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The Fight to Make Corporate America a Little More Democratic

An inside look at the battle over proxy access, and what it could mean for American capitalism.
March 10, 2015, 4:00am

For years, women and minorities have struggled to find seats at fancy boardroom tables. Photo via Flickr user reynermedia

James McRitchie calls himself an "activist shareholder," or someone who buys shares in a publicly traded corporation and attempts to use them to instill change from within. After the Enron collapse, the corporate governance advocate and editor of CorpGov.net unsuccessfully petitioned the Securities and Exchange Commission (SEC) for proxy access, a fancy name for the idea that shareholders should be able to nominate people and their platforms to the boards of corporations. And just this past December, he attempted to restrict Costco's board members' tenure to 15 years.

"I'm an old person myself," McRitchie told me over the phone. "So to put out this proposal goes against my own grain. But it's hard to imagine that you need to be against a 15-year term limit in this day and age. The problem is, if you have one choice, it's not really an election."

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Next up on his list: Whole Foods.

Last September, McRitchie called for elections on the board of the Austin-based grocery giant with a proposal that would give nominating privileges to a shareholder, or a group of shareholders, who have owned 3 percent of the company's shares for more than three years. The high threshold (now known as the "3 and 3 rule") is the standard for proxy access proponents and the handful of companies that have had their boardroom doors pried open to elections by shareholders, including Verizon, Western Union, and HP. The linchpin in this proposal, however, is that it would apply to only one fifth of Whole Foods' board, or at least two directors.

To combat these changes, Whole Foods executives proposed an even higher threshold: owning 9 percent of shares over five years as a nomination requirement. The grocery giant eventually capitulated to 5 percent ownership of stock—criteria that, according to investors, are nearly impossible to meet, even for the largest shareholders. (Currently, only two stakeholders in Whole Foods meet that mark.)

Whole Foods also argued, somewhat confusingly, that McRitchie had broken the I-9 rule, which states that a shareholder cannot issue a proposal that "directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting." In December, the SEC agreed, issuing what is known as a "no-action" letter in favor of Whole Foods, meaning that the regulatory agency would not tell the corporation what to do.

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Basically, if Whole Foods didn't want to put McRitchie's or its own proposal up for a vote, it didn't have to. McRitchie appealed the decision, but the SEC's abstention was a victory for the corporation, which no longer had to worry about competing voices from within. Soon enough, ten other major corporations lined up to ask the SEC to rule the same way for them, now dealing with their own activist shareholders.

The guys at the very top had won again. Shareholders like McRitchie were still without a way to change the companies they owned pieces of.

"The problem is, if you have one choice, it's not really an election." —James McRitchie


What makes a corporation a corporation is that it is owned by shareholders, who may own a single piece of stock or a much larger chunk of the company. In theory, these shareholders are represented by a board of directors, whose duties range from choosing and setting the salary of the CEO to approving the annual budget and stock options of the entire corporation and its employees. The shareholders elect the board of directors, and the board members are usually shareholders themselves too.

But who they're electing is where it gets troublesome. Board nominees are generally hand-picked by the directors in committees, and, on most boards, a director can re-nominate him or herself (usually himself) with just one share of the company. Sometimes, the nominee doesn't even need to pass a majority vote by shareholders to be appointed.

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The result is a Soviet-style voting process, where one board candidate is presented on the proxy statement (a platform announcing nominees and resolutions) and voted on by all the shareholders during a period called proxy season, which is happening across corporate America as we speak. If a shareholder disagrees with the choice, he or she can abstain from voting but has no other options. A plurality of yes votes, no matter how tiny, can win an election.

This, many critics argue, is how Enron happened. The early-Bush-era scandal that led to the biggest bankruptcy of its time saw executives trading insider information to make millions off Enron stock for themselves, even though they knew the company's financial core was rotting away. The board then stashed this fraud in secret offshore accounts and encouraged corporate officers to oversell in order to create the facade that the company was worth billions. Throughout it all, the investors who held major stock in a company worth $111 billion a year before it collapsed knew absolutely nothing about what was going on.

A recent New York Times study found that more men with my first name controlled large companies than the entire opposite sex.

A common complaint against boards is that these bodies are made up almost exclusively of old white men. According to one study from 2013, women held only 16.9 percent of corporate board positions; black women, a mere 3.2 percent. In 2010, there was not a single Latino woman on a Fortune 500 company's board. A recent New York Times study found that more men with my first name controlled large companies than the entire opposite sex. And these bodies are only getting whiter, while the rest of the country is doing the opposite.

It only takes a second grader to know why diversity is a good thing: Varied perspectives from different genders, races, and socioeconomic classes lead to better input and collaboration. And even fewer investigations: Research shows that female executives are actually less prone to tax evasion and fraud than their male counterparts.

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The argument in favor of the status quo is that boards need to remain insulated from the demands of their more rebellious investors, have the power to block the influence of special interest groups, and keep the proxy process moving. The idea is that we need unilateralism in business, not "How do you feel about this?" pluralism. After all, corporate America doesn't want to turn into the federal government, polarized and unable to make any real decisions.

So for decades, the SEC explicitly granted corporations the right to ignore any shareholder proposals that even mentioned an election. In fact, the SEC has a history dating back to 1942 of declining to back real proxy access. The strongest attempt came in 2010, with the passage of the Dodd-Frank Act—the post-meltdown financial regulation bill fought vehemently by business interests that has been the subject of countless legal battles. The legislation finally gave the SEC the power to mediate the 3 and 3 rule across corporate America—a privilege that was arguably one of the most significant financial reforms in American history.

Almost immediately, the Business Roundtable and Chamber of Commerce, two of the most influential corporate interest groups in the country, filed a lawsuit against the rule, arguing it was too arbitrary to enforce and did not provide any economic benefits for installing proxy access. Under the Administrative Procedure Act, those deficiencies ("arbitrary or capricious," as the law goes) in rule-making can cause a court to overturn any action taken by a federal agency.

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What happened next shouldn't have come as a surprise to anyone who's watched corporations influence the government. The US District Court in Washington, DC, vacated the rule, and the SEC never appealed the decision. The SEC Chair at the time, Mary Shapiro, said she believed "providing a meaningful opportunity for shareholders to exercise their right to nominate directors at their companies is in the best interest of investors and our markets." But, in the end, her agency caved without much of a fight.

Instead, the law permitted the SEC to engage in what is known as "private ordering," another amendment under Dodd-Frank that, starting in 2012, allows shareholders like McRitchie to submit proposals for proxy access on a company-by-company basis, laying the groundwork for individual showdowns with corporations like Whole Foods.

So now the SEC must intervene when these competing proposals come up to decide what's best for both parties, as the agency did with Whole Foods in December. But even with the ability for shareholders to propose board elections, the I-9 rule created a loophole that protects corporations by preventing any sort of conflict. As a result, the SEC is still very much confused as to what side it should take in these fights.

Michael J. Ryan Jr., a vice president of the Business Roundtable, a group made up of CEOs, told me in an interview that his organization applauded this piecemeal approach. Each corporation, he said, is its own species, equipped with different boards, different shareholders, and different mechanisms of rules. So putting a blanket proposal over this system—like the SEC mandatory proxy access rule that the Business Roundtable successfully sued over—was a bad idea.

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"Our philosophy is that one-size-fits-all corporate governance is not good public policy," Ryan said. "There's this relatively silent majority of shareholders, too, who aren't as activist about the I-9 rule. By and large, the system has worked effectively for boards and shareholders.

"Our issue is that it should be worked out within each individual company," Ryan continued. "Corporations need to figure out what works best for them."

But when I asked him whether or not board elections—in theory—are a good thing, he responded simply, "Corporations are not democracies."

"As a shareowner, I want to know that the board is focused on the company, not whether or not the CEO gets 'taken care of.'" —Scott Stringer


As comptroller of New York City, Scott M. Stringer has what most of us would call leverage. His office is in charge of five municipal public pension funds that total over $160 billion in assets. As a result, the city owns enormous amounts of stock in major corporations—New York claims over 9.6 million shares of Exxon-Mobil, for example, worth a combined $910 million.

Last November, Stringer used that leverage to announce the Boardroom Accountability Project—an unprecedented push for proxy access by a trillion-dollar coalition of institutional shareholders (local and state governments) from as far away as Norway, including the California Public Employees' Retirement System (better known as CALPERS). On Stringer's list are 75 major companies from all sectors of American industry and our daily lives, ranging from Chipotle and Netflix to Priceline and eBay.

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Stringer's office is arguing that boards would be worth more to shareholders if they were held accountable on three specific issues: The use of fossil fuels, excessive executive pay, and a lack of ethnic and gender diversity on their boards.

The comptroller likes to cite a report released last year by the CFA Institute, a group that, on its website, describes itself as the largest association of investment professionals in the world. The international organization makes the case that the market cap for publicly held corporations would rise 1.1 percent, or $140 billion, if board members feared reelection, because financial markets react positively to democratic corporate governance. Democratic boards, this line of argument goes, are actually better for business and our 401(k)s.

"We want these companies to start thinking about the environment and clean energy, because that's how coal companies are shrinking in value," Stringer said in an interview. "With the majority-minority shifting in the next few years, you can't have an all-male board. That's going to deplete value. And as a shareowner, I want to know that the board is focused on the company, not whether or not the CEO gets 'taken care of.'

"As the fiduciary of the fourth-largest pension fund in the country, the twelfth-largest in the world, we're looking at these companies because we have concerns about our investments," Stringer added. "At the end of the day, this is about adding value so our retirees have a strong retirement standing."

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Stringer and his coalition have further legitimized the proxy access movement, which, up until now, had been led by individual activist shareholders like McRitchie. In essence, the idea is that the SEC cannot ignore the pleas of New York City, the state of California, and other major stakeholders for corporate America to democratize.

And it might actually be working.

In January, in what Gretchen Morgenson of the New York Times called " a regulatory about-face," the SEC temporarily revoked its own no-action letter to Whole Foods after repeated requests to revisit their 2014 decision by the Council of Institutional Shareholders, which includes Stringer's office. Basically, Whole Foods can't do whatever it wants anymore. For the first time ever, the little guy, encouraged by city and state governments, may get a seat at the table.

In a January statement, current SEC Chair Mary Jo White said that her agency had an issue with "the proper scope and application" of how the conflict rule was used, and would review the matter.

The issue, according to McRitchie, involves intentional sabotage of shareholder proposals. "You can't propose something you weren't gonna propose before," he told me. "And that's clearly what Whole Foods had done."

White also went on to announce that the SEC would not offer no-action letters on behalf of other corporations—a move that could have a domino effect, especially for the 75 targets of Stringer's proposals. And they are fighting proxy access tooth and nail: 16 of the companies, including Chipotle and Citigroup, have scrambled to file their own proxy access proposals, which set the bar at a nearly impossible 8 percent mark, in order to quell tensions.

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Since the SEC's decision, GE and Citigroup have effectively thrown in the towel by allowing shareholders to vote for proxy access in the coming months. But Whole Foods has remained quiet; the company's annual shareholders' meeting, originally set for early March, was recently postponed until further notice due to the SEC's review. (I have reached out to the lead negotiator for Whole Foods, as well as their Northeast spokesperson, and have yet to hear back.)

McRitchie, of course, is pleased that his Whole Foods proposal is making waves. The way he sees it, Whole Foods' next move is deciding whether to deal with bad press or a bad bet. They can cave to proxy proponents, which would be against their own board's interests but cast the company in a better spotlight for investors. Or the corporation can put both proposals up for a vote and hope for the best.

McRitchie doesn't want any of this to go to court, as judges tend to side with major corporations. "One of the advantages the company has is that the court doesn't know much about the SEC or financial regulation," McRitchie told me. "They're ruling on something they don't necessarily know, and they tend to rule in ignorance."

So if corporate America was democratized, he said, it would be a gradual process. "I don't expect we'd see proxy access be reached," he said. "What should happen, though, is that directors will know someone is looking over their shoulders."

In a July article on the subject, Michael Ryan from the Business Roundtable was quoted as arguing that the recent upswing in proxy access demand is "far from a tipping point in terms of corporate governance." Thousands of corporations exist, he said, and this select few are a small minority. He told me he wouldn't weigh in on the Whole Foods situation, or any individual proxy fight for that matter. (The US Chamber of Commerce, however, wrote a letter to the SEC, criticizing the agency for adding "an additional layer of uncertainty into an already complicated set of rules.")

One question that often remains unasked is what would it even mean for average citizens if corporate board elections were a bit more democratic? Even investors with only 3 percent of a company's shares are generally very wealthy, and transferring power from the obscenely rich to the merely well-off doesn't strike some as being very progressive.

"We'd love it if Elon Musk got on the board of Exxon and changed their whole business plan to focus on electric cars—but that's never going to happen," Karthik Ganapathy, a spokesman for 350.org, Bill McKibben's environmental group, told me. "There's no way the most powerful corporations on the planet are going to hand over the reins to anyone who would seriously challenge their destructive practices. Fossil fuel companies have made it crystal clear—in their business plans, in their letters to shareholders, and in their political lobbying—that they have no intention of combating climate change.

"The NYC Comptroller can stick his fingers in his ears and talk about democratizing the board process, but that isn't going to change the fundamental reality that divestment is the only practical and responsible way forward," he continued. "A democracy initiative may work at the Park Slope Food Coop, but it's not going to make a lick of difference at a place like Chevron."

But proxy access isn't about changing the way businesses fundamentally operate—it's a reform aimed at making corporations more responsive to shareholders (as opposed to the general public) and perhaps alter the decision-making processes inside boardrooms.

"Even if we weren't able to elect one board member, the fact that we could do this in this country would change corporate America," Stringer said.

"Hopefully," McRitchie said, "it'll make directors feel somewhat accountable to the ones who elect them."

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