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Investors Strike Back: David Webber on Shareholder Proposals

Key Takeaways

Moves are under way in the investment universe to help individual shareholders take back the vote! Will that change how CEOs and boards act? Tune in as we wade into the waters of corporate civics with David Webber, author of The Rise of the Working-Class Shareholder: Labor's Last Best Weapon.

Steve: Hello, and welcome to Off the Books, where we surf the uncharted waters of accounting, finance, risk, and wherever else the waves take us. This episode is brought to you by Workiva, the risk, reporting, and compliance platform that simplifies your complex work, now with lower calories to help recharge your New Year's diet. Check it out at My name is Steve Soter, accounting enthusiast and Diet Coke aficionado. I'm looking forward to debiting a great conversation today, and I'm very happy to have you hanging ten with us. I'm also very happy to have Catherine Tsai joining me. Catherine, can you please tell the fine folks who you are?

Catherine: I'm not an accountant or Diet Coke aficionado, but I like asking questions, learning new things, and writing about them later. So I'm here to learn. What's on deck today, Steve?

Steve: Well, so we're talking today about the power that shareholders have over the companies that they own. So Catherine, I think most people understand the basic concept that the shareholders of a company get to have some say into how those companies operate. But this concept, we learned, starts to get a little murky when you introduce aspects of corporate law and the legal role of the board of directors. So to that end, today we're talking about shareholder proposals, which are kind of like recommendations from shareholders that get voted on to, as we will learn later, theoretically decide on whether or not those recommendations actually get implemented.

Catherine: The SEC recently proposed some rule changes that would affect the way this process works, and I wanted to understand it better. Steve was no help with this, so we reached out to David Webber, professor at Boston University School of Law, who is also the author of "The Rise of the Working-Class Shareholder: Labor's Last Best Weapon."

Steve: Well, and to be clear, Catherine, I'm rarely helpful to anyone, but I will try this once for today's listeners. Throughout this episode, we talk extensively about proxy statements. And for those who may not be familiar, a very simplified explanation is that a proxy statement is kind of like an annual report that discloses corporate governance information, executive and board of director pay, and a lot of other stuff. And it also includes any shareholder proposals to be voted on at the annual meeting, where the shareholders all get together. With that in mind, let's now get to David. David, welcome to Off the Books. As we mentioned in the intro, the SEC has proposed some changes to the way shareholders influence the companies that they own. And we noted that you've written extensively about this. So tell us a little about your work here and why shareholders should be paying attention.

David: Sure. Well, thanks so much, Steve, for having me on the program. There's been a lot of back and forth over at the SEC in recent years on shareholder proposals. Shareholder proposals, if you're a shareholder in a company and you own $2,000 of stock or more, there's a few more rules around it, but you have the right to file a shareholder proposal. That is a proposal that would be put on the proxy for all the shareholders to vote on at the annual shareholder meeting. There's also a whole bunch of rules that companies can use to keep those proposals off the proxy. And that's really where the action has been lately. Some people complain that it's too easy. Too many shareholders can too easily get proposals on the proxy. Others really value that input, value that voice. And so the latest out of the SEC is really a bit of a pushback on what the Trump administration had done in this space. So, for example, one reason why a company could exclude a shareholder proposal from showing up on the proxy is if it dealt with the so-called ordinary business of the company, right? The ordinary business, the day-to-day is supposed to be dealt with by corporate management, by the board and so forth. And so historically, if it invaded the ordinary business of the company, then it could be kept off the proxy. But the big question, of course, is how do you define that? What does it mean? And what the SEC has recently come out and said is, if it's a policy, a social policy issue of some significance, the current SEC, the Biden/Gensler SEC, has basically liberalized that again, meaning that it's easier for a shareholder to get a kind of policy issue onto the proxy if it's an important social policy, like related to human capital management. It's now gotten a little bit easier than it was after the Trump administration had tightened the rules there a little bit. And so that's going to be expanding the possibility of shareholders to put proposals on the proxy that deal with, say, important social policy questions.

Steve: So, David, maybe for our listeners who might not be familiar with this, how do these shareholder proposals work fundamentally? I mean, somebody proposes something like a cap on executive compensation, and then at the annual meeting, if a majority of shareholders vote for it, then it just happens?

David: Interestingly, no. Most of the time, shareholder proposals are so-called precatory proposals. And what that means is that actually the board has no obligation. The management has no legal obligation to actually implement them. So when someone files a shareholder proposal, as I said, a shareholder owns a certain amount of shares, they can file the proposal, assuming that it gets through, doesn't meet any of the bases for it being excluded from the proxy, then it gets on the proposal. If it gets voted on, the board can actually ignore it, surprisingly. And people often wonder, well, then what's the point? So two things. First of all, why can the board ignore it? And secondly, why does it actually still really matter, even though legally the board doesn't have to implement it? So first of all, the reason the board could basically ignore it, the company can ignore it, has to do with the corporate law question. Take Delaware, where most companies are incorporated. Delaware makes the board of directors the ultimate fiduciary of the company. The board has the ultimate legal responsibility for the company. And so if a shareholder proposal required the board to do something, that would arguably violate corporate law because it would now mean that some other entity is forcing the institution, some other player is forcing the corporation to do something. And really, at the end of the day, it should only be the board that has that power. That's why most of these shareholder proposals are structured as being precatory, as being advisory. They're advice, and they kind of take the temperature of the shareholder electorate, if you want to put it that way. That said, they have a lot of teeth. And the reason that they have teeth really has to do with the proxy advisory services that we're going to talk about and with shareholder voting, because oftentimes, you know, so big players like Institutional Shareholder Services and others, these are proxy advisory firms that give advice to shareholders on how to vote. And one of the things that they do is if, say, a majority of the shareholders vote in favor of a proposal and the board doesn't implement the proposal, that is going to mean that ISS and maybe other proxy advisory firms are going to recommend that next time, that director, any of the directors who voted against the implementation or refused to implement, the next time they're up for election, the recommendation is to vote against them because they ignore the will of the shareholders. And so many directors who want to keep their jobs, who don't want to get dinged, who don't even want to have an embarrassingly low re-election vote total have pretty strong incentive to implement that shareholder proposal, even if they don't have a legal requirement to do so. And that's really where the force of those proposals comes from.

Steve: Catherine, we should probably break in here and clarify that although the board isn't obligated to act on shareholder proposals, the board of directors is elected by the shareholders. So with all this talk of law and elections, this kind of feels like a government class. And to be honest with you, I kind of like it.

Catherine: Yeah, you can make up for all those civics lessons you missed in elementary school. Let's get back to our chat with David. So you bring up an important point because I'm pretty self-centered. And when I think of a shareholder, I think of someone like me or like Steve. But of course, there's other bigger shareholders like pension funds or these institutions that you're talking about. And they have a lot of influence, I assume, because they have so much stock, I guess.

David: Absolutely. They matter as proponents, as shareholders, folks who come up with, say, shareholder proposals, and they matter as voters in terms of their ability or willingness to give support to a proposal or not. So many of the important shareholder proposals of recent years have actually come from, say, public pension funds and labor union funds. If you look at the kind of corporate governance, shareholder rights revolution that we saw, really now it's been a few years, but you know, the early to mid 2010s, maybe a little bit into the later 2010s, what did we see? We saw public pension funds and labor union funds filing shareholder proposals on proxy access, on majority voting, on de-staggering of corporate boards. Proxy access basically just meant that dissident candidates could be listed on the proxy. Imagine if you walked into a voting booth in a presidential election and only the incumbent's name was listed there. If you want to vote for the challenger, you'd have to bring your own ballot with you. Well, that would be flatly unconstitutional in a presidential election. But in corporate elections, that's the way it's been forever. Which is to say the board would renominate itself or nominate its own candidates, put those names on the proxy, and then if challengers want to challenge, they're welcome to do so. But the company would refuse to list their names on the proxy, instead forcing the challenger to go out, print up all their own proxies, ballots, circulate them to shareholders. That's super expensive. Only hedge funds could ever afford or would even bother to do that. So proxy access was a reform that came about because public pension funds pushed it. And then the other thing I'll just squeeze in here is on the voting side, the biggest players, the big three, BlackRock, Vanguard, and State Street, they do nothing on the proposal front. They basically never file shareholder proposals. But as voters, they can be decisive. Back in 2017, for example, a couple of the big three, I think it was BlackRock and Vanguard, if I'm not mistaken, voted in favor of environmental proposals at energy companies. Well, their support flipped those proposals from being losers to winners. So absolutely, when the big three enter the game, they have the most shareholder power in the market. They can really make a difference in how these things play out.

Catherine: Earlier, you referenced the recent action by the SEC to try to make it a little bit easier for shareholders to bring proposals up for a vote. We're talking about Legal Bulletin No. 14L. I don't have much historical background about what's going on here, but can you describe a little bit about what's going on?

David: The SEC's most recent steps have made it easier for shareholder proposals and shareholder proponents to get those particular issues onto the proxy and have made it more difficult for companies to exclude, say, the social policy issue from the proxy. That I think is seen as a concession to an accommodation of ESG, the rise of environmental, social, and governance investing. The fact that investors, I think it's part of a larger suite of reforms that are designed to be more accommodating to investors who care about the environmental impact of business, the social impact of business, and so forth.

Steve: David, as I've been listening to this discussion, this term of democratizing shareholders, which is a nonsensical term, but that keeps going through my head. I keep thinking of like the Schoolhouse Rock! You know, I'm just a bill, right? And that whole process, I don't know if any of you remember that on Saturday mornings, but are we really just trying to elevate the shareholders in general to the board of directors to almost resolve the conflict that may have been created through Delaware law? I mean, maybe I'm drawing connections here that don't need to be, but I keep getting back to what's the fundamental issue that we're trying to solve, and it seems like shareholders ought to have more of a say. And these are all efforts that are trying to elevate them to where they could actually have more influence on what happens on a daily basis at the companies they own.

David: I think that's clearly correct, and to go back to your Schoolhouse Rock metaphor for a second. You know, I have to say one thing I've been harping on for for a while, I actually talk about this a little bit in my book, "The Rise of the Working-Class Shareholder," is the importance of basic education in corporate civics. It's interesting to me, obviously in elementary school, middle school, and such, we all get sort of the basics of civics, government civics, how a bill works, how a bill becomes law, and so on and so forth. It's always been somewhat surprising to me how little most people really know about what I would call corporate civics, about how a corporation works, the board, the shareholders proposals, these things. Well, the reality is, is that corporations are at least as influential, maybe even more, than what we see in kind of electoral politics and how laws get passed. So it's an interesting comparison here. I think there's also no question that this has all really been in the direction of shareholder empowerment. That has been the clear trend for a decade or two or three. For a while now. Shareholder empowerment. And I think that's itself an interesting story.

Steve: So Catherine, I need to break in here and ask, did it ever occur to you that corporate civics was like a thing? Because it hadn't occurred to me until I just started thinking about the Schoolhouse Rock! Song, I'm just a bill.

Catherine: For our listeners who may not be as old as Steve, Schoolhouse Rock! was an old Saturday morning cartoon and had a short episode called I'm Just a Bill that talked about a bill becoming law in Congress. And I think Winona Ryder even sang it in a really old movie called Reality Bites. But it is kind of reminding us a little bit of social studies.

Steve: Well, I totally agree. And for those of you who are old like me, I will remind you that David is explaining now why shareholders are regaining some influence over the companies that they own. Let's take a listen.

David: Why is it? How has it happened? I think there are a couple of factors in play here. Number one is we've seen the large growth in sort of institutional investing, right? If you go back to the 1930s, you know, to the time when the current regulatory infrastructure was created, the 1933 Securities Act, 1934 Securities Exchange Act, creating the SEC, creating our whole system of reporting. You go back to that era. What was an investor? An investor was an individual. Often an affluent individual, increasingly upper middle class, but individuals who are buying, they're all making their own investment choices or doing that through a broker. Well, today 70 percent of the market is institutional. And as a result, coordination problems, which notoriously used to hamper shareholders because we're atomized at individuals, coordination problems have really gone down. Large institutions wielding lots of capital can act as shareholders more easily than they used to be able to do. And then the third piece of it here, I think, is really kind of ideological almost. You know, you go back to the 80s, the 90s, the real era of the imperial CEO. You had guys like Al the "Chainsaw" Dunlap or Jack Welch. These CEOs who were seen as like, it didn't matter if the company had 100,000 employees. It was like, this guy, it was almost always a guy, was unlocking so much value and deserving massive compensation. And sometimes these folks would just fire workers by the tens of thousands and get paid huge. And I think that the disconnect between pay and performance, I think those two things seriously undermined this ideology of what you might call managerial primacy. You know the idea that, go back to '07/'08, many of these CEOs drove the economy and their own companies into a ditch. And even though they did that, they still got paid big time. A total disconnect between what the shareholders were getting and what the CEOs were paying themselves. And I think that these things seriously undermined what used to be a very deferential attitude toward CEOs, and shareholders started to step up and say, You know what, we need to take some power back from these people. We need to cap their compensation or have ways of voting on it. We need to have more say in elections and all these reforms I talked about earlier. So I think that there are broad historical forces at work here that are kind of realigning this power between shareholders and CEOs in ways that continue even today.

Catherine: We can always expect certain things to continue, including the fact that this podcast will be much more empowered if we can take a quick break for a commercial. We'll be right back.

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Steve: And we're back with David Webber, professor at Boston University School of Law, who is also the author of "The Rise of the Working-Class Shareholder: Labor's Last Best Weapon." So I'm chuckling, David, because I realized when I said Schoolhouse Rock! I nearly said the School of Rock, which is a whole other form of empowerment. But I think you laid out a lot of consequences just now of what has led up to all of these things. I'm wondering, how do you see this all playing out in the future? I mean, what's the fallout from all of these things that we're seeing develop here in this area?

David: Well, I think one of the most interesting developments, I think now, especially with the rise of ESG, there are a few things. There are a lot of moving pieces on this board here. One is shareholder primacy is itself a little bit in retreat right now as we see increasing calls for stakeholders, as we see calls to not just focus on shareholders, but to empower employees, to empower consumers, to empower communities. And this is having one kind of transformative effect, but not in the way that many would predict. One of the effects that I think is going on here is that CEOs in some ways are less and less empowered than ever. If you can kind of trace an arc from the Jack Welch days, you know, through the decline of CEOs because of shareholder empowerment. And now I think contrary to some predictions, that the stakeholderism is only further disempowering CEOs. Some of this, and I've actually written about this with some co-authors Michal Barzuza and Quinn Curtis, looking at the rise of millennials, millennials as investors, the millennial generation, increasingly Generation Z, you know, what we're seeing is, whether it's through social media, through cancel culture, through demands for companies to be responsive on environmental questions and questions of diversity and so forth that in fact now CEOs have more and more constituencies to cater to, to be afraid of, to be accountable to. They went from being almost untouchable to being increasingly reachable by shareholders to now being increasingly reachable by not just shareholders, but by employees and consumers and communities. And I think that that has made the the environment that CEOs operate in and boards operate in as complex and challenging as ever.

Catherine: I had one question because you talk about the directors coming up for a vote and it sounds like, in traditional times, it's not just getting 50 percent of the vote, but it seems like as a director, you kind of almost need to have like 90 percent of the vote, or it looks like people don't support you. I mean, is there some sort of percentage?

David: Well, it's forever been the case and actually still largely remains the case that directors get re-elected with huge numbers of 95 percent or well over 90 percent. That's still the dominant story. And it's also true, though, that getting re-elected by only 70-something percent can be embarrassing to a director. And in fact, there's some research that has tended to show that it could impact that director's ability to get the next job as a director. Even without any negative election result for them, they want to avoid that result. They could be held accountable, and so arguably they start to behave differently than they did before.

Catherine: I think that's a good thing for shareholders.

David: It certainly makes companies more responsive to shareholders. Look, there are critics, I'm not really among them myself, but there are critics who worry that does it make companies too short-termist? Does it make companies too unwilling to defy the market for some period of time or exercise their own judgment, take risks? Are they being held too accountable? And some people would say that, for example, this explains as a counter movement why we've seen the spread, the rise of dual class shares, particularly, let's say, like Silicon Valley, which allows founders and big players to basically retain control over the company. You know, there have been reactions to these kinds of developments, and it is possible that let's say we will continue to see in some places a lot of the institutional investors are trying to push back against dual class shares. So this itself is the kind of reaction in part. Will we see more of that? Certainly, it's pretty popular in Silicon Valley, where there's been a lot of wealth generated and a lot of innovation. And so it's always a give and take on on these kinds of questions.

Catherine: Steve, I know you said you'd only be helpful just once today, but can you clarify what he means by dual class shares?

Steve: Yeah, sure thing, Catherine. Not really for you, but I will be happy to clarify this for our listeners.

Catherine: That's very generous of you.

Steve: Oh, thank you. Well, a simplified way of understanding a dual class share structure is that you have different types of shareholders with different rights, such as voting rights or dividends. So what might happen, for example, in Silicon Valley, is that a founder will get a type of share that gives them multiple votes for one single vote of the company that could be held by a common shareholder. So what could happen there is that even though the Silicon Valley founder had sold some of their company to the public in an IPO, they can still retain the vast majority of the voting rights and therefore get to decide who's on the board of directors and who isn't.

Catherine: Whatever happened to one vote per person?

Steve: Not these days and definitely not in a dual class share structure.

Catherine: There is so much to talk about with this topic, but in your view, what should individual investors, pension members, 401(k) investors keep in mind about their powers as a shareholder?

David: You know, the individual investor is really making a comeback today. I was talking about the shift towards institutionalization, and while that's been very much the larger trend, moves like GameStop and that whole story from last year about what happened at GameStop and still kind of is going on, platforms like Robinhood have been empowering individual investors again in a way that we haven't seen in quite a long time. And so what's going to be very interesting to see is, how does both innovation and how do the traditional players respond to this? So right now, 401(k) holders are basically voiceless. But I think that this is possibly going to have to change. There's starting to be pressure in that direction, in part because more investors want voice. More investors want to be able to, say, vote their own proxies, or maybe, if not vote in each and every single one, whatever company they hold, be able to check a box that says, I want to vote these policies or that. One thing that we've seen lately is BlackRock, for example, recently announced that it was going to be turning back over to its pension clients, if they want it, proxy voting authority. So that's not true at the individual investor level, but for the bigger pensions, the pension clients, they, instead of letting BlackRock vote their proxies for them, they can choose to vote them. That will restore voice to pension clients. Robinhood has apparently been exploring possibilities of empowering its clients, individual retail clients, to vote. There seems to be clamor around it. It seems to be part of a trend in populist finance right now. So there hasn't been actual movement on that, but I feel like every 10 minutes I'm getting somebody who's trying to come up with an app or some way to empower the individual investor to vote. So watch this, watch this space and we'll see where it goes. It would not surprise me if we see continuing movement in the direction of empowering voting, even at the individual investor level.

Steve: Catherine, I feel like this really has been a corporate civics class. I know I've been saying that throughout this episode, but do we need to bust out a version of I'm Just a Bill for shareholder proposals?

Catherine: Do it, Steve.

Steve: You got it. .

Speaker 4: I just Bill, yes, I'm only a bill, and I'm sitting here on Capitol Hill.

Steve: How do you like that, Catherine?

Catherine: That's pretty good.

Steve: Well, not as good as our closing question of the day. Let's get right to it.

Catherine: David, I know you wrote your book under your own name. If you had to choose a pen name, what would it be?

David: Oh my goodness. A pen name. Wow. Hmm. Oh, gee, well, now you can tell why I I don't do creative writing. We have a little trouble coming up with -- maybe some kind of one mysterious, one name name. I think Publius or whoever was one of the signers of the The Federalist Papers. Maybe I'll stick with that, Publius.

Steve: There you go.

Steve: I like that. Catherine, you write way more than I do. What would your pen name be?

Catherine: C-note? It's also my rapper name.

David: C-note's your rapper name?

Catherine: Yeah, I don't have any raps.

Steve: And it's a hundred dollar bill, right? So just like three things right there. I love it.

David: I was once given such a name, Worldwide Webber.

Steve: Oh, so you're like, you're like the Pitbull of shareholder advocacy, right? Mr. Worldwide, Pitbull,

Catherine: it's a good hashtag. Oh, I love it. It's awesome. Steve, do you have a pen name?

Steve: You know what? The first thing that comes to mind? Short stack. You can't tell on an audio podcast, but I'm actually quite short. So that's where that comes from

Catherine: In my head, you're six feet tall, Steve.

Steve: Well, and behind the camera, I could be six feet tall. Nobody knows. That's what's so great about working from home.

David: I definitely had the experience after teaching on Zoom all of last year of, you know, meeting some student who was just in a Zoom square last year. And it's like, Oh, you're 6'6. OK,

Catherine: Steve, you're not even close to six foot six, and neither am I. But I think this was a six foot six episode.

Steve: I totally agree with you on all counts, Catherine. I had never really thought of the connection between government and corporate governance. But there you go. Learning, growing, still not helping. Catherine, why don't you take it from here?

Catherine: I would expect nothing less from you today. Big thanks to David Webber, professor at Boston University School of Law, who is also the author of "The Rise of the Working-Class Shareholder: Labor's Last Best Weapon." And big thanks to you, dear listener, for surfing along with us. I'm Catherine Tsai. That was Steve Soter, and this has been Off the Books, presented by Workiva. Please subscribe. Leave a podcast review. Tell your buddies if you liked the show, and feel free to drop us a line at Surf's up, and we'll see you on the next wave!

Off the Books season 3


33 minutes


Steve Soter, Catherine Tsai, David Webber

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