Getting The Politics Out Of Proxy Season

Time for the SEC to rethink a policy from the days of 1970s protests.

On April 14 the U.S. Court of Appeals for the Third Circuit overturned a lower court's injunction that would have required Wal-Mart to include on its proxy statement a shareholder resolution challenging the retailer's sale of firearms. So-called social investors thus lost their latest effort to turn annual shareholder meetings into forums for pet political causes. Nevertheless, these activists, cooperating with public-employee pension funds, have increasingly gained boardroom influence. The Securities and Exchange Commission needs to stop such efforts, which hurt the average diversified shareholder.

Mid-April is the beginning of the “proxy season,” the two-month period when most large publicly traded companies hold annual meetings where shareholders vote on proposals introduced on proxy ballots. Stockholders who have held shares valued at $2,000 or more for a period of at least one year can introduce resolutions that are included on such ballots.

Until 1970, the SEC had a rule that companies could exclude from proxy ballots any shareholder resolution introduced “for the purpose of promoting general economic, political, racial, religious, social or similar causes.” The agency's rule followed the seminal case of Dodge v. Ford Motor Company (1919) in which the Michigan Supreme Court declared that “a business corporation is organized and carried on primarily for the profit of the shareholders.” Corporate law directs boards and executives of stockholder corporations to focus on share value because a diverse set of competing agendas would limit the ability of courts to enforce fiduciary duties designed to protect owners of equity stock.

During the Vietnam War, however, the D.C. Circuit Court of Appeals (Medical Commission for Human Rights v. SEC) reversed the SEC's judgment that Dow Chemical could exclude from its proxy ballot a shareholder resolution opposing the company's sale of napalm. The court did not require the SEC to include shareholder proposals related to social or policy concerns, but after it sent the issue back to the agency for reconsideration, the SEC dropped its rule. The modern era of social and political agitation through the proxy process was born.

Last year, according to the Manhattan Institute's ProxyMonitor.org database, 47% of all shareholder resolutions on the proxy ballots of the largest 250 American companies by revenues involved social or policy concerns unrelated to share value. The issues included corporate political spending, environmental issues and animal rights. Since 2006, these companies have faced 1,150 such proposals, and 65 more have already been introduced in 2015.

The SEC still imposes some limits. In general, shareholders can introduce proposals with social or policy relevance concerning a company's own products, but not the products of its suppliers or customers. The SEC issued this guidance in 1983 and in 1997 applied it to retailers and advertisers selling tobacco products. The Third Circuit followed this principle this month in the firearms case (Trinity Wall Street v. Wal-Mart Stores Inc.).

Still, the SEC should revisit its broader rules about social or policy questions on corporate proxy ballots. Not one of the 1,150 shareholder proposals concerning social or policy issues since 2006 got the support of a majority of voting shareholders over board opposition. Mutual funds, private pension plans and other large institutional investors generally have their own fiduciary duties to vote consistent with maximizing share value. They see these shareholder resolutions for what they are.

Using proxies as a political soapbox has costs beyond those directly incurred by companies to respond to the proposals. Social-activist shareholders of companies that produce oil, pharmaceuticals, military equipment, cigarettes and agricultural products regularly leverage this process to generate press attention inimical to the companies' core interests. Public-employee pension funds headed by elected partisan officials—most notably, those for New York City and state, respectively led by comptrollers Scott Stringer and Thomas DiNapoli—exploit the proxy process to browbeat companies into leaving trade associations and other groups that the officials view as unhelpful to Democratic Party interests.

The SEC's legal mandate is to protect investors, facilitate capital formation, and promote efficient markets. Allowing social and policy issues to dominate corporate annual meetings conflicts with these goals. Here's hoping that the agency revisits this issue and removes politics from proxy process, for good.

This piece originally appeared in Wall Street Journal

This piece originally appeared in The Wall Street Journal