At a Roundtable at Maryland on Friday, we were given the opportunity to speak with a corporate secretary and assistant general counsel of a Fortune 200 Company.  One person asked her why she believes corporations fight so hard to exclude shareholder proposals from the proxy statement.  Indeed, there are at least two reasons why such fights seem costly, unnecessary and even potentially counter-productive. 

First, many shareholder proposals fail to receive significant shareholder support.  This failure suggests that other shareholders are not interested in most of these proposals, and hence it should not bother corporations to allow proposals to appear on the proxy statement.  In fact, given the low level of shareholder support many proposals ultimately receive, it seems more cost-effective to simply allow such proposals to appear on the proxy statement than to spend resources fighting to exclude them.   To this point, the corporate secretary did note that her corporation chose not to exclude many shareholder proposals, even when those proposals appeared to focus on subjects about which few shareholders were concerned or were interested in supporting. 

Of course, some shareholder proposals do receive significant shareholder support.  But for those proposals, there is a second reason why corporations may not seek to exclude them.  That is, such proposals may serve an important signaling function, alerting the corporation about the kinds of issues that shareholders find important and hence would like the corporation to consider.  So one wonders, what is the corporate interest in excluding such proposals?  To be sure, one could adopt the cynical proposition that corporations oppose such shareholder proposals not only because they simply do not care about the issues that concern their shareholders, but also because corporate officers and directors fear that if certain issues are highlighted, their positions within the corporation may be jeopardized.  But if this cynicism is not warranted, what is the reason why corporations fight some shareholder proposals so strenuously?  The corporate secretary with whom we interacted suggested that at least some of that opposition stemmed from the fact that the shareholder proposal process is not an effective vehicle for shareholder communication with management.  Hence, she noted that when the corporation had legitimate concerns about a particular proposal and its implementation, the process did not really enable corporations to express or discuss those concerns with shareholders.   Instead, too often, the corporation’s attempt to address those concerns would be painted as defensive or illegitimate.   In this regard, the proposal process appears to create a one-sided debate that may undermine the corporation’s effort to address legitimate concerns with a given proposal, thereby decreasing, rather than enhancing, the potential for communication between the corporation and its shareholders.

Whether you agree with this account of the proposal process, it does suggest a need for more effective mechanisms of communication both between shareholders and the corporation and among shareholders.  This is not to say that the proposal process is not useful, but rather that we may be expecting too much from it when we use it as a primary means of prompting communication with the corporation.  To be sure, corporations like Pfizer  are seeking to engage their largest shareholders.  And the relatively new rules on electronic shareholder forums may encourage greater communications among shareholders.  The corporate secretary’s comments suggest that those interested in enhancing shareholder voice should focus on these and other tools for developing and enhancing communication channels that do not involve over-burdening the shareholder proposal process. 

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