Shareholder proposals are submitted by a wide range of investors, from mutual funds to public pension funds to individuals. Many proponents focus on particular issues and view the shareholder proposal as only one element of a larger campaign to raise awareness and change corporate behavior. Other components of such efforts include company meetings, media outreach and lobbying for changes through institutional investors’ proxy voting guidelines.
33.02 Institutional Investors and the Collective Action Problem
In 1932, Adolf Berle and Gardiner Means set forth in The Modern Corporation and Private Property what has now become the classic description of the collective action problem facing shareholders in large, publicly-held corporations. In brief, they argued that the dispersion of ownership in such companies meant that each individual shareholder had less incentive to monitor a company actively, although shareholders in general would benefit from more active oversight. Put another way, “any shareholder who wishes to act must underwrite all of the costs, for only a pro rata share of any returns, if there are any. Everyone else gets a free ride.”[fn1] The collective action problem, compounded by barriers to shareholder communication, Berle and Means contended, precluded shareholders from serving as a meaningful check on management’s actions. Boards similarly failed to hold management accountable.[fn2]
At the time Berle and Means analyzed shareholder passivity, shareholders were primarily individuals. Since that time, institutional investors have come to control nearly half of the U.S. equity market, according to The Conference Board.[fn3] That concentration is even greater among larger companies, with institutional investors controlling 60% of the stock of the one thousand largest U.S. public companies.[fn4]
Some commentators view the rise of the institutional investor and the concomitant concentration of shareholdings as a solution, at least in part, to the collective action problem identified by Berle and Means.[fn5] Institutional investors do have much larger incentives to monitor companies whose stock they hold. First, institutional investors’ holdings are larger than those of individuals, so the sunk costs entailed in research and advocacy can be more easily justified. Second, institutions holding large blocks of shares find it more difficult to follow the “Wall Street Walk” — expressing disapproval by selling the stock — without driving down the price of the stock.[fn6] Finally, to the extent that institutions serve as fiduciaries for pension funds governed by the Employee Retirement Income Security Act of 1974 (ERISA) (or pension funds of states whose statutes or courts follow ERISA in regulating those funds), they must administer proxy voting rights in accordance with ERISA’s fiduciary duties.[fn7] These factors have influenced some institutional investors to become more activist.
However, institutional investors are not monolithic, and not all have embraced the kind of activist approach that leads to shareholder proposals and dialogues with company management. Some institutional investors still prefer to adhere to the Wall Street Rule. Others may refrain from criticizing a company out of fear that they will lose investment management or other business generated by the company or its pension fund.[fn8]
From the adoption of the shareholder proposal rule until relatively recently, individuals and religious shareholders made up the vast majority of proponents. Pension funds and other institutional investors did not begin to submit shareholder proposals until antitakeover devices began to proliferate in the mid-to-late 1980s. The first such initiative was undertaken in 1987, when TIAA-CREF spearheaded a shareholder proposal campaign against poison pills culminating in a 27.7% vote in favor of a proposal at International Paper.[fn9]
Since that time, institutions have filed hundreds of shareholder proposals and have reached settlements obviating the need for proposals at many more companies. This chapter identifies the most common shareholder proposal sponsors and describes the issues they advocate most often, their philosophies and the other governance activities they undertake in conjunction with shareholder proposals.
In addition, this chapter discusses several organizations that serve as clearinghouses for their members’ governance activism.
[fn1] See Robert A.G. Monks & Nell Minow, Power and Accountability (1991), available at www.thecorporatelibrary.com/power.
[fn2] Adolf Berle & Gardiner Means, The Modern Corporation and Private Property (1932).
[fn3] “Institutional Investor Assets Reach $18.6 Trillion,” Press Release of The Conference Board dated Dec. 5, 2000 (available at www.conference-board.org).
[fn4] Jayne Elizabeth Zanglein, “From Wall Street Walk to Wall Street Talk: the Changing Face of Corporate Governance,” 11 DePaul Bus. L.J. 43, 45 (1998).
[fn5] See William B. Chandler III, “On the Instructiveness of Insiders, Independents and Institutional Investors,” 67 U. Cin. L. Rev. 1083, 1089 (1999).
[fn6] See, e.g., Robert B. Reich, “A Moral Workout for Big Money,” The New York Times, Sept. 11, 1994, at C9.
[fn7] See Interpretive Bulletins Relating to the ERISA of 1974, 59 Fed. Reg. 38,860, 38,863 (1994) (codified at 29 C.F.R. pt. 2509.94-2 (1994)); Letter from Department to Robert A.G. Monks of Institutional Shareholder Services, Inc. (Jan. 23, 1990), reprinted in 17 Pens. & Ben. Rep. (BNA) 244, 245 (Jan. 29, 1990); Letter from Department to Helmuth Handl, Chairman of the Retirement Board of Avon Products (Feb. 23, 1988), reprinted in 15 Pens. & Ben. Rep. (BNA) 391 (Feb. 29, 1988).
[fn8] See Monks & Minow, supra note 1 (describing conflicts of interest on the part of mutual funds, banks, insurance companies and investment managers).
[fn9] Patrick J. Ryan, “Rule 14a-8, Institutional Shareholder Proposals, and Corporate Democracy,” 23 Ga. L. Rev. 97, 158-59 (1988).
33.03 Public Pension Funds
Some of the most visible shareholder activism has been engaged in by public employee pension funds, which as of 1998 boasted assets of $2.8 trillion.[fn10] The public pension funds most visible in the governance arena are New York City’s five public-employee funds, the California Public Employees’ Retirement System (CalPERS), the State of Wisconsin Investment Board (SWIB), the Connecticut Retirement Plans and Trust Funds (CRPTF), the New York State and Local Retirement System and the Minnesota State Board of Investment.
The New York City funds file shareholder proposals on a wide variety of corporate governance issues, including corporate responsibility issues. In the last several proxy seasons, the New York City funds have focused on board declassification, the right of shareholders to call special meetings and act by written consent, the MacBride Principles and codes of conduct for companies’ foreign operations. The New York City funds have also conducted several “vote-no” campaigns against directors of companies, such as Cooper Tire and Rubber, that have not implemented shareholder proposals that were supported by a majority of shares voting.
CalPERS’ corporate governance program produces fewer shareholder proposals, but significant negotiation takes place behind the scenes. CalPERS’ shareholder proposals in the last ten years have almost all related to the board of directors, usually addressing independence issues. CalPERS also publishes an annual “focus list” of poorly performing companies where discussions on corporate governance “could potentially add value and improve performance.”[fn11] CalPERS’ proxy voting decisions are posted on its Web site.
SWIB, although inactive on the shareholder proposal front in the last couple of years, has historically had a high profile on a number of corporate governance issues, including poison pills and repricing of stock options. SWIB filed the first binding shareholder proposals on options repricing; the no-action request filed by General DataComm, one of the companies facing such a resolution, spurred the SEC to reverse its position that proposals on repricing were excludable under the ordinary business exclusion. SWIB, which holds significant stakes in a number of small-capitalization companies, also led the way in opposing management pay plan proposals in recent years.The CRPTF is now, under Treasurer Denise Nappier,rebuilding a shareholder activism program after several years of inactivity. In the 2001 proxy season, the Connecticut funds contacted ten companies urging them to implement the MacBride Principles — four did so as of June 2001 — and filed proposals on executive compensation, board diversity and global labor standards.
The New York State and Local Retirement System has focused its attention on proposals dealing with MacBride Principles and executive compensation, especially stock option repricing. It also co-filed a proposal in the 2000 proxy season at Talisman Energy, a Canadian corporation, regarding global labor standards. Like CalPERS, the New York State fund compiles a focus list, but unlike CalPERS it does not make the list public, preferring instead to communicate privately with the companies.
Finally, the Minnesota State Board of Investment has been active on corporate responsibility issues, filing proposals relating to tobacco and the MacBride Principles.
[fn10] Zanglein, supra note 4, at 73.
[fn11] See CalPERS’ “Shareowner Forum” on its Web site, www.calpers-governance.org.
33.04 Union-Affiliated Investors
Union-affiliated investors — unions, the AFL-CIO (a union federation) and union-affiliated benefit funds — have been sponsoring shareholder proposals since the 1980s. However, activism by these shareholders was not widespread until the mid-1990s: in 1994, union-affiliated shareholders filed more proposals and achieved more majority votes than all other institutional investors combined.[fn12] This trend has continued, even as labor shareholders have moved away from proposals on takeover defenses and focus increasingly on executive compensation and corporate responsibility issues.[fn13]
The most active union-affiliated shareholders are funds affiliated with the AFL-CIO; International Brotherhood of Teamsters; International Brotherhood of Electrical Workers (IBEW); Communications Workers of America (CWA); American Federation of State, County and Municipal Employees (AFSCME); Sheet Metal Workers International Association (SMWIA); United Brotherhood of Carpenters and Joiners (UBC); Service Employees International Union (SEIU); UNITE!; Laborers’ International Union of North America (LIUNA); and the International Union of Operating Engineers (IUOE). The LongView Collective Investment Fund files numerous shareholder proposals as well; it is sponsored by the Amalgamated Bank, which in turn is wholly owned by UNITE!, the garment and textile workers’ union.
Some labor shareholders concentrate on resolutions dealing with takeover defenses. The AFSCME Employees’ Pension Plan, for example, filed proposals in the 2001 proxy season at seven companies, three of which sought declassification of the board and two of which asked the company to redeem or seek shareholder approval for the poison pill. Similarly, the SEIU General Fund submitted more than a dozen proposals to real estate investment trusts in the 2001 season, most dealing with classified boards and poison pills. Teamsters funds in recent years have also sponsored a number of resolutions regarding board declassification, and the LongView funds filed several binding poison pill proposals in 1998 and 1999.
Executive compensation is also a frequent subject of labor shareholder proposals, particularly in the last two proxy seasons. Executive pay proposals sponsored in the 2001 proxy season by funds affiliated with the SMWIA, UBC, LIUNA and the IBEW asked companies to establish performance criteria with a view to long-term shareholder value and to explain the reasoning behind their choices as well as the precise weighting and target levels. Those funds, along with the LongView funds, the AFL-CIO Staff Retirement Plan and the AFSCME Employees’ Pension Plan, have submitted proposals regarding indexed, premium-priced and performance-vesting stock options, while the Teamsters have focused attention on shareholder approval of severance agreements. Funds affiliated with the Communications Workers of America have been active on issues relating to outside director pensions and performance criteria for executive pay.
The independence of the board and key committees is another frequent topic of labor shareholder activism. In the 2001 proxy season, funds affiliated with the SMWIA, UBC, LIUNA, IBEW and IUOE filed proposals regarding the independence of key committees, especially the compensation committee. The IBEW filed several proposals regarding confidential voting in recent years. Finally, LongView, the AFL-CIO Staff Retirement Plan, and Teamster funds have submitted proposals on global labor standards.
In the 2000 proxy season, a group of funds affiliated with the UBC, SMWIA, IBEW, and LIUNA submitted a package of complementary proposals to a large number of companies for the purpose of initiating a wide-ranging discussion on corporate governance. The proposals set forth an alternative conception of corporate governance stressing long-term shareholding (through a proposal suggesting time-vested voting rights), less reliance on the market for corporate control to discipline managers (reflected in five-year, non-staggered terms for directors) and access to the proxy for significant shareholders. Two other proposals dealt with executive compensation and strategic plan reporting. The funds withdrew the proposals after beginning dialogues with the companies. They have since focused their efforts on board and committee independence, the role of the board n the strategic planning process and, in a high-profile 2002 campaign, the provision of non-audit services by accounting firms to audit clients.
[fn12] Randall S. Thomas & Kenneth J. Martin, “Should Labor be Allowed to Make Shareholder Proposals?”, 73 Wash. L. Rev. 41, 51 (1998).
[fn13] In the 2001 proxy season, union-affiliated investors submitted nearly 100 proposals and obtained 16 majority votes. Richard Ferlauto, “2001 Shareholder RoundUp — Active Owners Set New Milestones,” Labor and Corporate Governance, July/August 2001, at 1, 6.
33.05 Council of Institutional Investors
The Council of Institutional Investors (CII) is an organization of over 110 public, union and corporate pension funds with over $1 trillion in assets. CII was founded in 1985 in response to the adoption of anti-takeover measures by companies.[fn14]
CII serves as a clearinghouse for members’ activism and advances a shareholder-rights agenda that is embodied in its Corporate Governance Policies. The policies stress the sanctity of shareholder voting rights, the importance of board independence and accountability and the need for the interests of directors and management to be aligned with those of shareholders.[fn15] CII also publishes an annual “focus list” of companies that are performing poorly and could benefit from corporate governance reform.
[fn14] See description of CII at www.cii.org.
[fn15] Council of Institutional Investors, Corporate Governance Policies (undated), available at www.cii.org/corp governance. terms for directors) and access to the proxy for significant shareholders. Two other proposals dealt with executive compensation and strategic plan reporting. The funds withdrew the proposals after beginning dialogues with the companies. They have since focused their efforts on board and committee independence, the role of the board in the strategic planning process and, in a high-profile 2002 campaign, the provision of non-audit services by accounting firms to audit clients.
33.06 Religious Investors
Religious shareholders were among the earliest shareholder activists on corporate responsibility issues, and they continue to sponsor resolutions on those subjects, as well as on executive compensation and occasionally other issues. The activism of religious shareholders is coordinated by the Interfaith Center on Corporate Responsibility (ICCR), a coalition of 275 Protestant, Roman Catholic and Jewish institutional investors including denominations, religious communities, pension funds, healthcare corporations, foundations and dioceses with combined assets of approximately $100 billion. ICCR members “utilize religious investments and other resources to change unjust or harmful corporate policies, working for peace, economic justice and stewardship of the Earth.”[fn16]
ICCR members sponsor shareholder proposals on a wide range of issues. In recent years, proposals have addressed executive compensation; environmental issues, including emerging issues such as the genetic engineering of food; equality issues; global labor standards and human rights; international finance; international health and tobacco; militarism; confidential voting; and board independence. Many proposals backed by ICCR members are co-sponsored by religious, public fund, labor fund and other investors.
[fn16] “About ICCR” at www.iccr.org.
33.07 Socially Responsible Investment Funds
Although socially responsible investment managers often screen their portfolios to avoid purchasing stock in companies that engage in socially irresponsible behavior, these investors also use active ownership — the power of proxy voting and the shareholder proposal process — to effect changes in corporate behavior. They do so, in the words of Trillium Asset Management, “because we have found over the past eighteen years that the most powerful leverage for social change in the corporate arena is ownership in the company.”[fn17]
Socially responsible investment managers coordinate their activism both through ICCR and through the Shareholder Action Network, a new organization sponsored by the Social Investment Fund that aims to “increase the effectiveness of shareholder advocacy by expanding the network of organizations and financial professionals participating in shareholder action.”[fn18] According to Director Tracey Rembert, the Shareholder Action Network plans to expand its activities to assist socially-conscious individual shareholders in the future.
The socially responsible investors sponsoring the most shareholder proposals are Calvert Group, Citizens Funds, Domini Social Investments, Friends Ivory & Sime, Harrington Investments, Progressive Asset Management, Trillium Asset Management and Walden Capital Management. Most socially responsible investors file proposals on a wide variety of corporate responsibility and executive pay subjects, although Calvert Group has focused on employment and equality issues in recent years. Like religious shareholders, socially responsible investors often work in coalitions and co-sponsor proposals.
Many socially responsible investors see the filing of resolutions as only one part of their efforts. In the words of Walden Asset Management, “Our approach is to seek dialogue first with companies in which we invest. Resolutions result only when companies’ doors are closed to constructive discussion or when we reach an impasse.”[fn19] According to Domini Social Investments, “Working with companies on these complex issues is often a time-consuming process that can take years, but it has proven to be an effective way to build a foundation for positive change.”[fn20]
[fn17] Trillium Asset Management, Social Report 3 (2000).
[fn18] “Shareholder Action Network: Uniting Investors for Corporate Responsibility” at www.shareholderaction.org.
[fn19] “2001 Victories at Walden,” at www.waldenassetmanagement.com/news.
[fn20] “Domini Social Investments Shareholder Activism Program” at www.domini.com/ShareholderResolutions.
33.08 Mutual Funds and Investment Managers
Mutual funds and investment managers sponsor fewer proposals than other types of shareholders, and their proposals almost always focus on takeover defenses. Gamco Investors, which is affiliated with Mario Gabelli’s mutual fund operations, filed two proposals at S&P; Supercomposite companies in the 2001 proxy season, both asking the company to redeem or obtain shareholder approval for a poison pill.[fn21] Investment manager Crabbe Huson Group joined with the AFL-CIO and the Amalgamated Bank of New York LongView MidCap 400 Fund in sponsoring three proposals through a consent solicitation at Oregon Steel Mills in 1999.[fn22]
[fn21] See Definitive Proxy Statement of Standard Motor Products filed on Apr. 17, 2001; Definitive Proxy Statement of Navistar International filed on Jan. 22, 2001.
[fn22] See Definitive Proxy Statement of Committee to Restore Shareholder Value at Oregon Steel Mills, Inc. filed on Feb. 1, 1999.
33.09 Environmental and Social Justice Organizations
Environmental and social justice organizations often work in partnership with religious shareholders or socially responsible investors (or both) on issues of common concern. Friends of the Earth is the most prominent environmental organization active in the shareholder arena, and has published a how-to manual on shareholder activism.[fn23] In the 2001 proxy season, Friends of the Earth submitted a proposal to Enron, together with individuals, religious and socially responsible investors, asking the company to develop a policy regarding its impact on biodiversity and indigenous peoples.[fn24] Friends of the Earth has also sponsored proposals on greenhouse gas emissions at Reynolds Metals,[fn25] genetically modified seeds at DuPont[fn26] and renewable energy at Exxon.[fn27]
Three social justice organizations, United for a Fair Economy’s Responsible Wealth, A Territory Resource Foundation and the As You Sow Foundation, have also made their mark in the shareholder proposal arena. Responsible Wealth, a “national network of businesspeople, investors and affluent Americans who are concerned about deepening economic inequality and are working for widespread prosperity,”[fn28] campaigns around tax fairness, corporate responsibility and living wages, and has focused its shareholder proposal efforts on executive compensation issues. Responsible Wealth has asked companies to freeze executive pay during periods of significant downsizing,[fn29] limit the concentration of stock options granted to executives,[fn30] report on efforts to deepen employee stock ownership,[fn31] conduct a pay equity audit[fn32] and report on corporate welfare.[fn33]
The As You Sow Foundation, a foundation dedicated to promoting corporate accountability, files proposals on environmental issues (including genetically engineered foods),[fn34] global labor standards,[fn35] corporate governance issues[fn36] and executive compensation.[fn37] A Territory Resource Foundation, “a public foundation that supports activist, community-based organizations working for social, economic, and environmental justice across the Northwest,”[fn38] files proposals on board diversity,[fn39] sexual orientation discrimination,[fn40] reporting of equal employment opportunity data,[fn41] the MacBride Principles[fn42] and glass ceiling issues.[fn43]
[fn23] See www.foe.org/international/shareholder.
[fn24] Definitive Proxy Statement of Enron filed on Mar. 27, 2001.
[fn25] Interfaith Center on Corporate Responsibility, The Proxy Resolutions Book 36 (1999).
[fn26] Interfaith Center on Corporate Responsibility, The Proxy Resolutions Book 17 (2000) (hereinafter, “2000 Proxy Resolutions Book”).
[fn27] Id. at 22.
[fn28] See www.responsiblewealth.org.
[fn29] Interfaith Center on Corporate Responsibility, The Proxy Resolutions Book 4 (2001) (hereinafter, “2001 Proxy Resolutions Book”).
[fn30] Id. at 10.
[fn31] 2000 Proxy Resolutions Book, supra note 26, at 15.
[fn32] Id. at 43.
[fn33] Id. at 14.
[fn34] Id. at 17.
[fn35] Id. at 47.
[fn36] Id. at 3.
[fn37] Id. at 52.
[fn38] See www.atrfoundation.org.
[fn39] 2001 Proxy Resolutions Book, supra note 29, at 34.
[fn40] Id. at 43.
[fn41] Id. at 36.
[fn42] Id. at 61.
[fn43] Id. at 35.
Individuals file a large number of shareholder proposals each year on subjects ranging from board diversity to executive pay to takeover defenses. Since the adoption of the shareholder proposal rule, individuals such as the Gilbert brothers, Evelyn Davis and John Chevedden have greatly influenced the proposal landscape. Certain issues — such as multiple nominees for each board seat — are pursued exclusively by individuals working together.
Other issues, such as executive compensation, spark a high level of interest among individual shareholders, whose formulations sometimes vary from those advanced by institutional investors. For example, whereas an institutional investor might file a proposal to impose different performance criteria or require shareholder approval of severance arrangements, an individual shareholder is equally likely to propose eliminating all bonuses or stock option plans or prohibiting golden parachutes altogether. Proponents of “sell the company” proposals are much more likely to be individuals than institutional investors.
The Internet is making it easier for individual investors to coordinate their activism efforts.[fn44] Message boards dedicated to discussing particular companies’ stocks allow individuals to exchange information and plan shareholder proposal campaigns. Individuals can also make use of resources, such as the Friends of the Earth shareholder activism manual and the proxy voting information provided by CalPERS and Domini’s socially responsible investment funds, to navigate through the shareholder proposal process and gain insight into the thought processes of institutional investors. [fn44] See infra Chapter 36.