SOCIAL TOPICS (Archive): WORKPLACE

Published, March 1994

       United States Trust Company and its co-plaintiffs last fall won an important legal case for activist social investors. We filed suit against the Securities and Exchange Commission (SEC) for allowing Cracker Barrel Old Country Stores to exclude a resolution calling for an anti-discrimination policy from consideration at its annual shareholders meeting. We argued that the commission’s ruling signaled an arbitrary change in policy that abridged the democratic rights of shareholders to address actions of management.

       U.S. District Court Judge Kimba Wood ruled in our favor, enjoining the SEC from further decisions on employment related proposals until the commission adopts a new rule by using proper administrative procedure. The SEC was originally established to protect the rights of shareholders and is subject to the Administrative Procedures Act that prohibits administrative agencies from acting arbitrarily. Judge Wood’s opinion reminds the SEC that it cannot change policy unless it informs concerned citizens and gives them opportunities to comment.

       In challenging the SEC’s ruling on Cracker Barrel, we joined lead plaintiff New York City Employee Retirement System (NYCERS) and the Women’s Division of the Board of Global Ministries of the United Methodist Church. NYCERS had initiated shareholder action at Cracker Barrel because of the company’s policy of discrimination based on sexual orientation and its firing of several gay and lesbian employees.

       NYCERS’ resolution requested Cracker Barrel to “implement non-discriminatory policies relating to sexual orientation and to add explicit prohibitions against such discrimination to its corporate employment policy statement.” While Cracker Barrel claimed to have rescinded its policy of discrimination, it continued to fire employees because of their sexual orientation.

       The SEC’s original decision on Cracker Barrel reversed SEC policy on shareholder resolutions that address social issues. Previously, companies had to include shareholder proposals in their proxy statement if the proposals contained “significant policy, economic, or other implications inherent within them” — even if the proposals addressed “ordinary business” matters. However, in the Cracker Barrel decision, the SEC held that any employment related proposal could be eliminated from a company’s proxy statement under the “ordinary business” exemption no matter what broad policy issues were involved.

       This policy change invalidated an entire range of proposals with meaningful financial and social implications, including those on workplace safety and health, South Africa and Northern Ireland. It also supported company managements pressuring the SEC to remove social issues from proxy statements and to diminish management responsibility to shareholders.

       The SEC is expected to appeal Judge Wood’s decision. Meanwhile, the commission has responded to the decision by refusing to rule on all requests from companies to quash shareholder resolutions that management feels are related to “ordinary business” matters. The SEC is stonewalling firms on these resolutions whether they are related to employment issues or not. This peevish response suggests that Clinton’s newly appointed SEC chairman Arthur Levitt may not differ much from Bush’s appointee Richard Breeden in favoring managements over shareholders.

See previous related article Suit Against SEC Seeks to Reassert Shareholder Rights, July 1993