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Corporations are holding off activist investors–but for how long?

Shareholder proposals demanding changes in corporate behavior are on the rise. For now, companies have been mostly successful at quashing them. But perhaps it’s time to rethink the rules about how much influence shareholders have.

Corporations are holding off activist investors–but for how long?
[Source Images: paitoonpati/iStock]

On a chilly day in Chicago last year, protesters stood outside of a McDonald’s holding signs that asked passersby to reconsider whether the company’s Happy Meal was really so happy. There were billboards of sickly chickens on the hay-lined farm floors and people dressed up as demonic Ronald McDonalds. The Humane League started the #imnotlovinit campaign a year ago to persuade McDonald’s to stop sourcing chickens from factory farms.

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Last fall, New York state comptroller Thomas DiNapoli and Humane Society vice president of Farm Animal Protection Josh Balk spoke out against McDonald’s’s practice of working with farms that pack chickens together too densely, adding that better treatment of animals also makes good business sense. One of the organizations leading the charge, the Humane League, submitted a shareholder proposal this year that sought the creation of an annual report detailing the economic risks to McDonald’s from continuing high-profile, anti-animal cruelty campaigns.

After the Humane League sent in its proposal, McDonald’s asked permission from the Securities and Exchange Commission (SEC) to exclude it from the proxy materials it supplies to investors ahead of its annual shareholder meeting, through what’s called a no-action letter. There are a few different legal justifications for omitting a shareholder proposal. One of them, the one that McDonald’s used, allows a company to quash proposals that attempts to micromanage day-to-day business operations. In McDonald’s case, the SEC agreed that the proposal overstepped shareholder bounds.

The battle between the Humane League and McDonald’s is representative of a bigger movement. A growing number of shareholder proposals are asking companies to change the way they behave on environmental and social issues. “In contrast to purely administrative proposals about governance matters, social and environmental proposals like these increasingly seek a broader, consumer-facing audience and use social media tools to spread their message,” explains a new report by Intelligize on the state of shareholder proposals.

[Source Images: paitoonpati/iStock]
Shareholder proposals are a formal way for shareholders to have a say in how a business operates. These suggestions for action get voted on at annual meetings, where shareholders discuss company performance and operations. In order to submit one, a person or organization has to have a certain level of investment in the company, typically $2,000 of a given company’s stock. “You’ll see these groups, as part of their investment strategy, will go and invest in certain companies to specifically try and make change within those companies,” says Rob Peters, one of the paper’s authors.

Usually shareholder proposals involve mundanities like suggesting measurements around executive compensation or proxy access, a way for longtime shareholders to submit a limited number of alternative board candidates. The rules around shareholder proposals were written to give shareholders say in how a business operates at a high level, but not to interfere with day-to-day operations. They were not written with consideration for social or environmental policies, which often sit in between the kind of broader company policy shareholders around which are traditionally entitled to make suggestions and the minutiae of business operations, which the SEC tries to keep shareholders from meddling with. Things like the farms that McDonald’s uses to source its chickens was probably not something that the SEC or Congress anticipated would be an issue that a company would directly deal with with their shareholders,” he says. Per the report, requests on human, animal, and social rights constituted 14% all of shareholder proposals in 2016. In the first quarter of 2019, they represented 25% of proposals.


Related: The calls to rein in Mark Zuckerberg have never been louder

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The SEC has an array of rules that companies can use to bypass these requests, though, and so it’s rare that shareholder proposals actually make it to a vote. The report details two of these rules in particular, one of which says a proposal can be ignored if it too heavily impacts day-to-day operations, and another that allows the company to omit a proposal if it feels it has already taken steps to address the problem. For instance, the SEC concurred that Marriott International didn’t have to include a proposal for new shower heads that more minutely control water usage, because it was considered micromanaging. Exxon Mobil was able to exclude a shareholder proposal for a report on its various political contributions, because it already adopted a set of guidelines for sharing that information (though it may not have been as detailed as some shareholders may have wanted).

There is another rule that allows companies to ignore proposals related to operations that account for less than 5% of a company’s total assets. It’s what Dunkin’ used to avoid a shareholder vote on whether the company should conduct an environmental impact report on the use of K-Cup Pods, which account for a very small portion of the company’s spend. And there’s a rule that lets companies throw out a proposal if it doesn’t meet the criteria necessary for introduction, for instance, if the entity submitting it doesn’t have the required financial investment in the company.

From 2016 through Q1 2019, 84% of exclusions where companies put up multiple reasons for wanting the proposals thrown out were ultimately granted under one of these three rules. Just 16% came to a vote. But this growing class of social and environmental recommendations are not specifically addressed by the current rules. The reason that’s problematic is because legitimate proposals might get thrown out unnecessarily, and certain proposals that shouldn’t really make it through might make it to a vote.

For now, the SEC is attempting to make do with the rules it has, and it’s leading to some interesting outcomes. For example, in January, the Sisters of St. Joseph Brentwood, a group of activist investors, submitted a resolution that would limit the sale of Amazon’s facial recognition technology Rekognition over privacy concerns. “Shareholders have little evidence our company is effectively restricting the use of Rekognition to protect privacy and civil rights,” the resolution stated. “Resolved, shareholders request that the board of directors prohibit sales of facial recognition technology to government agencies unless the board concludes, after an evaluation using independent evidence, that the technology does not cause or contribute to actual or potential violations of civil and human rights.”

The SEC sided with the nuns. It ruled that Amazon didn’t have sufficient reason to withhold the proposal. When the company meets on May 22, the proposal will go to a vote, though Amazon’s board of directors is recommending shareholders vote against it.


Related: Amazon says face recognition fears are “insignificant.” Regulators disagree

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More of these kinds of proposals are going to a vote, because it’s getting harder for the SEC to justify exclusion, according to a 2018 report by legal firm Gibson, Dunn, & Crutchfield. In order to better accommodate these shareholder proposals, the Intelligize report suggests “tweaking” the rules to more directly addresses the parameters around what shareholders can and cannot ask for when it comes to social and environmental issues. It suggests the SEC put in writing how it demarcates what is a significant policy issue that shareholders are allowed to raise, and what is minutiae that the board is better able to make determinations about on its own. For the moment, the SEC appears to make its decisions around what constitutes a major policy issue, like who Amazon sells its facial recognition software to, based on its own instincts.

But the SEC might want make more than small adjustments to its process, says Peters. As more shareholder proposals come in, the SEC is having more difficulty responding to them all. During the government shutdown between late December 2018 and mid-January 2019, the commission experienced a backlog that forced companies to make their own judgments on proposals in the hopes that they align with the SEC’s eventual decision. In addition to making plain what kinds of proposal can and cannot be excluded, the SEC may have to find a way to make reviewing proposals less intensive on its staff.

“I think [the SEC] want[s] to streamline the process but still keep the spirit of the shareholders’ access to corporate matters and giving them a method to do that,” says Peters.

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About the author

Ruth Reader is a writer for Fast Company. She covers the intersection of real estate, technology, and the future of work.

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