SOCIAL TOPICS (Archive): WORKPLACE

Published, July 1993

       Last month, United States Trust Company of Boston joined the New York City Employees Retirement System (NYCERS) and the Women’s Division of the United Methodist Church in suing the Securities and Exchange Commission (SEC) for barring shareholder proposals based on anti-discrimination and other employment issues. “The SEC’s action seriously impinges upon the rights of investors to exercise their franchise on matters of great importance to them as both socially and financially concerned owners of corporations,” said Paul Neuhauser, attorney for the plaintiffs. “Companies that do not successfully integrate minorities into their workforce are facing law suits and expensive settlements.”

       As we go to press, we are encouraged by recent news: U.S. District Court Judge Kimba Wood ruled on a related case and found that the SEC had been misapplying its own rules to quash employment-related resolutions. She ordered Wal-Mart Stores to include in its proxy materials a proposal asking the retailer to publicly report on its equal employment and affirmative action programs. The SEC was not a party in this case, but Judge Wood’s broad ruling suggests that the Commission’s new policy thwarts the shareholder process in a way never intended by Congress.

       Our suit stems from the SEC’s precedent-setting decision in October 1992 which allowed Cracker Barrel Old Country Stores to omit from its proxy materials a shareholder resolution calling on the company to end discrimination based on sexual orientation. The Commission ruled that Cracker Barrel could suppress the resolution because it was related to the company’s “ordinary business operations”.

       The Securities Exchange Act of 1934 says that a shareholder proposal must be included in a company’s proxy materials unless it falls under a few legal exceptions. One such exception allows companies to prohibit resolutions related to “ordinary business operations”. The intent here was to balance shareholders’ rights to participate in important corporate decisions with the need for firms to be able to operate unfettered, on a day-to-day basis.

       For many years, the SEC has held that resolutions on matters with significant policy implications, such as equal employment opportunity, are beyond the realm of “ordinary business operations” and cannot be excluded. In 1988 for example, the SEC said AT&T could not exclude from proxy materials a shareholder resolution asking the company to terminate its affirmative action program. Reversing itself last fall, the SEC permitted Cracker Barrel to disregard a shareholder proposal against discrimination. Our suit claims that by changing the rules without the public notice and hearing process required by law, the SEC has exceeded its mandate, and the ruling must therefore be invalidated.

       Filed on behalf of our socially responsive clients, our suit has implications far beyond the Cracker Barrel decision. Because of its broad language, this SEC ruling appears to relegate most social issues to the “ordinary business” scrap heap. Social investors must act now or be faced with further inroads into their rights as shareholders, as corporations try to expand the ruling’s implications in their favor.