Three titans of US banking and investment had their requests to omit shareholder proposals on implementing the Business Roundtable Statement of the Purpose of a Corporation slapped back by the Securities and Exchange Commission (SEC) on Tuesday, in a move that offers an interesting case study into the regulator’s ’no action’ decision-making.
BlackRock, Citigroup and Goldman Sachs have all been asked to explain how they will implement commitments made in the recent statement that pledged to put employees, customers, supply chains, communities and the environment on a more even standing with shareholders.
A similar ’no action’ request was denied at Bank of America earlier this month.
Notably, the proposals are similar to the one that JPMorgan successfully blocked this season, but each was specifically designed for the target company and the companies employed different arguments to get the proposals omitted.
"BlackRock’s attempt to silence shareholder voices failed. We will continue to ask them to provide transparency to investors on their implementation plan of the new purpose of a corporation" – Andrew Behar, CEO, As You Sow
“The wording of the JPMorgan proposal was different, as was the company’s response,” explained Sanford Lewis, attorney at Strategic Counsel and lawyer for the proponents, Harrington Investments and As You Sow.
“That one had asked the board to consider certain issues, and the ’no action’ request claimed that the board had considered them. The company claimed that there was little difference between what the proposal requested that the board do, and what it had already done; and so in that instance, the staff [at the SEC] found substantial implementation.”
JPMorgan claimed the board had considered whether it was necessary to do anything, and decided it wasn’t.
John Harrington of Harrington investments, which filed the proposal, told RI that the SEC had not allowed them the proper amount of time to respond to JPMorgan’s objections.
Three of the successful proposals were also filed by Harrington. The fourth, at BlackRock, was filed by shareholder advocate As You Sow on behalf of the Trio Foundation. While they are differently worded, each proposal asks the companies’ boards to review whether the BRT’s statement “is reflected in our Company’s current governance documents, policies, long-term plans, goals, metrics and sustainability practices” and to publish its recommendations on “how any incongruities may be reconciled by changes to our Company’s governance documents, policies or practices”.
Commenting on the SEC decision not to omit the proposal at BlackRock, Andrew Behar, CEO of As You Sow, said: “BlackRock’s attempt to silence shareholder voices failed. We will continue to ask them to provide transparency to investors on their implementation plan of the new purpose of a corporation.”
JPMorgan’s request to omit was based on two arguments: “ordinary business”, which means that the proposal relates to everyday operations, and should therefore be left to management and the board of directors to handle, not shareholders; and “substantial implementation”, that the request has already been largely dealt with.
The four unsuccessful companies relied on the same “ordinary business” argument, but also on a “vague and indefinite” claim – that the proposals were not concrete enough to be actionable, and were open to too much interpretation.
As law firm Gibson Dunn put it in its supporting letter for Bank of America: “the Proposal is impermissibly vague and indefinite so as to be inherently misleading”. Those claims are largely based on the allegation that, because shareholders did not include the Business Roundtable statement in the proposal, other shareholders would not understand what the board was being asked to do. The proposal was vague and therefore shareholders cannot be asked to vote on whether it is significant for the company.
In these cases, the “ordinary business” objections focused on the fact that the statement puts customers, suppliers, employees, and communities above shareholders. And, claimed the lawyers, those first four stakeholder categories lie within “ordinary business”.
Neither objection was considered valid by the SEC and the companies’ requests to omit were therefore denied.
In letters to Bank of America, Harrington wrote: “While it may be easy enough for our CEO and others to sign on to the Business Roundtable statement, in the absence of actions like our proposal we believe this will serve as a meaningless gesture until it is enforceable through corporate governance documents or corporate law.
The proposals at Bank of America and JPMorgan list the major fossil fuel investments the banks have, and ask how this fits with commitment to communities. The proposal at BlackRock does the same, alongside flagging up the asset managers’ poor voting record on environmental shareholder proposals.
“Their CEO signed the Business Roundtable letter saying that they were committing to stakeholder capitalism,” said Behar, “but their past record on proxy voting on CEO pay and on climate and other issues seems like it’s in direct contradiction to that. We welcome their commitment to stakeholder capitalism; it’s central to our mission. What we are wondering is what is the process of implementation. Is it going to be a legal change?
“Are they going to be adopting it into their bylaws? What’s the plan? And what’s the material impact to shareholders? We hope that this means that they will begin to use the power of their proxy vote and to stand with shareholders to fight the proposed SEC rule changes that are trying to silence shareholders.”
At Citigroup, the resolution focuses on the incongruities between the bank’s public statements and its governance documents, while at Goldman Sachs, the proposal asks how signing the Business Roundtable statement might alter the company’s plans, goals, metrics and executive and board compensation.
“I think it's fair to say that both of the filers would say that the Statement aligning the purpose of the corporation with stakeholders could be of significant benefit if it is backed up with mechanisms of implementation, but that at all of the companies, clarity is lacking,” says Lewis. “How will the new purpose be implemented? Moreover, going beyond shareholder primacy, as the Statement implies, is raising significant issues and concerns. For instance, do boards of directors now have a fiduciary duty to stakeholders beyond the shareholders? How can one reconcile company behaviour that seems inconsistent with the new statement? As such, we would expect investor support for the proposal to clarifying how the underlying conflicts among stakeholders will be mitigated and resolved.”