February 18, 2005
Binding Resolutions and Coordination Circumvent Structural Limitations of Shareowner Action
by William Baue
A preview of the 2005 proxy season reveals tactics that challenge the systemic imbalance of power
favoring corporate management and directors over shareowners.
Shareowner action in the form of resolution filing promotes corporate progress within a series of
constraints. First, as KLD Research & Analytics
President Peter Kinder points out in a 2004 paper, the ad
hoc nature of resolution-filing imposes limitations, targeting "particular issues at particular
companies" instead of generating sector- or market-wide change. Second, the precatory nature of
resolutions places no obligation on companies to enact the terms of resolutions, even ones
supported by a majority of voting shareowners. And third, the common misperception (perpetuated by
the mainstream media) that minority votes represent a "defeat" inaccurately reflects the reality
that companies implementing the terms of resolutions more often than not do so for proposals
receiving minority votes.
Considering these confines, shareowner action achieves
impressive results. Last year's proxy season saw increasing company cooperation with shareowners,
with companies such as Coca-Cola (ticker: KO), Tyco (TYC), Cintas (CTAS) and Bank of Montreal (BMO) recommending
votes "for" resolutions (a rare move). However, the vast majority of companies oppose resolutions,
and many refuse to abide by the will of the majority of shareowners.
As the 2005 proxy
season commences under the shadow of US Securities and Exchange Commission (SEC) inaction on the rule proposal to allow shareowners access to
the proxy to nominate directors, one tactic is to challenge the structural limitations of
shareowner power. The American Federation of State, County and Municipal Employees (AFSCME) has filed several binding
resolutions, leveraging corporate law in Delaware and New Jersey that have such provisions. The
move seeks to circumvent the precatory nature of shareowner resolutions that, in these cases, have
received majority votes yet have not been implemented by management.
resolutions have historically proven to be toothless, and we're looking to invoke shareholder
rights under state law that we believe would mandate a response from directors given an appropriate
vote," Rich Ferlauto, director of pension and benefit policy at AFSCME, told SocialFunds.com. "As
long as a proxy access rule is not enacted by the SEC, then there is going to be a reexamination of
how the balance of power between shareholders and management can be leveled, and one way is to move
to binding requirements on issues that get majority votes."
This proxy season, AFSCME
filed a binding proxy access resolution at AIG (AIG) and Eastman Kodak (EK) to nominate
directors. And at Maytag (MYG), Raytheon (RTN), Morgan Stanley (MS), and Gillette
(G), AFSCME filed
a binding by-law amendment creating a board committee to meet with shareowner proponents of
resolutions that receive majority votes but go unimplemented. At all four companies, a resolution
calling for annual board elections had garnered majority votes that the companies ignored in past
years. This year, AFSCME withdrew the proposal at the latter three companies when they initiated
actions to declassify their boards by enacting annual elections. Maytag, however, remains
steadfast in opposing the will of the majority of its shareowners.
Harvard Law and
Economics Professor Lucian
Bebchuk has written a paper to be published this
year in the Harvard Law Review entitled The Case for Increasing Shareowner Power that
supports the principle of AFSCME's stance.
"My analysis indicates that the considerable
weakness of shareholders in US companies is not a necessary consequence of the dispersion of
ownership," Prof. Bebchuk writes. "This weakness is at least in part due to the legal rules that
insulate management from shareholder intervention."
Shareowner activists counteract the
other limitation of shareowner action, its ad hocand incomprehensive nature, by coordinating
resolution-filing campaigns across multiple companies and sectors. The 2005 Proxy Resolutions
Book from the Interfaith Center on Corporate Responsibility (ICCR), a coalition of 275 religious and ethical investors, reveals
the synchronization of shareowner campaigns. The book documents 268 shareholder resolutions with
184 companies throughout the United States and Canada.
"The statistics break down as
follows: 44 resolutions were filed on the topic of health care, 42 on corporate governance, 40 on
global warming, 27 on sexual orientation discrimination, 25 on human rights, 18 on contract
supplier issues, 12 on water and food, 11 on militarization and violence in society, and lastly 4
on capital and finance," state Sister Pat Wolf, executive director of ICCR, and Julie Wokaty,
director of web site and publications at ICCR, in the introduction.
The global warming
resolutions exemplify the broad scope of coordination, encompassing six industry sectors (auto,
electric power, oil and gas, manufacturing, real estate, and financial services). Filers also
represented a broad spectrum, with four public institutional investors, a labor union, three
foundations, nine socially responsible investment (SRI) firms, and a host of religious
The campaign also strategically ties into global developments.
For example, the Kyoto
Protocol formally went into effect earlier this week, requiring dozens of industrial countries
(excluding the US, which refuses to ratify it) to reduce greenhouse gas emissions by about five
percent below 1999 levels by 2012.
"Adoption of the Kyoto Protocol adds even greater
urgency to these shareholder resolutions," said Mindy Lubber, president of the Coalition for
Environmentally Responsible Economies (CERES),
one of the primary coordinators of the campaign. "There's a rising tide of investor concern
because carbon limits are taking effect around the world."
For example, ExxonMobil (XOM) generates more
than a third of its revenues in countries that have ratified the Kyoto Protocol.
companies are taking global warming seriously because of stakeholder concerns and we're hopeful
that will result in some of these resolutions being formally withdrawn as companies agree to more
climate change risk disclosure and actions to mitigate risks," said Leslie Lowe, program director
at ICCR, another primary coordinator of the campaign.
This comment highlights the final
limitation of shareowner action, the perception of majority votes as "victorious" and minority
votes as "defeats." Last year, four companies agreed to implement the climate change resolution,
yet none of those resolutions received majority votes in previous years.