Donald Trump’s continuing failure to place his assets in a blind trust creates an opportunity for him to abuse the public office of the Presidency for private gain—his own and his family’s. The Trumps have shown themselves willing to work with blatantly corrupt business partners in the past; now, with the awesome power of the Presidency, Trump is in a unique position to do significant damage to the anticorruption agenda. People who, like me, are bothered by the conflicts of interest have sought ways to fight back. While my last post discussed the viability of the Trump anticorruption boycotts, here I discuss a different but potentially complementary approach: shareholder proposals.
What is a shareholder proposal? Every year, each shareholder receives a long booklet of information, called a proxy statement, from every company in which he or she holds stock. These proxy statements are compiled by corporate leadership and distributed to shareholders, who are asked to vote on certain matters: electing directors to the board, hiring the corporate accounting firm, and approving executive compensation. At the end of the proxy statement come the shareholder proposals, short recommendations for the board of directors. Shareholders are asked to vote for or against those proposals.
Under SEC Rule 14a-8, any shareholder (or group of shareholders) who holds $2,000 or 1% (whichever is less) of the company for at least one year may submit a proposal. (There are a few other procedural requirements as well, but they are not too onerous.) Although shareholder proposals are merely advisory—the directors and management retain their power to make decisions on behalf of the corporation—shareholder proposals in the past have been used to advance social and political goals. For example, social activists used shareholder proposals to urge divesting from South Africa during the apartheid era. Last year Exxon Mobile included shareholder proposals to place a climate expert on the Board and to report on compensation for women. A shareholder proposal for Coca-Cola asked the company to report on its operations in high-risk regions with poor human rights records.
In this vein, anticorruption activists who hold stock in corporations that do business with the Trump family brands (such as Amazon, Macy’s, or Zappos) could submit shareholder proposals urging those companies to report on or cease all such business. To be sure, shareholder proposals are merely recommendations to the board. But shareholder proposals are nonetheless a low-cost tool in the anticorruption advocate’s toolbox that can help keep public attention on the issue and prevent the normalization of Trump’s conflicts.
An anti-Trumpian-conflicts-of-interest shareholder proposal, cast in the formalistic style typical of such proposals, might look something like the following:
Policy on Carrying Brands Related to President Trump’s Business Interests
Whereas, corruption at the highest levels of government, and the failure of the President to divest from his private interests, have become significant policy issues in the public eye. [Corporation’s] continuing business agreements with the Trump family risk damaging the company’s reputation and shareholder value.
Resolved: The proponent requests the board of directors cease all business dealings with corporations and partnerships controlled by the Trump family.
Supporting Statement: [Corporation’s] brand value is its greatest strength and an enduring source of value to its shareholders. However, the Trump family’s conflicts of interest, and public outrage over apparent corruption and the appearance of corruption in the White House, damage the reputation and brand value of any business that puts money in Trump family pockets.
Were such a proposal to appear on the proxy statement of a major corporation, business-oriented media would almost certainly report on it. The board of a corporation would probably wish to exclude the proposal from its proxy statement in order to avoid such publicity (and the risk of White House retribution), but the board would not be legally able to do so–unless the SEC radically altered its rules, which would no doubt spur even more publicity. As noted above, shareholders who comply with a relatively undemanding set of procedural requirements can get a proposal included in the proxy statement. Current SEC rules do give management (1) the authority to exclude shareholder proposals relating to operations accounting for less than 5% of the company’s assets, earnings, or sales and that are not otherwise “significantly related” to the company’s business; and (2) the authority to exclude proposals related to “ordinary business matters,” which includes things like product line decisions. While the “significantly related” test is not a clear standard, past cases strongly suggest that corporate leadership could not exclude anticorruption proposals. Medical Commission for Human Rights v. SEC suggested that general political and social concerns satisfy the test, and Lovenheim v. Iroquois Brands Ltd. held that ethical matters are proper subjects for proposals. Austin v. Consolidated Edison Company of New York, Inc. held that, unlike senior executive compensation, shareholder proposals related to employee pension benefits were excludable because the issue “has not yet captured public attention and concern.” While Austin is unfortunate for employee advocates, it bolsters the case for anticorruption proposals, as Trump’s conflicts of interest are a subject of public concern. Similarly, anticorruption proposals are also unlikely to fall under “ordinary business matters,” as the SEC’s Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 40018 (May 21, 1998) explicitly stated that the “ordinary business matters” rule does not allow for excluding proposals that raise significant social policy issues.
An anti-Trumpian-conflicts-of-interest shareholder proposal should therefore end up on the proxy statement. What then? Some critics argue that shareholder proposals are worthless. The board nearly always recommends voting against the proposals. And even if they pass with a majority of votes, shareholder proposals are merely precatory; the board is not obligated to implement the recommendations. However, there is a reason why sophisticated institutional investors resort to these proposals. They do have power: corporate pressure played a role, albeit a minor one, in toppling apartheid. Even if the board is not required by law to implement a proposal, the risk of bad publicity or poor shareholder relations might convince the board, and even if they don’t, the proposals keep the issue in the public eye and on management’s radar.
Like boycotts, shareholder proposals are a relatively low-cost mechanism to express dismay over corruption and the appearance of corruption in the Trump White House. Proposals have little formal power beyond the potential to sustain public attention on Trump’s conflicts. But that alone, challenging the normalization of corruption, is a good goal for American anticorruption advocates in 2017.