JING ZHAO’S main occupation is translating Latin classics into Chinese. He runs a small think-tank, the US-Japan-China Comparative Policy Research Institute. He lives off rents from property bought cheaply after the financial crisis. But this quiet, intellectual California resident has a surprising sideline: submitting proposals to be voted on by the shareholders of companies in which he owns small stakes. That makes him part of a movement that is forcing management at some of the world’s biggest firms to consider not just profitability but broad shifts in social attitudes.
The annual meetings of America’s listed companies, usually held between February and June, have come to constitute “proxy season”—so-called because shareholders need not cast their votes in person. This year proposals from Mr Zhao will be on the ballot at four giant firms. He wants Apple to create a human-rights committee, citing its decision last year to bow to Chinese censorship by removing hundreds of “virtual private network” apps from its Chinese app store. For Twitter, he proposes a new committee to oversee issues such as human rights and corporate social responsibility. A third proposal would lessen Elon Musk’s dominance over Tesla by giving the board more power. And finally, he wants changes to remuneration policies at Wells Fargo, a big bank that faces fines of up to $1bn for mis-selling financial products.
Each firm has reacted negatively to Mr Zhao’s proposals. Apple and Twitter appealed, unsuccessfully, to the Securities and Exchanges Commission (SEC) to have them struck down. So far only the proposal regarding Apple has been voted on, with just 5% in favour. But Mr Zhao, and others trying to use proxy votes to mould corporate America, are playing a long game. The vote has drawn attention to Apple’s concessions in China. And 5% is enough, under the SEC’s rules, that Apple cannot block the proposal from next year’s ballot.
Shareholder proposals used to relate mostly to corporate governance—for example, splitting the roles of chairman and chief executive. But in recent years that has changed. Even as the total number of proposals has fallen, the number relating to social and policy issues has crept up. Last year, according to the Manhattan Institute, a think-tank, more than half of those at America’s 250 biggest firms related to such matters. An analysis by Institutional Shareholder Services (ISS), a proxy-advisory firm—which advises fund managers on how to vote on proposals—found that of the 459 shareholder proposals submitted by early April this year, many fell under just a few headings: transparency about political spending, climate change, racial and gender diversity, and pay.
But that does not capture the proposals’ range and creativity. Campaigners on a dizzying array of issues regard proxy voting as an exciting new weapon. For example, this year the Sisters of St Francis of Philadelphia, an American order of nuns, got a proposal onto the ballot at AmerisourceBergan, one of America’s largest pharmaceutical distributors. Demanding greater transparency about the sale of opioids, it gained 41% of the vote. That is startling, given that supplying pharmaceuticals is the firm’s core purpose. The message to management is unlikely to go unnoticed. Two other distributors, Depomed and McKesson, face similar votes.
The Interfaith Centre on Corporate Responsibility, a group of unions, pension funds, religious groups and self-described “socially responsible” asset managers, published a guide to the 266 proposals its members put forward this year. One wants Amazon to look at how to cut food waste. Another wants Bristol-Myers to consider how to incorporate public concerns over expensive drugs into executive pay. A third wants Goldman Sachs and Citigroup to say how they will avoid violating the rights of indigenous people whose lands might be crossed by oil pipelines.
Early and often
Typically, proxy proposals are framed as being beneficial for a firm’s bottom line, no matter what the issue. That can stretch credulity. But it also provides essential cover for fund managers who may look kindly on a proposal but are voting on behalf of the shares they manage, since they are generally bound to support only proposals that would enhance a firm’s value.
In public, executives tend to welcome proxy activism. In private they moan about the time and money it soaks up. Seemingly innocuous requests for studies on an issue touch a raw nerve; each word could form the basis for future litigation.
It is all a far cry from the early days of proxy voting, in the 19th century, when the rise of public companies with dispersed owners made it hard to get a quorum. Shareholders were permitted to nominate a proxy to vote on their behalf. For a long time, their representation was mostly for show. In 1937 a jaded correspondent for The Economist noted that shareholders were merely provided with “special facilities for voting in favour of the chairman’s policy before they have heard his speech”.
The issue was included in the SEC’s original mandate, in 1934. But the agency has struggled ever since to decide who should be able to put forward a proposal, and what sort of demands it may entail. It took years for shareholders to gain the right to approve a firm’s choice of auditor, but such a vote is now mandatory—and particularly relevant this year. The collapse of two big firms, Carillion and Steinhoff, is provoking shareholders at some other firms with the same auditors, KPMG and Deloitte, to demand that they switch. ISS has recommended that GE’s shareholders vote in favour of dropping KPMG.
The current rules set a low bar for submitting a proposal. A shareholder must have owned at least $2,000 of a company’s stock for a year, and write a letter setting out the topic of the vote in less than 500 words. But getting it accepted is harder. Proposals are supposed to address issues that affect at least 5% of a company’s business, and neither conflict with its ordinary activities nor reflect a personal grievance. Management can appeal to the SEC to block a vote. According to the Sustainable Investments Institute, an advisory firm for social, environmental and policy issues, during the past eight years appeals heard by the SEC have been granted 40-60% of the time.
The SEC can be unpredictable and its results and utterances Delphic, says Heidi Walsh, the institute’s director. Last year it ruled that Exxon had to allow a vote on proposals requiring extensive studies of the risks climate change posed to its business. Over the firm’s objections, the proposals were approved. But this year the SEC allowed EOG, an oil and gas firm, to block a proposal requiring it to set targets to reduce greenhouse-gas emissions.
If either side disagrees with the SEC’s decision, it can go to court. In 1969 opponents of the Vietnam war, who had sought and failed to call a shareholder vote to force Dow Chemical to stop making napalm, appealed. That led to the SEC ending its ban on proposals relating to political and moral issues. After a proposal in the 1980s to stop the force-feeding of geese was blocked, litigation established that a proposal can sometimes merit a vote, even if it concerns less than 5% of a firm’s business. In 2015 litigation by Walmart reversed an SEC decision to allow a proposal seeking to restrict the retailer’s gun sales.
The changing nature of shareholding has created some unlikely social-justice warriors. Shares used to be held in tiny lots by individuals. They are now largely consolidated into big public and private pools. That has turned sovereign-wealth funds, pension funds and the like, which vote in proportion to the shares they manage, into the equivalent of voting blocs. Private funds often used to neglect to cast their votes, perhaps for fear of antagonising corporate clients. That changed in 2003, when the SEC started requiring them to do so. Some officials running public pension funds seem to revel in their new-found power. Scott Stringer, New York City’s chief financial officer, made his stance on proxy proposals relating to diversity and climate change a big part of his election campaign.
In this new framework for corporate governance, the role of éminence grise is filled by proxy-advisory firms like ISS. It and Glass Lewis are the two best-known. They help institutional investors to sort through the array of proposals put forward by other shareholders and by the firm itself, and give recommendations to guide votes. But one voice is still scarcely heard: that of individual owners whose shares are held in funds and pension schemes. As social issues rise up the corporate agenda, it is a lingering injustice that they are ignored.