December 6, 2011
From Street Activism to Shareholder Activism
The Occupy protests over the last few months have gotten me thinking about methodology lately. Suppose someone has a criticism, legitimate or not, against a corporation. (At this point, I don’t mean to challenge the rationales behind the protests.) Certainly, there are some practical advantages to drawing up a sign and simply camping. Anyone can do it: it imposes minimal effort costs on the participant and minimal political costs in that two participants can agree to disagree while together contributing to and benefitting from the overall effect of a mass movement (e.g., public visibility, occupying enough physical space to impede infrastructure). And acting in a cohesive group provides morale benefits in the form of camaraderie and social reinforcement. But what is puzzling is not so much the strategies in the arsenal as much as the one strategy palpably missing from it. Why haven’t more protesters turned to shareholder activism?
Take, for example, the use of SEC Rule 14a-8 (shareholder proposals). Though limited to 500 words and one submission per year, these proposals enable relatively small-time investors to campaign in annual meetings and distribute literature to all the stakeholders, on the company’s dime, about issues “significantly related” to a company’s business. And members of the 99% can participate even if they do not have the investment capital of a pension plan or a social-responsibility fund: at the relatively low price of $2,000.
If the purpose of protest is to bring the message to a forum where it will be heard by the decisionmakers, this method potentially generates a lot of bang for one’s buck. If the purpose is to gain bargaining power, a lawsuit after a no-action letter will create more headaches for a company than physical occupation of property. If the purpose is to gain media attention for one’s demands, this method provides an additional means of attracting such attention and specifically using it to apply public relations pressure against a targeted corporation, when coupled with a visible movement.
Granted, requests to circulate shareholder proposals in proxy statements often, in themselves, entail a legal battle, and proposals are rarely successful when put to a vote. Although Rule 14a-8 no longer expressly prohibits social or political proposals, it would take some careful thought to frame the proposal in such a way to convince the SEC that the proposal isn’t about a pet cause and that it has some relevance to the business of the company, without crossing the line into becoming a management function. And some topics would be more suitable as proposal subject matter than others. (For example, resolutions calling for corporate transparency, investigations into the benefits of certain compensation structures, or recommendations on the desirability of certain company policies might have greater success than standalone proposals exhorting the corporation to embrace certain moral principles.) But even if a proposal loses at the lawsuit stage or garners only a small percentage of the votes, the point, for protestors, isn’t necessarily to win, but to acquire a loudspeaker and a bargaining chip. Cf. D.A. Jeremy Telman, Is the Quest for Corporate Responsibility a Wild Goose Chase? The Story of Lovenheim v. Iroquois Brands, Ltd., 44 Akron L. Rev. 479 (2011), http://www.uakron.edu/dotAsset/1849639.pdf. That article gives an interesting account of aftereffects that favor the activist shareholder, even if the proposal never reaches a vote or the vote fails, including the fact that, often, proposals are withdrawn as moot because the company adopts them sans vote. (Another interesting example of well-organized shareholder activism: http://www.csjsl.org/news/nuns-who-wont-stop-nudging-shareholder-activism.php.)
To be clear, I am not saying that shareholder meetings are hotbeds of democratic process and dialogue. Most shareholders are passive, most professionally managed funds won’t poll their constituents about their preferences, and most institutional investors have a fiduciary duty to their members to focus narrowly on profit maximization, even if incidentally a majority of their members, if asked, would rather not invest in certain weapon production or oil exploration in a politically unstable country. But at least some differences of opinion between management and an activist investor may come from information asymmetry: some suggestions are desirable to both, but the management does not know to pursue it until someone speaks up. Or, even if the management is only thinking of cold hard profit, the undesirability of a highly publicized campaign airing out the company’s dirty laundry may persuade it to make concessions and to correctly value the reputational risk of not compromising with some of the more reasonable, socially favored demands.
And though a proposal loses, it may confer other benefits too. For example, if uniform demands are made to several major companies in an industry regarding executive compensation, it may create a norm (if enough companies pledge to meet the demands) or articulate a standard (even if the demands are not met). Just as marketers use product differentiation to educate consumers about the differences between Company A and B, communicating expectations has inherent value in creating a tangible point of differentiation. (For example, I might not know to buy a car with a certain airbag configuration as opposed to another, but if someone simplifies the analysis and tells me that expensive Car A meets 2012 safety standards while cheap Car B does not, I will buy Car A over B.) Reputational risk increases when norms are clearly communicated.
Certainly, such a world would come with costs. A well-executed campaign and lawsuit would require a company to respond by redirecting profits into counterattacking, and critics may observe that a relatively small but active stakeholder may exercise undue influence over a company, at the expense of the passive majority of stakeholders that have no agenda other than profit. It’s possible that an ill-advised but popular idea might pressure a board into following a bad course of action. Decisionmakers will still have to weigh the costs, benefits, and risks of alternatives, even though a successful campaign may cause it to rethink the weight it gives to principles it undervalued before, or the company’s long-term relationships with employees, consumers, and communities. A protestor, similarly, may have to come to terms with the fact that many investors, even those not part of the 1%, do not share his views. But protestor participation as shareholders may create a better forum for dialogue between the two sides.
And there are obstacles. The average protestor knows more about political activism than shareholder activism, whether navigating Rule 14a-8 or engaging a proxy services firm. And some protestors may find participation in the capital market, itself, distasteful. (After all, one is contributing to the demand for a particular company’s stock, not because the company is worthy of approval, but simply because the company is influential.) In order to have any impact, this brand of activism may require some like-minded protestors to agree on certain modest priorities, to pool resources, and to coordinate closely with a larger campaign designed to amplify the private dialogue between shareholder and management into a public one.
But whether because of distrust in the market system itself or lack of leadership, expertise, and consensus, it does not appear that protestors are supplementing their methods with any serious attempts at shareholder activism. Using the power of numbers, Occupy protestors have garnered media attention, sparked public dialogue, and even shut down facilities. But, despite symbolically occupying ground near financial institutions and centers of commerce, there does not appear to be much dialogue with (or pressure against) the perceived adversary---the corporations themselves, and the people who run or own them.