The shareholder proposal has long been an effective tool for shareholders to bring emerging corporate governance issues to the attention of a company’s board of directors, its managers, and their fellow shareholders. Over time, shareholder proposals have driven a variety of governance reforms, from eliminating staggered boards to adopting majority voting in director elections. Although the subjects of shareholder proposals vary substantially, and some fade quickly into obscurity, others gradually build sufficient support leading not only to their implementation but to their incorporation into future standards of good governance.

At the same time, shareholder proposals are controversial. Critics argue that there are too many of them, that they are frequently sponsored by retail investors with small stakes – termed “corporate gadflies” – and that they do not enhance economic value.  These concerns led the Securities and Exchange Commission in September 2020 to revise the shareholder proposal rule to raise the barriers for introducing a shareholder proposal.[1]

Proposals seeking to repurpose the corporation to formalize commitments to stakeholder governance reflect a new entry into the debate over the shareholder proposal. The increasing demand for stakeholder governance was sparked, in part, by the Business Roundtable’s August 2019 statement on the purpose of the corporation.[2] The statement announced that the Business Roundtable had replaced its support for shareholder primacy with the proposition that corporations be run for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders.

In response, several shareholders introduced proposals requesting that corporations follow the Business Roundtable’s lead and implement stakeholder governance. I term these proposals, which first surfaced during the 2019-2020 proxy season, “purpose proposals.” Purpose proposals evolved over the past three years from seeking disclosure about corporate commitments to stakeholder governance to requesting that issuers convert to public benefit corporations (PBCs).

In my current working paper, available here, I present new data on the introduction of and support for such proposals over the past three proxy seasons. The paper describes the sponsors of purpose proposals, the issuers targeted by such proposals, and the SEC’s treatment of the proposals. Ironically, despite BlackRock CEO Larry Fink’s highly-publicized statement that “[w]ithout a sense of purpose, no company, either public or private, can achieve its full potential,”[3]  BlackRock was one of the recipients of a purpose proposal. Perhaps more ironically, BlackRock argued to the SEC staff that the shareholder proposal should be excluded on the ground that it related to the company’s ordinary business operations and was therefore “best left to the judgment of BlackRock’s Board of Directors (the “Board”) and management.”[4]

My article reveals that, despite their potential promise, purpose proposals have received very limited support. The major proxy advisory firms have not recommended voting in favor of them, although none of the firms has issued a formal position on purpose proposals generally. Most importantly, large institutional investors, which command substantial voting power, have neither supported purpose proposals nor participated in the debate over their merits.

Purpose proposals nonetheless demonstrate the value of the shareholder proposal rule in enabling governance reform. They provide a relatively low-cost procedure for shareholders with a modest ownership stake to raise a new governance issue and allow the other shareholders to communicate their support or opposition through the voting process. Shareholder proposals also serve an information-generating function by providing a mechanism for both the proposing shareholder and management to articulate arguments for and against the proposal. In the context of purpose proposals, Rule 14a-8 allows corporate participants to address and refine critical questions regarding the meaning and significance of stakeholder governance, so as to inform both boards and shareholders as to the desirability of the reform. Critically, purpose proposals enable issuers to make decisions about the relative importance to them of financial success, stakeholder interests, and other public benefits.

The paper reports and evaluates these arguments about stakeholder governance and PBC conversion. Purpose proposals and their supporting statements reflect two themes. One is that corporations are pursuing profits to an excessive degree.  The other is that, in doing so, corporations are taking actions that have a detrimental effect on both broadly diversified investors and other corporate stakeholders. They then offer stakeholder governance as a proposed solution, in that it empowers corporate decisionmakers to consider a broader range of corporate objectives rather than focusing exclusively on profit maximization including, specifically, the interests of non-shareholder stakeholders. For example, the purpose proposal introduced at Fox Corp.’s 2021 annual meeting requested that the company convert to a PBC and that “one of the public benefits included in the amendment be provision of the Company’s viewers with an accurate understanding of current events through the exercise of journalistic integrity . . . .”[5] At the same time, purpose proposals highlight the inherent tensions and ambiguities in stakeholder governance, as well as the potential limitations of the PBC form in resolving those tensions.

The effectiveness of the shareholder proposal rule depends critically, however, on the integrity of the shareholder voting process. That process has been dramatically affected by intermediation. Institutional intermediaries control the majority of the voting power at most publicly-traded companies, but they lack the underlying economic interest in the shares they vote. I have characterized this separation of voting power and economic interest as “empty voting.”[6] At present, asset managers have limited tools for ascertaining the voting preferences of their beneficiaries and, as a result, voting outcomes may not reflect the true preferences of fund beneficiaries. The fiduciary obligations of asset managers may also limit their ability to support proposals that contemplate sacrificing shareholder value in favor of other societal interests. If Rule 14a–8 is to function effectively as a tool for bringing debates over social policy inside the corporation, corporations will need to find a way to engage the voices of their true shareholders, not just those who manage their assets.

In sum, purpose proposals are both good news and bad news for corporate governance.  The good news is that shareholders are using purpose proposals to highlight a critical governance issue – the desirability of stakeholder governance. Purpose proposals demonstrate the effectiveness of the shareholder proposal process in enabling small shareholders to raise the issue before their fellow shareholders, generating management responses to their arguments, and determining whether shareholders as a whole view the public benefit corporation as an appropriate mechanism for enabling portfolio companies to commit to stakeholder governance. Purpose proposals also demonstrate the effectiveness of the shareholder proposal rule as a mechanism for private ordering, allowing debates within a company over purpose and PBC conversion without the need for regulatory intervention.

The bad news is that purpose proposals expose the challenges of intermediation for shareholder democracy. Although voting by institutional shareholder intermediaries is likely an efficient tool for pursuing a single clearly-defined objective such as price maximization, intermediaries are poorly positioned to evaluate the normative trade-offs presented by the debate over stakeholder governance. The problems of intermediation are likely responsible, at least in part, for the questionable viability of purpose proposals.

ENDNOTES

[1] Securities & Exchange Comm’n, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, Sept. 23, 2020, https://www.sec.gov/rules/final/2020/34-89964.pdf.

[2] Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’, Bus. Roundtable (Aug. 19, 2019), https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-servesall-americans.

[3] Larry Fink’s 2018 Letter to CEOs, A Sense of Purpose, available at https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter.

[4] https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2020/asyousowtrioblackrock012020-14a8-incoming.pdf. The SEC declined to grant no action relief, and BlackRock included the proposal in its 2021 proxy statement. See BlackRock 2021 Proxy Statement at 98, Apr. 16, 2021, https://s24.q4cdn.com/856567660/files/doc_financials/2021/ar/2021proxy.pdf.

[5] Def. Schedule 14A, Fox Corp., Sept. 17, 2021, at 57, https://sec.report/Document/0001193125-21-276133/.

[6] Jill E. Fisch, Mutual Fund Stewardship and the Empty Voting Problem, 16 Brook. J. Corp. Fin. & Comm. L. 71(2021).

This post comes to us from Professor Jill E. Fisch at the University of Pennsylvania Law School. It is based on her article, “Purpose Proposals,” forthcoming in the University of Chicago Business Law Review and available here.