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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.

"Precatory 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 "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 institutional investors.

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.

"More 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.


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