Paul Hodgson: Engagement through the courts might be all stakeholders have left

If shareholder resolutions become all but impossible, shareholders may have to turn to the law

On 7 July, an Oracle shareholder, R Andre Klein, filed a derivative suit against company founder Larry Ellison, CEO Safra Katz and a number of other directors and executives accusing them of failing to implement the software company’s own diversity initiatives. A derivative lawsuit is one that is fought for the benefit of the corporation, where typically the board and the executives are sued and have to pay out if the case is won. It is different from a class action lawsuit, in which a losing company pays damages only to the shareholders bringing the suit. The Mercury News said Oracle declined to comment on the suit.

It is perhaps not a surprise, given the widespread unrest about racial justice in the US, that a shareholder should decide to raise this issue now with a company that has already been questioned and criticised by the US Congress and been prosecuted by the US Department of Labor for its lack of racial diversity and its underpayment of women and ethnic and racial minorities. Indeed, US shareholder Pax World [now part of Impax] has filed a resolution at the company calling on it to disclose its gender pay gap for the last three years. With Ellison’s large shareholding, the proposal has been prevented from winning majority support, though last year it won 36% support. And the company is also subject of a class action suit from a group of employees alleging underpayment compared to Caucasian male colleagues.

While Oracle claims that diversity begins at the top, in its proxy statement, as the suit contends: “Founded in 1977, Oracle’s Board today in 2020 has no African‐ Americans and no Latinos; and no Asian‐American or other minority representatives aside from Vishal Sikka [the Indian-born former CEO of Infosys].  And, none are in the offing.” The suit also claims that there are no non-white executives at the company and alleges that the defendants have misrepresented Oracle’s position on diversity and signally failed to implement is own diversity and inclusion policies.

Oracle is not the only target

Nuclear power firm Exelon is also the subject of a derivative lawsuit from shareholder Jack Feintuch which alleges that executives and the board concealed for months the fact that Exelon and its subsidiary ComEd has been receiving subpoenas from the US Attorney’s Office for Northern Illinois for information on their lobbying activities and communications with state Democratic Senator Martin Sandoval, who since has pleaded guilty to taking bribes.

This is not the first time, nor the last, that a shareholder will despair of reform at a company and take to the courts through either a derivative or class action suit. But recently a different kind of shareholder challenge has been revived.

In 2018, the New York City pension funds took US aerospace components firm TransDigm to court because it was seeking to exclude their shareholder resolution which called for “time-bound, quantitative, company-wide goals for managing green-house gas (GHG) emissions, taking into account the objectives of the Paris Climate Agreement”. As disclosed in an RI article, in a stipulation filed on 17 January this year, TransDigm wrote to the SEC on 28 December saying that it withdrew its no-action letter and would include the resolution, in effect capitulating to the demands in the suit.

Another, though unsuccessful, attempt to bypass the SEC also occurred at the end of 2019. Montana attorney Tom Tosdal filed a proposal with energy company Northwestern to end coal use and start using renewables. As at TransDigm, the company wrote to the SEC seeking to exclude the resolution, but days later Tosdal filed suit in the US District Court in Montana to require inclusion of the proposal. Meanwhile, the SEC said it would not be responding to the company’s request because of the litigation. As RI noted at the time, though not widely known, the SEC’s authority is not absolute in the area of excluding shareholder proposals; only the courts have final authority.   

Shareholders and employees are not the only ‘stakeholders’ suing companies, US states have been attempting to bring companies to account for everything from the opioid crisis to climate change for some time. The District of Columbia, Colorado and Minnesota have just launched similar suits to those already filed by New York and Massachusetts against the oil majors for misleading the public and shareholders about the causes of climate change. German chemical company Bayer, which, perhaps regretfully, acquired US-based Monsanto, the maker of weed killer RoundUp, has been sued by customers over the chemical’s role in causing non-Hodgkins Lymphoma. Native American nations and a whole slew of environmental groups have finally shut down the Dakota Access Pipeline.

In addition, NGOs are also ‘engaging’ with corporations through the courts. Following the lead of suits against tobacco companies – as the suits against pharmaceutical and oil companies have – a  California-based environmental campaigner, Earth Island Institute, is suing the following food and drink companies: Coca Cola, Pepsi, Nestle, Clorox, Crystal Geyser, Mars, Danone, Mondelez International, Colgate-Palmolive, and Procter & Gamble, claiming they are responsible for a significant amount of the eight to 20 million tons of plastic entering the Earth’s oceans annually. Like the prior suits, this one also alleges public nuisance, breach of warranty, and negligence claims.

The suit alleges that companies have engaged in a “decades-long campaign to deflect blame for the plastic pollution crisis to consumers” rather than producers. “Consumers are led to believe that the earth would be healthy, if only they recycled properly, when, in reality, there is no market for most plastics to be recycled,” the suit says.

The 10 companies were found to be the top producers of plastic collected in beach cleanups by an international audit conducted last year by environmental group Break Free From Plastic. The suit says that the companies have known for a long time that only a tiny fraction of the single-use plastic they use has been recycled and have concealed this from consumers, while claiming that all their plastic is recyclable.

If, as seems possible, the current, right wing-dominated SEC passes its unwanted changes to the shareholder resolution system, in 2021, lawsuits may be the only way, outside of one-on-one engagement, to get the attention of corporations.