Alphabet, Inc., the parent corporation of Google and its affiliated companies, recently held its annual shareholder meeting. ((Alphabet, Inc. Proxy Statement, https://www.sec.gov/Archives/edgar/data/1652044/000130817919000205/lgoog2019_def14a.htm (April 30, 2019).)) Among the list of items that were voted on were twelve shareholder proposals. ((Id. at 11.)) Some of these concerned important issues in corporate governance, including sexual harassment in the workplace and inequitable working conditions. ((Id.)) These proposals, known as corporate social responsibility proposals, are an important way for shareholders to challenge companies to improve their working conditions and inequitable employment practices, such as forced arbitration and opaque policies on sexual harassment in the workplace. Shareholders use corporate social responsibility proposals to keep issues in discussion, and they are an effective way for shareholders to make their voices heard in the governance of large public companies. In turn, these proposals help the company’s stakeholders by allowing shareholders to submit proposals for their benefits.
First, I will give a brief history of corporate social responsibility proposals. Then, I will discuss two specific proposals that shareholders included in Alphabet’s proxy statement as examples of the types of issues that these proposals can address. Finally, I will argue that corporate social responsibility proposals are a good way for shareholders to exert power over the companies they co-own, and that these proposals frequently benefit stakeholders other than shareholders.
History of Corporate Social Responsibility Proposals
Shareholders may submit proposals to management to be included in the company’s proxy statement. ((Myron P. Curzan & Mark L. Pelesh, Revitalizing Corporate Democracy: Control of Investment Managers’ Voting on Social Responsibility Proxy Issues, 93 Harv. L. Rev. 670, 672 (1980).)) Under SEC Rule 14a-8, the company bears the cost of including shareholders’ proposals in the proxy materials. ((Daniel E. Lazaroff, Promoting Corporate Democracy and Social Responsibility: The Need to Reform the Federal Proxy Rules on Shareholder Proposals, 50 Rutgers L. Rev. 33, 36 (1997).)) This gives shareholders the ability to put their ideas up for vote at annual meetings, without requiring them to fund their own costly proxy statement.
Use of this power to advocate for corporate social responsibility began increasing in the 1970s, when a group of shareholders famously used a corporate social responsibility proposal to push for Dow Chemical Company to stop manufacturing napalm that was being used as an incendiary device against human beings in wars. ((Curzan & Pelesh, supra note 4, at 676.)) That resulted in the case Medical Committee for Human Rights v. SEC, where the court ruled that the proposal did not fit any of the SEC’s exclusions, allowing the proposal to appear on the proxy statement. ((Id. at 677.)) The SEC allows corporations to remove shareholder proposals when the proposals fall within the exclusions listed in Regulation 14a-8. ((William T. Allen & Reinier Kraakman, Commentaries and Cases on the Law of Business Organization 208 (5th ed. 2016).)) This decision paved the way for the current state of corporate social responsibility proposals, because the ruling narrowed the exclusions so that companies could no longer exclude proposals just because they were political or social in nature. ((Id.))
There are, of course, limitations to this power. One major development that limited this power occurred in 1991, when the SEC made the decision to allow Cracker Barrel restaurant to omit a shareholder proposal that would have prohibited employment discrimination based on sexual orientation. ((Allen and Kraakman, supra note 8, at 212.)) The SEC made this decision based on what is called the ordinary business exclusion. ((Id.)) This exclusion allows companies to exclude proposals from their proxy statement if the proposal “relate[s] to matters falling within the province of management.” ((Id.)) However, the Cracker Barrel decision was widely criticized, and the SEC changed their policy on the ordinary business exclusion to one where decisions are made on a case-by-case basis, instead of using a “bright line” standard. ((Id. at 213.)) That brings us to today’s standard, where the cases involving the ordinary business exclusion are decided on an individual basis. There are other exclusions that allow companies to avoid putting the proposals in their proxy statements ((17 C.F.R. § 240.14a-8(i).)), but many of the most important cases have dealt with the ordinary business exclusion.
What Alphabet’s Shareholders Included in Their Proposals
Two of the shareholder proposals in Alphabet’s proxy statement were particularly interesting: the proposal regarding inequitable employment practices ((Proxy statement, supra note 1, at 64.)), and the proposal to review management’s policies on sexual harassment in the workplace. ((Id. at 68.))
The first proposal asks that the company abstain from engaging in a list of inequitable employment practices, including mandatory arbitration agreements and involuntary non-disclosure agreements. ((Id. at 64.)) These two issues have been getting a lot of press recently. ((See, e.g., Elizabeth A. Harris, Despite #MeToo Glare, Efforts to Ban Secret Settlements Stop Short, N.Y. Times (June 14, 2019), https://www.nytimes.com/2019/06/14/arts/metoo-movement-nda.html (non-disclosure agreements); Juliana Feliciano Reyes, Philly airport workers are being forced to sign away their rights to take their employer to court, Phila. Inquirer (Sept. 17, 2019), https://www.inquirer.com/news/forced-arbitration-agreements-otg-unite-here-20190917.html (mandatory arbitration clauses).))
Another proposal focused on sexual harassment in the workplace, and asked Alphabet to review its policies on sexual harassment to protect both the shareholders and employees. ((Proxy statement, supra note 1, at 68.)) This is another hot-button issue in the corporate world, and it is not surprising that Alphabet’s shareholders are concerned about workplace policies in this area. It is an issue that could cause losses for shareholders ((Daniel Hemel & Dorothy S. Lund, Sexual Harassment and Corporate Law, 118 Colum. L. Rev. 1583, 1583 (2018) (stating that “[t]he #MeToo movement has . . . lead to . . . sharp stock price declines at a number of firms.”).
)), and it is also important for the protection of employees.
These are two examples of the types of issues shareholders can raise through the corporate social responsibility proxy system. It allows shareholders to address important issues that companies might simply ignore without shareholder pressure.
Why These Proposals are a Force for Positive Change
Even though the Alphabet shareholders’ proposals were not successful ((Sugandha Lahoti, Google rejects all 13 shareholder proposals at its annual meeting, despite protesting workers, Packt (June 20, 2019), https://hub.packtpub.com/google-rejects-all-13-shareholder-proposals-at-its-annual-meeting-despite-protesting-workers/.)), they are an important power for shareholders to have. Due to Alphabet’s dual-class management structure, the proposals were never going to win without the approval of management. ((Emily Chasan, Google’s Multi-Class Stock Structure Made Alphabet Move Unique, Wall St. J. (Aug. 12, 2015) https://blogs.wsj.com/cfo/2015/08/12/googles-multi-class-stock-structure-made-alphabet-move-unique/ (stating that Google founders Larry Page and Sergey Brin control the company by holding “Class B super-voting shares [that] carry 10 times as many votes”).)) But they keep management informed of the issues that are most important to shareholders. Allowing these proposals into the proxy statement gives the shareholders a platform to highlight what they believe are serious problems with the company.
Another reason that this power is so important is that it allows shareholders to get their ideas to a large audience of other shareholders. As the court in Medical Committee stated, one of the main purposes of this power is to “permit shareholders to bring before other shareholders concerns common to them as co-owners of the corporation.” ((Lazaroff, supra note 5, at 54.)) This is not a rule that allows shareholders to control the day-to-day operations of the company. ((Id.)) Rather, it is a tool that gives shareholders the ability to address important issues of corporate governance in an accessible and effective manner, and to communicate and organize with other shareholders.
The term stakeholder refers to the idea that shareholders are not the only group that companies should be concerned with. Instead, companies should consider the interests of the greater community, their employees, and their customers when they make decisions, along with the interests of their shareholders. ((See Adam Winkler, Corporate Law or the Law of Business?: Stakeholders and Corporate Governance at the End of History, 67 Law & Contemp. Probs. 109, 110 (2004) (noting different types of stakeholders).)) When shareholders believe in this model of doing business, they can use corporate social responsibility proposals to promote the interests of other groups of stakeholders that lack the power to do so themselves. We have already seen this come up, with the Cracker Barrel case and the two Alphabet proposals discussed above, all of which focused on employment conditions.
In the Cracker Barrel case, shareholders sought to use the power of corporate social responsibility proposals to improve the working conditions of Cracker Barrel employees and applicants by prohibiting discrimination based on sexual orientation. ((Allen & Kraakman, supra note 8, at 212.)) Although that group of shareholders were unsuccessful at getting this proposal approved ((Id.)), it was a good strategy, because it took the issue to a Court of Appeals and let the shareholders litigate the issue.
The two Alphabet proposals I have focused on in this discussion were also unsuccessful. But they gave the shareholders an opportunity to show that these are important issues that they care about. Even though Alphabet’s board declined to adopt the proposals officially, it seems likely that they will look further into the concerns that the proposals raised, which might lead to changes that would benefit Alphabet’s employees.
Corporate social responsibility proposals are a great way for shareholders to put important social issues in front of the board of directors and their fellow shareholders. These proposals benefit the entire corporate world, from employees, to management, to shareholders, because they allow shareholders to make their voice heard on issues that might not come up otherwise.
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