It’s Time to Rethink Shareholder Proposals
With the exception of Berkshire Hathaway’s gathering in Omaha, where Warren Buffett might play his ukulele and sing along to a country combo, most annual shareholder meetings focus on a handful of humdrum governance issues: ratification of independent auditors, approval of executive compensation and election of a predetermined slate of directors. Management recommendations on how investors should vote on these issues typically prevail by a landslide, as shareholders vote with management at least 95 percent of the time.
Shareholder meetings of large, publicly traded corporations are often venues for activist shareholders with de minimis holdings. Proposals prepared in accordance with U.S. Securities and Exchange Commission (SEC) rules make their way into the firm’s proxy statement, requiring the company to provide a detailed response justifying the usual “Against” vote. In the past two years, the number of shareholder proposals has risen by 25 percent—from 754 to 941.
Historically, most shareholder proposals have requested disclosure and action on environmental, social and governance (ESG) issues. But in recent years, the fastest growing category of shareholder proposals has been anti-ESG. According to the Harvard Law School Forum on Corporate Governance, the volume of proposals from anti-ESG proponents rose from 30 to 79 in the past three years—turning shareholder meetings into battlefields in the larger ESG culture war.
Many anti-ESG proposals are brought by activist firms like the National Legal and Policy Center and the National Center for Public Policy Research (NCPPR) rather than by individual shareholders. One example appears in the 2023 proxy statement from Google’s parent company, Alphabet. Introduced by the NCPPR, the proposal asks for a report analyzing voluntary partnerships between the company and organizations that promote social and political ends and conflict with Alphabet’s fiduciary duty to shareholders.
It decries association with organizations such as the World Economic Forum, which the NCPPR alleges “openly advocates for transhumanism, abolishing private property, eating bugs, social credit systems, the great reset, and a host of other blatantly Orwellian objectives.” It also maintains that “most Alphabet shareholders are unaware (since the Board hides it from them) that their capital is in part being used to pursue this anti-human, anti-freedom agenda. Moreover, none of this is congruent with the Company’s basic purpose of providing value to shareholders by serving customers.”
The low bar for introducing shareholder proposals—which allows any individual shareholder with a minimum investment of $2,000 held for three years, whether in the proxy or on the floor, to submit a proposal—has facilitated some ludicrous requests. For example, Procter & Gamble received a proposal in 2005 for the company to be sold because “feminist careerism” was stunting its growth. Nomura, a global financial services company traded in the United States, received a proposal to change its articles of incorporation so that “all toilets within the company’s offices shall be Japanese-style toilets, thereby toughening the legs and loins and hunkering down on a daily basis, aiming at achieving 4-digit stock prices.”
Nostalgia for the 1970s
Nearly a decade after the passage of the Securities Exchange Act of 1934, which enabled shareholders to present their own proposals at company meetings as well as to consider and vote on them, the SEC released a statement saying it was “not the intent … to permit stockholders to obtain the consensus of other stockholders with respect to matters which are of a general political, social or economic nature.” In 1952, it emphasized that proposals are not appropriate if they “redress a personal grievance or for purposes of promoting general economic, political, racial, religious, social or similar issues.” And in 1972, it clarified that a proposal can be excluded if it “consists of a recommendation, request or mandate that action be taken on any matter, including general economic, political, racial, social or similar cause that is not significantly related to the business of the issuer or is not within the control of the issuer.” In 2021, SEC Chairman Gary Gensler unwound the above prohibitions and opened the floodgates to all manner of shareholder proposals.
Two individuals, Evelyn Davis and John Chevedden, pioneered the introduction of shareholder proposals in the mid-to-late 20th century. Davis, who died in 2018, had holdings in 80 companies. Known as “the queen of the corporate jungle,” she actively introduced proposals for close to 50 years. Her appearance was often dramatic, such as when she wore an aluminum dress to General Steel in 1968, and her speeches occasionally got her escorted out of meetings. Chevedden, Davis’ successor, has filed over 1,000 shareholder proposals. Davis and Chevedden became known as “corporate gadflies” since their proposals irritated companies by requiring extensive commentary in response.
The battle between pro- and anti-ESG elements is an outgrowth of the ESG wars, in which each side has adopted extreme (and faulty) positions. While Utah State Treasurer Marlo Oaks has declared ESG part of Satan’s plan, pro-ESG groups like Extinction Rebellion maintain the Earth is in crisis and facing mass extinction. Unwarranted hyperbole and histrionics run rampant on both sides of the debate.
The volume and tenor of this rhetoric has consumed so much oxygen that a more nuanced view is necessary. Such a view would restrict the ability for shareholders with minimal investment in firms to distract companies with excessive reporting demands that purport to save the planet while doing nothing to increase value. At the same time, it would recognize that considering ESG proposals will not erode a firm’s ability to invest funds where they contribute most to valuation.
There is room in the debate for such a nuanced view, and we will continue to argue for it.