SOCIAL TOPICS (Archive): HISTORY OF WALDEN ASSET MANAGEMENT/SRI

Published, March 1998

       After months of intense pressure exerted by concerned investors, the Securities and Exchange Commission (SEC) appears poised to reverse the controversial 1992 Cracker Barrel decision. That decision has allowed companies to omit employment-related shareholder proposals from their proxy ballots. These resolutions frequently address issues of discrimination and human rights, social concerns that often have financial implications as well. The victory is made sweeter by the SEC’s apparent failure to build support for its far-reaching proposal to overhaul the shareholder resolution process — a proposal that most certainly would have undermined the ability of investors to bring most shareholder proposals to a vote. Many thanks to all of you who joined in this campaign. But alas, any changes favorable to shareholders are unlikely to arrive soon enough for this proxy season.

       In 1997 the SEC surveyed a variety of constituencies on how to improve the proxy voting process. Based on the survey results and their own analysis, the SEC proposed a new set of governing rules that were released for public comment last September. The outcry from investors, who saw the changes as largely anti-shareholder even in conjunction with the repeal of Cracker Barrel, was monumental and swift, so much so that the SEC extended the period for public comment into 1998. Some of the major points of contention were as follows:

       • Thresholds for resubmission of shareholder proposals would be raised in each year, reaching 30% by year three, from 10% previously. Such high thresholds, in the context of a very undemocratic proxy voting system, would virtually guarantee that the majority of shareholder resolutions would be unsuccessful in garnering sufficient support.
       • A new “override provision” would guarantee access to proxy ballots, if proponents could accrue support in advance from 3% of outstanding stockholders. This initial level of support would be virtually impossible for most shareholders to attain. It also would allow the SEC to abdicate its legal responsibility as arbiter of the proxy process and place it in the hands of large institutional shareholders.
       • A revised “relevance test” based on the amount of corporate assets in question would seriously restrict the scope of shareholder resolutions. From a historical perspective, nearly all of the proxy initiatives relating to South Africa, Northern Ireland and Burma would have never made it to the ballot. Other proposal topics such as tobacco divestment would feel the impact as well.
       • Shareholder proponents would lose their right to review the proposed management response opposing their resolution, currently an important safeguard against statements that are misleading to investors.

       The SEC appeared dumbfounded by the ground swell of opposition to their proposal. Consequently, SEC Chairman Levitt sought outside counsel from independent experts Ira Millstein and Harvey Goldschmid. These attorneys recommended reversing Cracker Barrel, abandoning most aspects of the SEC proposal, preferring instead to stick with the current rules. They explicitly state “…in general, discrimination and affirmative action proposals will not be considered ordinary business, and therefore, will be proper for inclusion in a company’s proxy statement.” Levitt auspiciously responded that, “…the approach laid out in the Goldschmid/Millstein letter seems particularly attractive.”

       While we await a final decision about the “new” proxy rules, we have witnessed Chairman Levitt and others such as Federal Reserve Chairman Alan Greenspan publicly professing their commitment to equal opportunity (see quote below). “Fostering diversity is, and will remain, a priority for the SEC – both in corporate America and in our own agency," said Levitt on the occasion of Martin Luther King Jr. Day.

       We are optimistic that shareholders will ultimately prevail in this public debate.

       Imagine: you are a shareholder of a large consumer goods corporation with stores across the country. The company has been the target of several large class action lawsuits alleging that women experience discriminatory hiring and promotion practices. You read a news story and discover that your company has spent over $100 million to settle the suits, costing 25 percent of quarterly earnings. Concerned about your investment, you ask the firm to provide investors with information about the composition of its workforce so that you can assess any remaining financial risk. The company tells you it is none of your business and the SEC agrees, at least for now.

       Impossible? No. Incredible? Yes! This “hypothetical” company and series of events characterizes our experience with home improvement giant Home Depot. When confronted with our resolution requesting specific equal employment opportunity data, Home Depot appealed to the SEC to have it excluded on the basis that it is “ordinary business” under the Cracker Barrel precedent. The SEC granted them permission in February. Is $100 million ordinary? Only a handful of companies have settled similar legal action for such a high price tag. With its action, the SEC has confirmed that until Cracker Barrel and the issue of new proxy rules are resolved, a host of shareholder concerns will be tied up until later this year.

       We are working with a coalition of socially responsive investment managers, mutual funds, religious investors, foundations and unions. Together we continue to press Home Depot to disclose the information requested or allow our initiative to go to the ballot. Discussions about both of these options are underway. Meanwhile, we continue to hold shares of Home Depot, working to ensure that its admirable record on environmental matters and community involvement will one day spread to equal employment opportunity as well.

"[Discrimination] is now increasingly being seen as unprofitable ... We must find ways to prepare the more racially and culturally diverse pool of young people who will be flowing into jobs and operating businesses in the twenty-first century."

— Federal Reserve Chairman
Alan Greenspan
January 16, 1998