In November last year – in a first ever – a county comptroller from New York State, March Gallagher, filed a shareholder proposal at rail transport company CSX for reparations.
Wikipedia defines reparations as: “A political justice concept that argues that reparations should be paid to the descendants of slaves from Sub-Saharan Africa who were trafficked to and enslaved in the Americas as a consequence of the Atlantic slave trade”.
CSX bought the 160-year old Richmond, Fredericksburg & Potomac Railroad (RF&P) in 1991, and, the proposal claims, the RF&P “benefitted from slave labor. CSX is still operating on infrastructure built with slave labor. CSX capital was accumulated using infrastructure built with uncompensated slave labor.”
The proposal requests that the company fund a study this year to “determine how the corporation can best atone for its participation in slavery”. It asks that the commission responsible for the study be made up of “recognized scholars with knowledge and experience in reparations”. It will study how other corporations have atoned for slavery, determine how CSX will atone “with an emphasis on apology and community-building reparations” through a trust fund. It will also “clarify the historical record regarding CSX’s participation in slavery so that the corporation's shareholders and the public at large understand why atonement is being made”.
The proposal was, of course, immediately the subject of a request to the SEC by the company to exclude it from its proxy statement. The company’s objections are based on two rules: the first objection, Rule 14a-8(i)(7), relates to the company’s ordinary business operations by impermissibly seeking to micromanage the company. The second, Rule 14a-8(i)(5), allows a company to omit a shareholder proposal from its proxy materials if it is not a significant part of its operations as defined by the 5% rule. The 5% rule states that the subject of a proposal must be concerned with more than “5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.” The omission request claims that the RF&P is a subsidiary of the company “acquired after slavery was abolished” which leases property to CSX Transportation for approximately $27.5 million a year, which accounts for less than 1% of the company’s total assets.
There has been a flurry of activity in the last few days.
On February 27, Gallagher received a letter from CSX’s lawyers with an extract from the draft proxy statement, which she provided to me, showing that the resolution would be included and that the board had recommended that shareholders vote against. The board said the nature of the report was too prescriptive and would distract from the company’s “future social responsibility efforts”.
"I felt like my voice was echoing in their boardroom. I felt I had some impact. And now that nuclear plant is scheduled for closure." – March Gallagher
Knowing of the challenge, Gallagher was “dumbfounded”, she told RI, to see that her proposal was to be included on the proxy.
Her optimism was short-lived.
The very next day, the SEC announced that it concurred with the company’s ‘micromanagement’ objections, which would mean that the company was within its rights to exclude the proposal.
I contacted CSX to see what actions it would take as a result of the SEC decision, but was told that the company declined to comment until its proxy is filed, which will be “on or about the 23rd of March”; at which point all its shareholders will know what’s in the proxy.
This is not the first shareholder resolution filed by Gallagher. She brought a resolution at Entergy’s annual meeting in 2014, which received support from around 3% of outstanding shares, including from the New York State Common Retirement Fund, that urged the company to decommission the Indian Point nuclear power plant outside New York City.
Gallagher said: “After the annual meeting, at which I presented my shareholder resolution in person, the general counsel and several board members came over to me and we had a frank discussion. I felt like my voice was echoing in their boardroom. I felt I had some impact. And now that nuclear plant is scheduled for closure. If the SEC changes its shareholder proposal regulations as proposed this kind of action will be impossible for retail shareholders.”
Sometime after this, she flipped her investment from Entergy into CSX. She did not buy the CSX stock initially to file the resolution, but rather because she believed in infrastructure and the company did business where she lived.
"We need to have a conversation about reparations. I own an asset and I am benefiting financially because other people’s ancestors were not paid for their work. That’s not right." – March Gallagher
Prior to her election as comptroller, Gallagher was the president and CEO of the Community Foundation of the Hudson River Valley, which had a significant portfolio of around $80 million, with 70% in stocks.
“There was a resource that was available to us that allowed you to look at companies differently, and I looked up some companies that did business in the area. I realised that CSX Corporation, in which I had a stockholding, had a large amount of its railroads in the south built by slave labour.”
Most reparations, she noted, were undertaken by governments, not by actors in the corporate sector, and she understood that her proposal would break new ground.
The SEC response, which Gallagher forwarded to me, also gives an interesting view into the SEC’s new ‘no letter’ procedures, whereby they announce a decision on the new web page [already ref’d above] rather than file a letter on the ‘official’ no-action page.
Nevertheless, Gallagher was sent an email announcing the decision; no letter, but an email. How different that is as a policy is unclear. It is true that the email is not ‘filed’, but the decision is recorded on the new page and, frankly, the ‘letters’ sent out by the SEC recording decisions rarely included anything but the decision. It just means that shareholders and other interested parties need to visit two websites to follow decisions instead of just one.
The company’s draft proxy defence said that the study “will only devote time and resources better spent on the company’s current and future social responsibility initiatives” as well alleging that the report is likely to produce misleading information. No evidence is provided to back up the latter allegation, but the first simply ignores the main purpose of the resolution, which is to get the company to deal with the social responsibilities of the past, as well as those of the present and future.
Ironically, the RF&P’s own north-south railroads provided important and often effective escape routes for enslaved African Americans fleeing the South both before and during the civil war.
“We need to have a conversation about reparations. I own an asset and I am benefiting financially because other people’s ancestors were not paid for their work,” said Gallagher. “That’s not right.”