BOSTON, MA – There is a chill in the air for shareholder activists as four companies – Express Scripts Holding Company, Omnicom, Chipotle, and EMC Corporation – recently filed suits in U.S. District Courts to prevent a shareholder from exercising his right to participate in decisions about corporate governance.
NorthStar Asset Management, Inc. has led a campaign, joined by Walden Asset Management and 18 other investor firms or groups, to question the motives and effect of these lawsuits on both shareholder value and corporate governance. A PDF of those letters can be found here.
The investor at the center of these four lawsuits, John Chevedden, has a remarkable track record of successful engagement with corporations’ shareholders. His proposals aimed at corporate governance have been filed at numerous companies in the past, and regularly receive 50-80 percent of favorable shareholder support. Majority votes, like the percentage Chevedden’s proposals receive, are highly unusual and a strong indication of shareholder concern. But shareholder votes are not required to be implemented by company management. In fact, such votes are “non-binding,” meaning that the management of Express Scripts Holding Company, Omnicom, Chipotle, and EMC Corporation may ignore stakeholder wishes, even when a majority of shareholders seek change, and continue to operate as they always have. With this in mind, why have these companies chosen to engage in costly litigation?
Julie Goodridge, CEO of Boston-based NorthStar Asset Management, Inc., a company that routinely files shareholder resolutions, responded to these lawsuits with alarm. “Why would a corporation choose to take such an expensive measure against a shareholder presenting a non-binding resolution? It is not necessary to involve judicial bodies in a process that has been long mediated by the Securities and Exchange Commission. I doubt that corporations feel that their pockets are so deep that going to court will have no deleterious financial effects. I can only assume that these corporations fear shareholder input more than they value shareholder dollars,” Goodridge stated.
Historically, when management wants to quash a shareholder proposal, the company simply files a “no-action request” with the Securities and Exchange Commission (SEC). Since 1934, the SEC has acted as arbiter between shareholders and corporations in matters of shareholder proposals’ adherence to established rulings, under the Securities and Exchange Act. This legislation appointed the SEC as the agency primarily responsible for regulation of U.S. public securities traded in secondary markets. Hundreds of no-action requests are filed each year (368 in the year 2013 alone), so it’s clear that this process is well-established. For many years, it has proven itself to be an effective method of moderating company-shareholder communication. It appears, however, that this “informal process” (as described by the SEC itself) has become insufficient for the four companies listed above. These corporations have chosen to sidestep this long-established process to achieve its desired ends.
Rule 14a-8 of the Securities Exchange Act of 1934 provides “an opportunity for a shareholder owning a relatively small amount of a company’s securities to have his or her proposal placed alongside management’s proposals in that company’s proxy materials for presentation to a vote at an annual or special meeting of shareholders.” Chevedden, a concerned investor, is putting forth sound and reasonable requests. He is not a major institutional investor, but rather an individual exercising his rights as a shareholder of publically traded companies. Chevedden has not violated any laws that would warrant the legal action. Goodridge notes, “Corporations sidestepping the SEC, using shareholder profits to avoid substantive investor input, brings poor governance and fears of transparency to a new level. Perhaps these publicly traded companies should use their resources to re-examine their responsibility to shareholders rather than use shareholder dollars to take away shareholder rights.”
NorthStar Asset Management, Inc., based in Boston, is a wealth management company with a focus on socially responsible investing.
Contact: Julie Goodridge
NorthStar Asset Management, Inc.