inc. filed on Mar. 16, 2001. See supra note 20 (discussing the MacBride Principles).

§ 30.04[A][4] Glass Ceiling

RESOLVED that shareholders request: The Board of Directors prepare a report, at reasonable cost and excluding confidential information, and available to shareholders four months after the annual shareholder meeting, on our progress concerning the Glass Ceiling Commission's business recommendations including a review of:

Steps the company has taken to use the Glass Ceiling Commission Report and management's recommendations flowing from it.
Company-wide policies addressing leadership development, employee mentoring, workforce diversity initiatives and family friendly programs.
An explanation of how executive compensation packages and performance evaluations include executive efforts in breaking the glass ceiling.
The top one hundred or one percent of company wage earners broken down by gender and race.[fn24]

[fn24] Definitive Proxy Statement of MBNA Corp. filed on Mar. 16, 2001.

§ 30.04[B] The Debate Over Equal Employment Opportunity and Discrimination Proposals

§ 30.04[B][1] EEO-1 and Diversity Disclosure

Companies with 100 or more employees must file annually a report on a Form EEO-1 setting forth information about its employees in nine different categories by sex and race. Except in limited circumstances, EEO-1 data is confidential, although a few companies release EEO-1 data to shareholders and the public.[fn25] There is no parallel requirement to compile data requested in proposals regarding the "glass ceiling," such as information on mentoring programs, diversity initiatives, and leadership development,

Sponsors of proposals seeking disclosure of EEO-1 and diversity data urge that shareholders need this information to assess the likelihood that a company will be involved in costly litigation that could harm the company's reputation.[fn26] Further, proponents contend that companies' top management "should more closely reflect the people in the workforce and marketplace if our company is going to remain competitive."[fn27] Companies generally respond that release of such data is unnecessary because they are committed to nondiscrimination and diversity.[fn28] As one company stated, "The Board believes that there is ample information on the Corporation's policies, programs and results already available to stockholders on its website. The Board believes that the Corporation is meeting the objectives of the proposal, and, therefore, there is no need for another report."[fn29]

[fn25] Susan Williams, "Social Issues Service 2001 Background Report C Equal Employment Opportunity," Jan. 16, 2001, at 15-16. Of 271 companies responding to an IRRC survey, only 17 made their EEO-1 data public.

[fn26] See, e.g., Definitive Proxy Statement of American International Group filed on Apr. 6, 2001.

[fn27] Definitive Proxy Statement of MBNA Corp. filed on Mar. 16, 2001.

[fn28] See, e.g., Definitive Proxy Statement of Gannett Co., Inc. filed on Mar. 22, 2001.

[fn29] Definitive Proxy Statement of MBNA Corp. filed on Mar. 16, 2001.

§ 30.04[B][2] Sexual Orientation Discrimination

With respect to proposals seeking to prohibit discrimination based on sexual orientation, proponents argue that companies that extend non-discrimination protections to gay men and lesbians "avoid costly litigation" and enjoy a competitive advantage in recruiting and retaining employees. Sponsors point to legislative initiatives adopted in San Francisco, Atlanta, Seattle and Los Angeles restricting those cities from doing business with companies that do not guarantee equal treatment for gay employees.[fn30] Companies claim that general anti-discrimination language applies to prohibit sexual orientation discrimination.[fn31]

[fn30] See Definitive Proxy Statement of Exxon Mobil Corp. filed on Apr. 18, 2001.

[fn31] See, e.g., Definitive Proxy Statement of Emerson Electric Co. filed on Dec. 4, 2000. Although most proposals on this subject ask the company to prohibit sexual orientation discrimination, a proposal at AT&T asking the company to remove sexual orientation from its non-discrimination policy was voted on in 2001. See Definitive Proxy Statement of AT&T Corp. filed on Mar. 30, 2001.

§ 30.04[B][3] Religious Discrimination

Finally, sponsors of proposals asking for adoption and implementation of the MacBride Principles claim that implementation of the Principles will ensure that a company can draw from the largest possible talent pool when it recruits and promotes employees.[fn32] In addition, IRRC notes that most observers agree that the campaign to urge U.S. companies to adopt the MacBride Principles helped strengthen Northern Ireland's own fair employment law.[fn33] As in the U.S. equal employment context, companies contend that they are already committed to equal employment for all religious groups.

[fn32] Definitive Proxy Statement of Baker Hughes Inc. filed on Mar. 16, 2000.

[fn33] Heidi Welsh, "IRRC Social Issues Service 2001 Background Report K Fair Employment in Northern Ireland," Feb. 16, 2001, at 25.

§ 30.05 Environmental Issues

Proposals on energy and the environment comprise the largest subset of corporate responsibility proposals. Shareholders, reasoning that environmental problems can lead to massive liabilities and decimate corporate reputations, ask companies to change their behavior, provide shareholders with more information on particular policies or risks, or adopt the CERES Principles, a code of conduct regarding sustainable development.

Some proposals relate to the practices and risks relating to a particular industry. For example, proposals were submitted to a number of paper companies in the 2001 proxy season asking them to "report on the current status of the issues raised" in a report by the World Resources Institute regarding the environmental risks facing companies in the paper industry.[fn34] Other proposals are company-specific, like the various proposals relating to polychlorinated biphenyls (PCBs) filed with General Electric, which disposed of PCBs in the Hudson River from 1947 to 1977.[fn35]

[fn34] See, e.g., Definitive Proxy Statement of Weyerhaeuser Co. filed on Mar. 7, 2001.

[fn35] See, e.g., Definitive Proxy Statement of General Electric Co. filed on Mar. 13, 2000 (proposal asking GE to undertake a public education campaign along the Hudson River Valley regarding the dangers of consuming fish caught there and other efforts to remediate the pollution); Definitive Proxy Statement of General Electric Co. filed on Mar. 9, 2001 (proposal seeking report on the amount spent by GE on attorneys' fees, expert fees, lobbying and public relations relating to PCBs).

§ 30.05[A] Typical Proposals

§ 30.05[A][1] CERES Principles

RESOLVED: Shareholders request that the company endorse the CERES Principles as a reasonable and beneficial component of their corporate commitment to be publicly accountable for environmental performance.[fn36]

[fn36] Definitive Proxy Statement of Albertson's Inc. filed on Apr. 27, 2001. By adopting the CERES Principles, a company pledges to make continual progress toward eliminating discharge of harmful substances, make sustainable use of renewable natural resources, reduce or eliminate waste, conserve energy, minimize risks to employees and communities, reduce or eliminate production of damaging products or services, restore the environment, fully inform corporate officers about environmental issues, conduct an annual self-evaluation and complete the CERES report each year. See "The CERES Principles," at www.ceres.org/about/principles.html.

§ 30.05[A][2] Global Climate Change

RESOLVED: that the shareholders of Chevron request that the Board of Directors report (at reasonable costs and omitting proprietary information) to shareholders by August 2001, on the greenhouse gas emissions from our company's own operations and products, including (with dollar amounts where relevant) (i) what our company is doing in research and/or action to reduce those emissions and ameliorate the problem, and (ii) the financial exposure of our company and its shareholders due to the likely costs of reducing those emissions for damages associated with climate change.[fn37]

[fn37] Definitive Proxy Statement of Chevron Corp. filed on Mar. 20, 2001.

§ 30.05[A][3] Energy Issues

Be it resolved that the shareholders recommend that Constellation Energy Group should invest sufficient resources to build new electrical generation from solar and wind power sources to replace approximately one percent (1%) of system capacity yearly for the next twenty years with the goal of having the company producing twenty percent (20%) of generation capacity from clean renewable sources in 20 years.[fn38]

[fn38] Definitive Proxy Statement of Constellation Energy Group filed on Mar. 8, 2001.

§ 30.05[B] The Debate Over Environmental Proposals

Like many other corporate responsibility proposals, environmental proposals are justified on the ground that their implementation will improve the company's public image. For example, a proposal seeking investment in renewable energy sources stated, "Utility deregulation demands the company present a good public image, and the public is demanding progress towards clean energy."[fn39] Similarly, proposals promoting the CERES Principles contend that adoption will "demonstrate [a company's] seriousness about superior environmental performance."[fn40]

Sponsors of proposals on environmental issues do not only cite improved image and corporate performance; they also try to capitalize on shareholders' altruism-proponents argue that adoption of their proposals is warranted because it's the right thing to do. A proposal regarding drilling in the Arctic National Wildlife Refuge (ANWR), for example, cited the effects of drilling on several species of animals that make their home in the refuge.[fn41] A proposal seeking the elimination of bioaccumulative halogenated pollutants argued, "Ethically this is the right thing for our company to do because children and other family members are sick in disproportionately exposed communities near its facilities, and our actions can prevent some exposures."[fn42] The proponent of a proposal regarding clean energy urged, "Efforts must be made to slow down changes in global climate so that we can continue to survive on planet earth."[fn43]

It is unsurprising, then, that companies' responses often focus on the effect of the proposal's subject on constituencies beyond the company and its shareholders. Chevron's statement in opposition to the proposal regarding the ANWR countered, "We believe that opening the ANWR Coastal Plain to oil and gas operations would be a responsible step in implementing a comprehensive national energy policy. . . . Producing these reserves would offer major economic benefits for the U.S., which currently imports more than 50 percent of its oil and is increasingly dependent on natural gas imports." Chevron also contended that drilling in the ANWR would provide jobs.[fn44] In a similar vein, General Electric responded to a proposal to assist customers in shutting down nuclear operations and installing alternative energy sources by stating, "Nuclear power makes a significant contribution to meeting the world's demand for electricity."[fn45]

However, companies also make company-specific arguments, usually based on cost. In response to a proposal asking it not to participate in an initiative promoting use of plutonium fuel in nuclear reactors, Duke Energy argued that use of plutonium fuel would save it money.[fn46] Opposing a proposal to eliminate all chlorine-based chemicals from its operations, Weyerhaeuser contended that the market for the elemental-chlorine-free products it makes is much larger than the market for totally-chlorine-free products, and that the totally-chlorine-free technology is more costly.[fn47]

As with proposals on codes of conduct, companies opposing proposals regarding environmental issues frequently argue that they have already taken the requested actions, although they sometimes concede that significant differences remain. For example, Coca-Cola, responding to a proposal asking it to adopt a comprehensive recycling strategy aimed at achieving 25% recycled content in plastic beverage containers, stated, "Our Company does have a comprehensive recycling strategy. . . . We do plan to increase our use of recycled plastic, but the timeframe and goals set forth in this shareowner proposal would displace significant levels of material currently being used by other industries."[fn48] Asked to analyze the company's biodiversity and indigenous peoples' impacts, Enron outlined the steps it had already taken to address the issue, concluding, "Given Enron's continued and increased commitment to social and environmental responsibility regarding biodiversity and indigenous peoples' rights issues described above, Enron believes that it is currently acting in accordance with the recommendations embodied in the shareholder proposal and recommends voting against this proposal."[fn49]

Finally, with respect to certain proposal subjects, proponents and companies disagree with one another over scientific evidence and conclusions. Most recently, such a dispute arose in the context of a proposal to report on efforts to curb greenhouse gas emissions and quantify the company's exposure relating to the costs of reducing emissions. The proposal stated, "The overwhelming majority of independent, peer-reviewed atmospheric scientists agree that global warming is a real, existing problem posing serious challenges to our country." Explaining its opposition to the proposal, Eastman Chemical disputed the proponent's assertion that global warming was a verified proposition: "The Board believes that, given the lack of consensus within the scientific community regarding the potential implications of the climate change issue, any report attempting to quantify potential financial effects on the Company would be entirely speculative and, consequently, of little, if any, value to shareholders."[fn50]

[fn39] Definitive Proxy Statement of Duke Energy Corp. filed on Mar. 19, 2001.

[fn40] Definitive Proxy Statement of Eli Lilly & Co. filed on Mar. 3, 2000.

[fn41] See Definitive Proxy Statement of Chevron Corp. filed on Mar. 20, 2001.

[fn42] Id.

[fn43] Definitive Proxy Statement of Duke Energy Corp. filed on Mar. 19, 2001.

[fn44] Definitive Proxy Statement of Chevron Corp. filed on Mar. 20, 2001.

[fn45] Definitive Proxy Statement of General Electric Co. filed on Mar. 13, 2001.

[fn46] Definitive Proxy Statement of Duke Energy Corp. filed on Mar. 19, 2001.

[fn47] Definitive Proxy Statement of Weyerhaeuser Co. filed on Mar. 7, 2001.

[fn48] Definitive Proxy Statement of Coca-Cola Co. filed on Mar. 2, 2001.

[fn49] Definitive Proxy Statement of Enron Corp. filed on Mar. 27, 2001.

[fn50] Definitive Proxy Statement of Eastman Chemical Co. filed on Mar. 30, 2001.

§ 30.06 Tobacco

Shareholders have filed a wide variety of proposals regarding tobacco, not only to cigarette companies like Philip Morris and Loews, but also to retailers, media companies, manufacturers of non-tobacco cigarette components and financial institutions that invest in tobacco company stocks. These proposals aim to highlight tobacco's dangers and expose tobacco company strategies targeting children and other populations.

§ 30.06[A] Typical Proposals

§ 30.06[A][1] Tobacco Advertising

RESOLVED: Shareholders request the Board to implement the following, or a similar policy for our Company: That, within six months of this annual meeting, before any promotional, marketing and/or advertising campaign presently running is allowed to continue or is inaugurated in the future, it must be submitted to independent and certifiable testing to ensure that it is not equally or more appealing to the 12-to-17 age group than groups 18 and over.[fn51]

[fn51] Definitive Proxy Statement of Philip Morris Companies filed on Mar. 10, 2000.

§ 30.06[A][2] Tobacco Manufacture

BE IT RESOLVED: the shareholders request the Board of Directors adopt a policy not to sell its adhesives to any tobacco-related company when they will be used for the production of cigarettes or other tobacco products until it can be shown that tobacco, if used as intended in cigarettes and smokeless tobacco, is not detrimental to health.[fn52]

[fn52] Definitive Proxy Statement of HB Fuller Co. filed on Mar. 9, 2001.

§ 30.06[B] The Debate Over Tobacco Proposals

The common theme in most tobacco-related proposals is the potential liability facing any company involved even tangentially in the tobacco business, given the large jury verdicts handed down against cigarette companies. For example, a proposal submitted to Eastman Chemical, which produces cellulose acetate fiber, an ingredient used in cigarette filters, stated, "If cellulose acetate filters contribute to cigarette-caused disease, Eastman Chemical may be liable for injuries to smokers as the tobacco litigation net gets thrown wider and wider."[fn53] A proposal filed at Loews regarding targeting of African Americans in the marketing of Newport menthol cigarettes raised the specter of additional adverse publicity: "The possibility that our Company might be targeting the African American community leaves it open to accusations of racism in our marketing programs."[fn54]

Companies generally argue that they already have policies in place to deal with the issues raised in the proposals. Typical of such arguments is that asserted by RJ Reynolds, which, facing a proposal on advertising to children, argued, "RJR Tobacco's policies permit it to develop marketing materials which it believes will motivate (1) those 21 years of age or older who already smoke brands manufactured by its competitors to purchase RJR Tobacco's brands more often or to switch to one of them entirely, and (2) those 21 years of age and older who already smoke one of RJR Tobacco's brands to continue to choose that brand if they continue to choose to smoke."[fn55]

Similarly, Loews cited its tobacco subsidiary's "Corporate Principles Concerning Marketing, Promotion and Youth Smoking," as well as the industry's Cigarette Advertising and Promotion Code and the Master Settlement Agreement as mooting the proposal to study its targeting of African Americans.[fn56] Financial services and insurance companies opposing proposals requesting divestment of tobacco company stocks argue that they are obligated to provide customers with competitive returns and that a single social policy consideration cannot guide investment decisions.[fn57]

[fn53] Definitive Proxy Statement of Eastman Chemical Co. filed on Mar. 30, 2001.

[fn54] Definitive Proxy Statement of Loews Corp. filed on Mar. 29, 2001.

[fn55] Definitive Proxy Statement of RJ Reynolds Tobacco Holdings Inc. filed on Mar. 14, 2000.

[fn56] Definitive Proxy Statement of Loews Corp. filed on Mar. 29, 2001.

[fn57] Definitive Proxy Statement of Lincoln National Corp. filed on Apr. 10, 2001.

§ 30.07 Pharmaceutical Pricing

Shareholders concerned by the rising price of prescription drugs have filed proposals in the last two years asking pharmaceutical companies to adopt a policy of price restraint.

§ 30.07[A] Corporate Governance Guidelines

RESOLVED: Shareholders request the Board of Directors to:

Create and implement a policy of price restraint on prescription drugs, utilizing a combination of approaches to keep prices at reasonable levels;

Report to shareholders by September, 2001 on changes in policies and pricing procedures for prescription drugs (withholding any competitive information and at reasonable cost).[fn58]

[fn58] Definitive Proxy Statement of Merck & Company filed on Mar. 22, 2001.

§ 30.07[B] The Debate Over Pharmaceutical Pricing Proposals

Proponents of price restraint proposals urge that price differentials harm those customers who do not have insurance and those who buy their drugs at a retail outlet such as a pharmacy rather than by mail or through an institution such as a hospital. They claim that drug companies can reduce expenses by decreasing the amount of advertising.[fn59]

According to companies, however, research would suffer if they were forced to adopt a price restraint policy. Companies explain that they favor certain initiatives to provide access to drugs, as long as they are market-based and allow choice among multiple plans.[fn60] They also assert that their pricing decisions "must be flexible in order to respond to market dynamics in product and geographic segments, and to assure the company's continued ability to invest in research and development across our product lines."[fn61]

[fn59] Definitive Proxy Statement of Schering Plough Corp. filed on Mar. 12, 2001.

[fn60] Definitive Proxy Statement of Johnson & Johnson filed on Mar. 14, 2001.

[fn61] Definitive Proxy Statement of Abbott Laboratories filed on Mar. 14, 2000.

§ 30.08 Banking

Banks and other financial institutions may be targets of shareholder proposal campaigns relating primarily to their own conduct for example, shareholders have filed several proposals seeking to curb certain short-term lending in order to stabilize the international financial system. In addition, shareholders may focus on financial institutions because they lend to or underwrite securities issued by companies whose conduct the shareholders find objectionable. Typical of this approach is the proposal submitted to Citigroup regarding underwriting and lending criteria, which was spurred by Citigroup's involvement in an offering that indirectly funded the controversial Three Gorges Dam in China.

§ 30.08[A] Typical Proposals

§ 30.08[A][1] International Financial Stabilization

BE IT RESOLVED that the Board of Directors develop a publicly stated policy for the Corporation to restrain the corporation's short-term lending and exposure of other financial instruments to emerging market countries, especially the inter-bank market, to highly leveraged institutions and to poorly regulated banking centers, if need be by establishing the corporation's own internal capital requirements at higher levels than required by regulators, and to promote and support such measures by the IMF, Bank for International Settlements and other such coordinating bodies.[fn62]

[fn62] Definitive Proxy Statement of J.P. Morgan Chase and Company filed on Mar. 30, 2001.

§ 30.08[A][2] Underwriting and Lending Criteria

BE IT RESOLVED: the shareholders request the Board to issue a report, prepared at reasonable cost and omitting proprietary information, to shareholders by October 2001, reviewing the lending and underwriting criteria of Citigroup with the view to incorporating and appropriately disclosing criteria relating to a transaction's impact on the environment, human rights and risk to the company's good reputation.[fn63]

[fn63] Interfaith Center on Corporate Responsibility, The Proxy Resolutions Book 64 (2001) (proposal did not appear in proxy statement).

§ 30.08[B] The Debate Over Banking Proposals

The sponsors of the proposals on international financial stabilization contend that the volatility of the international financial system harms lenders as a result of their exposures to particular markets the examples given are Mexico, Asia and Russia and as a result of the loss of markets deemed untouchable as a result of financial crises. The proposals ask companies to adopt several measures recommended by a Council on Foreign Relations task force (and by the dissents therefrom), especially curbing certain short-term lending, in order to "moderate the boom-bust cycle in private capital flows and to tilt the composition of such flows toward longer term, less crisis-prone components." The proposals cite the bail-out of Long Term Capital Management as a consequence of instability arising from highly leveraged institutions.[fn64]

The companies opposing the financial stabilization proposals argue that short-term lending in emerging markets encourages exports, creates jobs and spurs investment in those countries.[fn65] Both J.P. Morgan Chase and Citigroup claim that their own internal policies are adequate to prevent them from lending to highly leveraged institutions and poorly regulated banking centers.[fn66]

[fn64] Definitive Proxy Statement of Citigroup, Inc. filed on Mar. 2, 2001.

[fn65] See id.

[fn66] Id.; Definitive Proxy Statement of J.P. Morgan Chase and Company filed on Mar. 30, 2001.

§ 30.09 Military Issues

A wide variety of issues relating to weapons and military contracting have been raised through the shareholder proposal process. Recent efforts have focused on offsets agreements by U.S. weapons manufacturers and the U.S. government to direct benefits to the purchasing country as a condition of sale the development of criteria for contracting, and, to a lesser extent, the militarization of space and the discontinuance of landmine production.

§ 30.09[A] Typical Proposals

§ 30.09[A][1] Offsets

RESOLVED: Shareholders request the company to disclose all significant promises (including technology transfers) made to foreign governments or foreign firms in connection with foreign military sales, intended to offset their U.S. dollar cost of weapons purchased by foreign nations.[fn67]

[fn67] Definitive Proxy Statement of Lockheed Martin Corp. filed on Mar. 20, 2001.

§ 30.09[A][2] Criteria for Contracting

RESOLVED: That the Board of Directors develop ethical criteria for General Dynamics' foreign military transfers; that a report of the criteria (prepared at reasonable cost, omitting classified and proprietary information) be sent to all shareholders by December, 2001.[fn68]

[fn68] Definitive Proxy Statement of General Dynamics Corp. filed on Mar. 30, 2001.

§ 30.09[B] The Debate Over Proposals Regarding Military Issues

With respect to proposals regarding offsets, the sponsors contend that offsets substantially benefit foreign firms and governments, and result in the export of U.S. jobs. According to the proponents, "[t]he value of offsets sometimes exceeds the weapons' cost."[fn69] Companies facing this proposal argue that offsets help them make sales, and that eliminating offsets would impair their profitability. On balance, they say, offsets do not result in a loss of jobs. They also claim that the agreements themselves prohibit disclosure of their terms.[fn70]

The proponents of the proposals regarding ethical criteria for arms sales argue that companies need guidelines for, among other things, handling employee concerns that company products may be "used by rogue governments, terrorists, drug dealers, or human rights violators or could easily fall into the hands of such." The proposals warn that absent such standards, "shareholders risk bearing responsibility for global chaos and rising despotism."[fn71]

Companies maintain that the proper source for ethical criteria regarding their products is the federal government and that the proponents should address the issue through those channels.[fn72] Further, one company states, "To the extent that any supplier adopted criteria in conflict with those of the U.S. government, either voluntarily or under duress as a result of an organized effort by special interest groups, it is likely your Company's largest customer, the U.S. government, would view that supplier as less than reliable, to the detriment of that supplier's owners."[fn73]

[fn69] Definitive Proxy Statement of Raytheon Co. filed on Feb. 15, 2001.

[fn70] See, e.g., Definitive Proxy Statement of Northrop Grumman Systems Corp. filed on Mar. 29, 2001.

[fn71] Definitive Proxy Statement of General Dynamics Corp. filed on Mar. 30, 2001.

[fn72] Definitive Proxy Statement of Lockheed Martin Corp. filed on Mar. 22, 2000.

[fn73] Definitive Proxy Statement of General Dynamics Corp. filed on Mar. 30, 2001.

§ 30.10 Auditor Independence

In the 2002 proxy season, several shareholders introduced proposals aimed at ensuring the independence of outside auditors. Under new SEC rules, companies were required for the first time in the 2001 proxy season to disclose the amount of fees paid to their auditors for audit and non-audit (i.e., consulting) services. Using this data, shareholders were able to identify companies that paid large amounts to their auditors for non-audit services, a practice which many observers believe poses a significant threat to the objectivity of the auditor.

§ 30.10[A] Typical Proposal

RESOLVED: That the shareholders of The Walt Disney Co. request that the Board of Directors adopt a policy that in the Page 30-26.1 future the firm that is appointed to be the Company's independent accountants will only provide audit services to the Company and not provide any other services.[fn74]

[fn74] Definitive Proxy Statement of Walt Disney Company filed on Jan. 4, 2002.

§ 30.10[B] The Debate Over Auditor Independence

Between fall 2001, when the bulk of proposals on this subject were submitted, and spring 2002, when they came to a vote, opinion on the wisdom of restricting auditors' performance of non-audit services for audit clients had shifted tremendously. In 2000, then-SEC chairman Arthur Levitt had tried to ban the provision of most such services but was defeated by an intense and well-organized lobbying effort by business and the accounting industry. Watered-down rules, including a new rule requiring companies to disclose the amounts they paid in fees for audit and non-audit services, went into effect. Following the Enron debacle and rash of accounting scandals at Xerox, Global Crossing, and WorldCom, among others, many including policymakers and business executives took a second look at the auditor independence issue.

Those favoring a ban on the provision of non-audit services argue that auditors are compromised when their firms benefit financially from providing other services to audit clients. Those non-audit engagements, according to proponents of a ban, put pressure on auditors to accede to client wishes, and may result in auditors' reviewing the work of colleagues at their own firms in the course of the audit. Certain non-audit services, such as management consulting, litigation support services, and human resources, place employees of the audit firm in the position of an employee of or advocate for the client firm.[fn75] Companies generally argue that boards not shareholders are in the best position to decide what kinds of work the independent auditor ought to be able to perform.[fn76]

This issue has been mooted to some extent by the Sarbanes-Oxley Act of 2002, which prohibited accounting firms from performing a number of non-audit services for audit clients. However, since the Act fell short of a complete ban, shareholder activists will likely continue to pressure companies to go further than the Act requires.

[fn75] The most complete discussion of the threats to independence posed by the provision of non-audit services appears in the SEC's proposing and adopting releases in connection with the 2000 rulemaking. These releases are available on www.sec.gov/rules/proposed.shtml (proposing release dated June 30, 2000) and www.sec.gov/rules/final.shtml (adopting release dated Nov. 21, 2000).

[fn76] See, e.g., Definitive Proxy Statement of Walt Disney Company filed on Jan. 4, 2002.

§ 30.11 Corporate Responsibility Proposals Most Common Grounds for Exclusion

Proposals dealing with the company's day-to-day operations such as hiring and firing employees or wages and benefits are vulnerable to exclusion under Rule 14a-8(i)(7), as relating to the company's ordinary business operations, unless the proposal involves a significant policy issue. The SEC staff found recently that a proposal asking the company to adopt a code of conduct based on the International Labor Organization's principles was not excludable on this basis.

A company might try to omit a proposal relating to a minor segment of the company's business under Rule 14a-8(i)(5), which permits exclusion of proposals that are not relevant to the company's business (applying a 5% of assets, sales or income test); exclusion is not permitted, however, when a proposal's subject is otherwise significantly related to the company's business, which mostly commonly is found when the topic could subject the company to significant liabilities or is high-profile and thus could damage the company's reputation.

Rule 14a-8(i)(6), permitting omission of proposals that are beyond the company's power or authority to effectuate, may allow exclusion of a proposal that is phrased very generally on the theory that it too vague to be implemented.

Objection under Rule 14a-8(i)(10), which allows a company to omit a proposal that has been substantially implemented, is very common when a proposal asks a company to adopt a code of conduct or policy. Proponents should familiarize themselves with all of a company's actions in relation to the subject matter of a proposal and be prepared to point out differences between the company's actions and those requested in the proposal.

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Chapter 30 Corporate Responsibility