March 26, 2009
TARP Banks Rebuff Shareowner Request to Create Economic Security Committees
by Robert Kropp
Shareowner proposal introduced by Harrington Investments is excluded from proxy ballots by the SEC,
and Bank of America and Citigroup refuse a direct request from Harrington to form a board-level
Created by the Emergency Economic Stabilization Act of 2008, the Troubled Asset Relief Plan (TARP)
authorized $700 billion to purchase or insure troubled assets and equity from financial
institutions. The necessity for the taxpayer bailout of many of the nation's largest banks came
about in large part because of banks' involvement with risky mortgage-backed securities and the
global economic crisis that erupted in the aftermath.
Public anger in the wake of
the bailout suggests at least a necessity for increased measures of accountability from TARP banks.
Such measures could include clearly stated commitments to ensure that such a threat to US economic
security is avoided in the future. Dennis Blair, the current US Director of National Security, has
publicly identified the global economic crisis as the most serious national security challenge
facing the US.
In the spirit of ensuring that TARP banks that have received many billions
of dollars henceforth act in ways that serve US economic security, Harrington Investments, an investment management firm
that has been involved in socially responsible investing (SRI) and shareowner advocacy since 1982,
introduced shareowner proposals at Citigroup, Bank of America, and Goldman Sachs that would create
board-level Committees on US Economic Security.
Citigroup and Bank of America have
received $45 billion each in TARP funds, the largest amount received by banks involved in the plan.
Goldman Sachs received $10 billion.
The shareowner statement included with the proxy
filing states that stabilization of the US economic system was necessary because of "years of
irresponsible lending and business practices. Unregulated trading in speculative derivatives and a
general lack of management and board oversight at major US financial institutions has brought the
global economy to the brink of disaster."
John Harrington, President of Harrington
Investments, has been involved in SRI issues since 1972. Harrington introduced the shareowner
proposals, he told SocialFunds.com, "Because we felt there was a fiduciary duty to the economic
security of the US on the part of the boards of those companies."
Sanford Lewis, an
attorney whose practice focuses on corporate environmental and social disclosure under the
securities laws, represented Harrington Investments in its shareowner proposals.
that the boards needed to look at the extent to which companies are impacting the US economy and
what the boards could do to better reflect US economic interests," Lewis told SocialFunds.com.
"Given the amounts of money that these companies are receiving from American taxpayers, we felt it
seemed an appropriate question for these boards to consider."
Harrington said, "A couple
of these institutions have taken ownership in companies associated with totalitarian governments.
The Bank of America, for instance, has an ownership stake in the China Construction Bank, and a
Bank of America employee sits on the board of the China Construction Bank. So some of the money
from the bailout went to finalize an acquisition of stock in a bank associated with a totalitarian
Harrington continued, "Goldman Sachs, which received $10 billion in bailout
funds, also received money from AIG for credit default swaps."
Citigroup and Bank of
America responded to Harrington's shareowner proposal by seeking permission from the Securities and
Exchange Commission (SEC) to disqualify the proposal on grounds that it violates Delaware law. In
what Harrington describes as one of the most aggressive efforts in recent memory to try to block a
shareowner resolution, the two banks sent a total of eight letters and memoranda to the SEC to keep
the resolution off the 2009 proxy.
Lewis said, "The two companies had one overlapping
argument, that it might violate Delaware law. If you read the statute, there is no clarity at all
on the issue."
Yet in a decision that came as a disappointing surprise to Harrington and
other socially responsible investors who had hoped that under President Obama and Mary Schapiro,
the new Commissioner, the SEC would return to its mandate to protect investors, the staff of the
SEC Division of Corporation Finance allowed Citigroup and Bank of America to exclude the shareowner
resolution from the 2009 proxy ballot.
"The SEC staff deferred to the companies because
they had a memo from a Delaware attorney" alleging possible conflicts with Delaware state law,
"It's not the commissioners at the SEC that makes the decisions, but the
staff," Lewis continued.
Harrington said, "If you look at the people who comprise the
staff of the SEC, too many of them come from positions of corporate counsel. It's the same
revolving-door policy too often seen inside the Beltway."
He continued, "I'm concerned
that not much has changed within the SEC. It needs to undergo a significant change. The same group
of insiders continues to set policy. When you ask the staff to send information to the
commissioners, they ignore your request or flatly refuse."
Lewis said, "Investors are
being forced into fewer templates, and may have to resort to broad issues such as sustainability in
order to engage companies on such matters as the Harrington proposal. Being shut out of the
shareholder process forces investors to examine more hard-hitting avenues as recourse."
While it notified Harrington that it would oppose the shareowner proposal at its annual proxy
meeting, Goldman Sachs did not challenge the proposal before the SEC. The Goldman Sachs shareowner
proposal is scheduled to be voted on at the company's proxy meeting on May 8.
the SEC decision, Harrington decided to bypass the SEC and call upon the board of directors of
Citigroup and Bank of America to create a board committee on US economic security.
have not received a response from Citigroup," Harrington said. "I received a letter from Alice
Herald, Deputy Chief Counsel of Bank of America, who wrote, 'The corporation already considers
economic implications of our policy on a day-to-day basis and it touches almost every aspect of our
operations. We believe we are managing these issues appropriately and efficiently.'"
Harrington believes that the time has come for a thorough reconsideration of many of the
fundamental aspects of the current financial industry.
"Shareholders have so little
power," he said. "We have created a class of managers that do not answer to the owners. The concept
of 'too big to fail' is truly frightening. We need to look at significant structural changes to our
Referring to such financial instruments as credit default swaps, contracts
providing insurance against complex debt securities in case of default that were created on Wall
Street in the 1990s and remain unregulated, Harrington said:
"All we are doing with these
credit default swaps is creating wealth for a small group of traders. The amount of speculation is
"There are a lot of piranhas in the pond," Harrington concluded.