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Wall Street’s “Moral Minority”

A New York Times article has revealed that long before Occupy Wall Street, the Sisters of St. Francis of Philadelphia were battling Wall Street over corporate responsibility. For the last thirty years, the Sisters have used the investments in their retirement fund to become Wall Street’s moral minority.

Using their status as shareholders, the nuns fought with Kroger over farm worker rights, with McDonald’s over childhood obesity, and with Wells Fargo over lending practices. They have met face-to-face with the heads of Lockheed Martin, BP, and General Electric. Most recently, they advised Goldman Sachs executives that the bank should protect consumers, rein in executive pay, increase its transparency, and remember the poor.

With their moral authority, the Sisters of St. Francis “can really bring attention to issues,” said Robert McCormick, chief policy officer of Glass, Lewis & Company, the proxy voting firm. “You haven’t seen shareholder activism until you see a nun battling it out with the CEOs. They can be devastating,” said Michael Passoff in a 2005 article on religious shareholder activists. Passoff works in the Corporate Social Responsibility Program for As You Sow, a leading organization in the strategizing and organizing of shareholder campaigns.

The nuns have been waging this war since 1980, when St. Francis Sister Nora Nash formed a committee with her community to combat troubling developments at the businesses in which they invested their retirement fund. The Roman Catholic order of over 500 nuns has teamed up with other orders and faith-based investing groups on shareholder resolutions. Much of Sister Nora’s activism takes place under the Interfaith Center on Corporate Responsibility, an umbrella group which includes Jews, Quakers and Presbyterians.

Sister Nora said that she and the order “want social returns, as well as financial ones.” She added, “when you look at the major financial institutions, you have to realize there is greed involved.”

The full New York Times article can be found here.

Firm Value Improved by Shareholder Access to Proxy Vote

A recent working paper published by Harvard Business School researchers presents evidence supporting regulatory efforts to increase shareholder power by providing proxy access to board elections.  The results suggest that the financial market puts a positive value on the election of shareholder-sponsored board members. 

The researchers studied the share prices of companies after the Securities Exchange Commission suspended its recently-passed “shareholder proxy access rule,” which would have made it easier for investors to nominate directors. 

Specifically, they found that the greater the stake of activist investors in a company, the more negatively the share price was impacted by news of the rule suspension.  In other words, the companies that would have been the most affected by the new rule suffered the largest drop in value.

One researcher explained that “[t]he biggest conclusion we draw from this is that allowing owners to have more power and influence with corporate decision-making, on balance, seems to be valuable in the eyes of the stock market.”

The New Wall Street Reform and Consumer Protection Act: Proxy Access and the SEC

As we should all know by now, last week, on July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act.  For the complete text, click here or click here 

 

Strengthening Corporate Governance through Proxy Access is specifically addressed.  See Title IX – Investor Protections and Improvements to the Regulation of Securities, Subtitle G – Strengthening Corporate Governance, Sec. 971. Proxy Access.  Proxy access makes it easier for shareowners to nominate their own candidates for corporate board directors by letting them place their nominees for director on the company’s proxy card.  Currently, the only way that shareowners can present alternative director candidates at a U.S. public company is by waging a full-blown election contest. For most investors, that is onerous and prohibitively expensive.  For more about Proxy Access, from the Council of Institutional Investors, http://www.cii.org/resourcesKeyGovernanceIssuesProxyAccess. 

 

In particular, the Proxy Access provision, § 971, amends Section 14(a) of the Exchange Act by adding a new subsection (1) that explicitly gives the SEC the authority to issue rules permitting shareholder access to proxy materials in order to nominate candidates to the Board of Directors.  As previously addressed in a Pomtalk post on July 15, 2010, entitled, “SEC Seeks Comments on Proxy System,” the SEC is currently seeking public comments on the U.S. proxy system and asking whether rule revisions should be considered to promote greater efficiency and transparency.  

 

More specifically, Title IX – Investor Protections and Improvements to the Regulation of Securities, Subtitle G – Strengthening Corporate Governance, Sec. 971. Proxy Access, provides: 

(a) PROXY ACCESS … The rules and regulations prescribed by the [SEC] … may include –

(A) a requirement that a solicitation of proxy, consent, or authorization by (or on behalf of) an issuer include a nominee submitted by a shareholder to serve on the board of directors of the issuer; and

(B) a requirement that an issuer follow a certain procedure in relation to a solicitation described in subparagraph  (A).’’.

(b) REGULATIONS.—The Commission may issue rules permitting the use by a shareholder of proxy solicitation materials supplied by an issuer of securities for the purpose of nominating individuals to membership on the board of directors of the issuer, under such terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors.

(c) EXEMPTIONS.—The Commission may, by rule or order, exempt an issuer or class of issuers from the requirement made by this section or an amendment made by this section. In determining whether to make an exemption under this subsection, the Commission shall take into account, among other considerations, whether the requirement in the amendment made by subsection (a) disproportionately burdens small issuers.

 

See http://thomas.loc.gov/cgi-bin/query/F?c111:6:./temp/~c111Q9Hs5H:e1747149

From the Pages of The Pomerantz Monitor: Hedge Funds Secretly Engage in “Total Return Equity Swaps” to Gain Seats on CSX Board

The August issue of The Pomerantz Monitor reports on the questionable tactics successfully used by hedge funds to gain seats on the CSX board. For years, two offshore hedge fund groups, The Children's Investment Funds and the 3G Funds, have wanted to buy CSX, one of the largest railroad systems in the U.S. But CSX was not interested. So the two fund groups recently launched a proxy contest seeking, among other things, to place five directors on the 12-person CSX board, to pave the way for an acquisition.

Delaware to Decide on Proxy Proposal

With more than 60% of U.S. companies being incorporated in Delaware, the state’s legislature established a procedure last year where the Securities and Exchange Commission is able to get direct access to Delaware’s highest court and requests rulings on various state legal matters such as whether shareholder proposals comply with the state’s law. As such, the Delaware Supreme Court has just agreed to entertain a question concerning a shareholder proposal where a company would need to reimburse a shareholder reasonable expenses who successfully wages a proxy fight in getting at least one board seat.

Originally, CA Inc. asked the SEC for permission to omit the proposal submitted by the American Federal of State, County and Municipal Employees from its annual proxy statement on the basis that such an amendment to its bylaws would cause the company to violate Delaware law because decisions on spending are traditionally decided by the company and its directors, not shareholders. Instead of providing guidance, the SEC referred the question to the Delaware Supreme Court. The state’s highest court has put the issue on fast track and instructed the parties to submit briefs by July 7 and present oral arguments two days later.

Click here for story.

SEC Favors No Proxy Access

In the ongoing battle to get more shareholder access to corporate proxies, the SEC has just sent another blow to investors. According to a media report, the SEC sent dozens of “no action” letters to number of public companies, including Bear Stearns, JPMorgan Chase & Co., E-Trade Financial, Croghan Bancshares and Kellwood Co., that the agency will not stand in the way of companies that deny shareholders from recommending various proxy proposals. For instance, the SEC’s staff letter to Bear Stearns, it concluded that the staff “will not recommend enforcement action to the Commission if Bear Stearns omits” from its proxy materials a shareholder’s proposal requesting the company to provide a report to shareholders discussing its potential financial exposure as a result of the mortgage securities crisis.

Unfortunately, this latest action by the SEC should not be a surprise to investors based on the SEC’s prior decisions on this critical issue of granting shareholders more access to proxies. Indeed, according to this article, the SEC voted three to one, along party lines “against its own proposal to allow shareholders who own 5 percent of a company to formally suggest bylaw changes related to director nominations.”

“We’ve expected this response,” said Richard Ferlauto, director of pension investment policy for American Federal of State, County and Municipal Employees.

SEC rejects proxy access

Make no mistake -- Chairman Christopher Cox and the SEC are out to protect corporate interests, not shareholders.  In a rushed vote, Cox and the SEC approved a rule that will allow companies to deny shareholders the right to put their own director nominees on corporate ballots.  As a result, companies can close off the prospect of ousting entrenched directors by anything but a full blown proxy contest, which is prohibitively expensive in most cases, and face no reprisal from the SEC.

Investor advocate and former SEC chief accountant Lynn Turner sees the move as part of a larger attack on shareholders.   "We have heard a lot of talk from Chris Cox in the past, and now we get to see how he walks," he said.  "This could be the least investor-friendly SEC we've seen in four decades."  Annette Nazareth, the sole Democrat on the commission, opposed the rule, calling it "an unfortunate step backward."  Nazareth explained that  "responsible management need not fear its shareholders."  We couldn't agree more.  As owners of the corporation, shareholders are entitled to have their votes heard, not thwarted by Byzantine rules designed to protect entrenched directors.

Proxy Access Rules Going Nowhere Fast

As we reported previously, the SEC has two competing rule proposals concerning proxy access.  It looks increasingly as if neither proposal is generating sufficient support to carry the day.  Thus, as we approach the beginning of the 2008 proxy season, it seems increasingly likely that shareholders will be dealing with the same old proxy access rules.

After a hearing on proxy access last week before Rep. Barney Frank's House Financial Services Committee, Mr. Frank indicated that he wants to “see some changes” made to the current proxy process, but that may be difficult with a key SEC commissioner seat vacant. “I think that [the SEC's] got to go back and work on it some more,” Mr. Frank said. “But it may be very hard to get an answer, so you may see status quo for a while.”

The swing vote on the proxy proposals was Roel Campos, but he resigned last month and a replacement has not been nominated or approved.   

Whatever happens in the coming days and weeks, we strongly encourage Chairman Cox and to oppose the "no access" proposal.  We applauded the Chariman's pro-shareholder position when it came to the internal debate within the Executive Branch about scheme liability (a position that, unfortunately, did not carry the day with President Bush and his Solicitor General) and hope he will follow those same instincts when it comes to proxy access.   Shareholders deserve a voice when it comes to director nominations and any perceived problems related to such access, at this point at least, are purely speculative. 

Urgent Action Needed: Shareholder Rights Under Attack (Again)

As our readers know, we have posted several times in the last few months about vaious SEC proposals related to proxy voting.  Three of these proposals, currently on the table, would: (1) create an "opt-out" option that would allow companies to drop out of the shareholder resolution process; (2) raise the shareholder resolution resubmission levels from the current 3%, 6% and 10% vote levels to 10%, 15% and 20%; and (3)  bar shareholders from making proposals related to the way in which directors are elected. 

We urge our readers to contact the SEC, prior to the close of the comment period on October 2, 2007, to oppose these proposals.  Now is not the time to cut back on shareholder rights.  You can follow this link to submit your comments directly to the SEC.

For those who are interested, we also encourage our readers to check out the Joint Initiative of the Social Investment Forum and the Interfaith Center on Corporate Responsibility, an umbrella organization of socially responsible and religious investing groups who are weighing in on this issue.  You can automatically send a pro-shareholder message to the SEC from their website as well.

SEC Considering Voting Rights for Shareholders

Following a roundtable discussion sponsored by the SEC on proxy matters, Chairman Cox commented to reporters that the SEC plans to propose new rules to increase shareholder participation in the proxy process. If the new rules are proposed by this summer, they could be in place for the 2008 proxy season. According to this article by CFO.com, Cox “expects the SEC to develop a proposal that addresses the ability of shareholders to nominate corporate directors and to place the names of those candidates on proxy ballots.”

This public roundtable was the first of three planned discussions by the SEC to address the shareholder rights and the federal proxy rules. In this first roundtable, the panelists including two vice chancellors from the Delaware Court of Chancery discussed the federal role in upholding shareholders’ state law rights, the purpose and effect of the federal proxy rules, and non-binding proposals under the proxy rules.