The cicada is a locust-like insect that emerges from a long hibernation every umpteen years to create an incessant buzzing across the country. Equally annoying in death as in life, when spent, cicadas drop from trees en masse, littering once-pleasant lawns and parks with piles of crunchy carcasses.
On this tenth anniversary of the last Securities and Exchange Commission (SEC) last attempt to cripple shareholder advocacy, the commission has again floated potentially drastic changes to the shareholder resolution process that make our advocacy many times more difficult. In 1997, the story had a happy ending. After a barrage of support for the extant system, the SEC shelved its proposals. This time around, we cannot take another success for granted because the stakes are too high. If successful, advocates for change will eliminate the federal government’s role in protecting the rights of investors to file shareholder resolutions and allow companies to create their own weak, or even nonexistent, mechanisms to govern the process. Investors will not be able to file resolutions to change company bylaws to permit director nominations. Accordingly, the socially responsible investment community is mobilizing vigorously to fight any rollback of investor rights.

Heads I Win, Tails You Lose

In August, the SEC floated two proposals for public comment.[1] Both deal with proxy access very differently, reflecting deep division among the five commissioners.[2] The Republican-supported proposal would disallow any resolutions regarding the election of corporate board directors (or “proxy access” resolutions). The alternative, reluctantly supported by the Democratic commissioners, would allow shareholders to nominate directors, but only if they collectively represent at least 5% of a company’s stock. In an unusual move, Chairman Chris Cox voted in favor of both to prompt public debate on a range of options, while also indicating that he supported some form of proxy access.
Neither alternative is acceptable. Democratic Commissioner Ann Nazareth called the second a “non-access” proposal because of the practical impossibility – for reasons to lengthy to discuss here — of organizing a coalition representing 5% to file a shareholder resolution. Both would stymie for good the growing support among shareholders for proxy access proposals, which received over 40% on the ballots of HP and UnitedHealth Group last spring.
The second proposal also requests comment on whether companies should be able to opt out entirely from receiving any non-binding resolutions – posing a potentially devastating threat to socially concerned investors.
Non-binding resolutions constitute 95% of all resolutions filed, according to the Investor Responsibility Research Center – and 100% of the resolutions resolutions filed by Trillium Asset Management Corporation and our peers in the socially responsible investment field. Without them, we wouldn’t have had the high-impact campaigns of South Africa, sustainability reporting, diversity, political contributions and hundreds of lesser known resolutions that spurred corporate change, many of which we have written about in these pages. Unsurprisingly, many on the other side of the table would like to be rid of them once and for all. SEC Commissioner Paul Atkins said advisory resolutions detract from primary business operations and that their proponents represent the tyranny of the minority…[using their] economic interest to hijack the agenda of all investors.”

Lowlights of the SEC’s Proposals

The opt-out option. The SEC is seeking comment on whether a company should be allowed, with shareholder approval, to opt out of the resolution process, or even, if their state of incorporation allows it, to have the board vote to opt out (and most state corporation laws do permit directors to alter their bylaws without a shareholder vote.) In theory, this would create two universes of companies for investors – those respectful of shareholder input, and those with better things to do than listen to their owners. In reality, the latter would surely dwarf the former, forcing investors to turn to more confrontational methods to raise their issues.
The chat room proposal. The Commission puts out for comment the idea that the inclusion of shareholder resolutions on proxy ballots could be replaced by companies with an “electronic petition model.” Everything is wrong with this suggestion. To start, companies would not have to respond to the proposal, so voting shareholders would have no idea of where a company stood on a particular issue, and neither management nor board is obligated to give it the slightest bit of attention. Second, except for the requirement that the web resolutions contain no “false or misleading” material, any subject could be addressed, guaranteeing a flood of them that investors would find impossible to wade through, thus depressing voter turnout. Third, voter turnout is likely to be low anyway; who besides John Mackey[3] frequents company chat rooms?

Chat rooms are a non-starter unless they become an addition to the current mechanism, not a substitute.
Resubmission thresholds. Also up for grabs: raising resolution resubmission thresholds from 3% in the first year, 6% in the second year, and 10% every succeeding year to 10, 15 and 20% respectively. These higher thresholds would have squelched numerous resolutions that took time to gain support because shareholders needed time to study them, such as climate change resolutions, which garnered only single-digit support when introduced ten years ago, but which now receive 20-30% routinely.
If the resolution process is gutted, management and directors are likely to turn a deaf ear to all but their biggest shareholders. Of the 1,400 resolutions filed each year, one-quarter to one-third are withdrawn, mostly due to successful agreements between investors and management. These agreements range from strong substantive commitments that produce real changes in policy or practices, the disclosure of previously hidden information, commitments to further dialogue, and sometimes simply agreement to disagree. In any of these circumstances, much is learned by both sides. In our twenty-odd years of shareholder advocacy, the staff at Trillium Asset Management can personally testify to dozens of positive relationships with companies that were jumpstarted by shareholder resolutions. Shareholder resolutions are responsible for the Ceres memberships of General Electric, Sunoco, Baxter, and Bank of America, to name a few. They have produced enhanced nondiscrimination policies at over fifty companies. These are commitments that corporations routinely boast about in their public relations material. Yet it remains a sad reflection of some corporations’ insularity that it too often requires a resolution to get in the door.
The SEC needs to hear from all of us who have ever filed for, voted in favor of, or benefited from a shareholder resolution. We must vociferously object to the misguided suggestions analyzed above, and insist that no rule changes be voted upon until the seat vacated this summer by Democratic Commissioner Roel Campos is filled.
For model letters to the SEC and Congress, visit our web site at www.trilliuminvest.com. To view comments already submitted to the SEC, visit http://sec.gov/comments/s7-16-07/s71607.shtml.

---

[1] In 2006, the American Federation of State, County, and Municipal Employees (AFSCME) sued American International Group (AIG), the insurance giant, for access to the proxy ballot after AIG omitted its resolution seeking a bylaw change to allow proxy access to nominate directors. The court ruled in favor of AFSCME, and challenged the SEC to either start allowing such resolutions or provide a rationale for omitting them. [2] By statute, three commissioners are appointed from the majority party, and two from the minority.
[3] John Mackey is the CEO of Whole Foods, who made headlines this summer when his online alter-ego made highly questionable statements in a Yahoo! chat room.