Death by proxy

Late spring is the season when shareholders come together—in a manner of speaking—for annual meetings at Wal-Mart and DuPont and other corporations. Very few ordinary shareholders go to the meeting. Sometimes the company offers a free lunch, which might attract a retiree or two (including several of my relatives). An angry investor might come to the meeting to yell at the company’s chief executive. But most shareholders vote by “proxy.” Along with an annual report and other materials, the company sends each shareholder a proxy “card” with boxes to check to vote for director candidates and on the other issues.

This is where the mischief comes in. Federal law increasingly micromanages shareholder proxy voting. In 1993, after concluding that corporate executives are paid too much, the Securities and Exchange Commission required companies to disclose in their annual report how much the top executives are paid. The SEC thought the new requirement, and others that followed, would embarrass companies that paid big salaries. But they were wrong. Shareholders wanted to make sure their executives were well-paid by comparison to the executives of other similar companies. Now that they know what those other executives are being paid, shareholders approve larger compensation packages, not smaller ones.

The SEC also requires the company to include proposals made by ordinary shareholders unless, among other things, the proposal is illegal or would meddle in the company’s ordinary business operations. Although some of these proposals deal with basic corporate governance, others read like a roll call of the trendy social issues of the moment. In the 1980s, the issues were divestment from South Africa and tobacco; in the 1990s, foreign suppliers that failed to pay their workers a living wage.

Wal-Mart, which is a magnet for these kinds of proposals, is at the center of the key social activism battle of the current proxy season. Trinity Wall Street, a mainline church that holds Wal-Mart stock in its enormous endowment, submitted a shareholder proposal asking Wal-Mart’s board of directors to create a new policy policing its sale of products that “would be reasonably considered by many as offensive to the family and community values integral to the Company’s promotion of its brand.” In its supporting statement, Trinity made its real objective clear: It wants to stop Wal-Mart from selling guns with high-capacity magazines.

I personally don’t like guns with high capacity magazines any more than Trinity Church does. But these are precisely the kinds of ordinary operations that shareholders should not be meddling in. Under the current federal framework, anyone who buys $2,000 worth of stock and holds it for a year can submit a proposal like this one.

In an important new decision, a federal appeals court in Philadelphia brought a little bit of sanity to the proxy voting process. Although it has not yet released its reasoning, the court held that Wal-Mart is entitled to exclude the proposal from the proxy materials it sends to shareholders.

The shareholder proxy process is still a mess. If the SEC were serious about creating a more meaningful voting process, it would require that shareholders hold a lot more than $2,000 of stock in order to submit a proposal. A shareholder who owns $50,000 or $100,000 of stock is much more likely to take the company’s interests into account than one who holds $2,000. The SEC also should encourage companies to allow their shareholders to vote electronically and to broadcast their meetings on the web.

The appeals court decision doesn’t do any of these things. But it is a small gesture in the right direction.