THE DEATH OF SHAREHOLDER DEMOCRACY

R.I.P.

“Shareholder Democracy” has for many decades been little more than a felicitous juxtaposition of words. Even that slender hope has now been crushed. Those interested in the governance of large publicly owned corporations, from now on, will need look in other directions than the company proxy statement.

The century long rhythm of corporate corruption followed by attempts at reform was punctuated in the 1930s by the idealistic concept of a benign federal assurance of shareholder access to the company’s proxy process that would transcend the predictable entrenching state laws. Exactly what matters would be required to be included on the company proxy statement has – to put it mildly – never been entirely clear. Dispute over the implementation of section 14(a)(8) of the 1934 Act has sustained several generations of corporate lawyers in their particularly discreditable (if successful) effort to distort and destroy “corporate democracy”.

On March 13, 2005, the SEC staff advised ExxonMobil Corporation that – in the little loved bureaucratic jargon - “There appears to be some basis for your view that ExxonMobil may exclude the proposal under rule 14a-8(i) (6).” This proposal submitted by Ram Trust Services, Inc. was identical with the proposals submitted in 2003 and 2004 which received 21% and 27% of the vote at the respective Annual Meetings.

The SEC staff decision culminated a tortuous series of correspondence among lawyers, beginning with the company’s filing a No Action letter on January 17, 2005.  The No Action letter informed the SEC that the company was planning to deny placement on the company proxy to a shareholder proposal submitted in due order by an engaged group of owners.  One can begin to grasp the strange vocabulary of the Shareholder Democracy movement by addressing specifically the proposal that was the subject of these proceedings. “The proposal urges the board of directors to take the necessary steps to amend the bylaws to require that an independent director serve as chairman of the board and that the chairman shall not concurrently serve as the chief executive officer.” Note this proposal, if approved by the requisite majority vote, requires the company to do absolutely nothing. It is precatory in the terminology of securities lawyers, it requests. Why then would the company resist its inclusion in the proxy statement so ferociously? What is threatening about an expression of opinion by owners to fiduciary directors, who are conceded by all, to have the ultimate authority to decide in the corporation’s best interest?

The proposal to consider separation of the board presiding officer and the executive whose monitoring is one of that board’s principal responsibilities is not a surprise attack on corporate America. Indeed, virtually all recent compilations of best governance practice have urged just this separation. The authorities that support an independent board chairman include the Council of Institutional Investors, Institutional Shareholder Services, Barclays Global, Warren Buffett, and a high-level Conference Board commission chaired by now-Treasury Secretary John Snow.  The high shareholder votes at ExxonMobil indicate its increasing acceptance by just this body of shareholders. This is a simple and an important question. The SEC’s action in this matter compels the conclusion that, henceforth, no shareholder proposal can survive the sustained opposition of company management and its counsel. What is left for shareholders?

How much money should a management be entitled to spend in order to exclude such a resolution? In this situation, there is a record of no less than four letters from the company to the Commission. In the bureaucratic nature of things, this required four letters from the proponent – and, all of this, with respect to the identical proposition which garnered 27% of the vote at the next previous meeting. This has about it the flavor of bullying – it reeks of censorship, a censorship by the bottomless pocket.

Remember, all this expense and all this fuss is about a purely advisory resolution.  We are witnessing a management determination – endorsed by our government – to stamp out even a suggestion by ownership of a change in corporate governance. And that is the Death of Shareholder Democracy.