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.
§ 33.10 Individuals
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.
