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The Power of Persuasion: How Non-Binding Shareholder Proposals Shape Corporate America

Apr 17, 2023
Shareholder proposals, both binding and non-binding, have been pivotal in shaping the landscape of corporate America. Non-binding proposals, although lacking legal force, can still influence company policies, practices, and decision-making. This article explores the potential of non-binding shareholder proposals in driving corporate change and how investors focused on maximizing wealth can use this approach in the future, while also highlighting anti-ESG examples.

Non-binding shareholder proposals have been a persuasive force in driving corporate change by fostering dialogue, enhancing transparency, and influencing corporate policies on various issues, such as executive compensation, environmental, social, and governance (ESG) matters, and corporate governance practices. However, some critics argue that focusing on ESG concerns may detract from a company's primary goal: maximizing shareholder value.

There are instances where non-binding shareholder proposals have been used:

Sustainability Costs: In 2017, the National Center for Public Policy Research submitted a proposal to Apple, requesting the company to disclose the costs associated with its sustainability programs, arguing that the focus on sustainability could divert resources from core business operations and impact shareholder value.

Gun Control: In 2018, following the tragic Parkland shooting, BlackRock, one of the world's largest asset managers, supported a non-binding shareholder proposal requesting that gun manufacturer Sturm, Ruger & Co. provide a report on its efforts to promote gun safety. The proposal passed with an overwhelming majority, demonstrating how non-binding resolutions can bring attention to critical social issues and prompt companies to respond.

Renewable Energy Initiatives: In 2014, the National Center for Public Policy Research submitted a shareholder proposal to General Electric, asking the company to disclose information about the potential risks and costs associated with its renewable energy initiatives, questioning whether the company's commitment to renewable energy was driven by political considerations or market demand.

Executive Compensation: In 2011, Citigroup faced a significant backlash when a majority of its shareholders rejected the company's executive compensation plan through a non-binding "say-on-pay" vote. Although the vote did not legally require Citigroup to modify its pay practices, the company responded by overhauling its compensation structure and engaging with shareholders to address their concerns. This example highlights how non-binding proposals can push companies to reassess and improve their executive compensation policies.

Charitable Contributions: In 2018, the conservative Free Enterprise Project submitted a shareholder proposal to Amazon, requesting the company to disclose its charitable contributions made to political or ideological causes, raising concerns about the potential impact of such contributions on the company's reputation and shareholder value.

Board Ideological Diversity: In 2019, the conservative Free Enterprise Project submitted a shareholder proposal to Starbucks, requesting the company to consider ideological diversity on its board of directors, aiming to counter the push for increased racial and gender diversity and emphasizing that a range of political and philosophical perspectives could benefit the company.

Board Racial Diversity: In 2020, Starbucks shareholders introduced a non-binding proposal requesting the company to adopt a policy to increase board racial diversity. Although the proposal did not pass, it sparked a conversation about the importance of diverse racial representation in corporate leadership, and Starbucks has since made strides in diversifying its board.

Non-binding shareholder proposals can also be utilized to address topics beyond ESG concerns, such as capital allocation, operational efficiency, and shareholder rights. Investors focused on maximizing wealth can leverage non-binding proposals to encourage companies to optimize their operations, reduce expenses, and return more value to shareholders.

For example, an investor might propose a non-binding resolution urging a company to divest non-core assets or streamline operations to improve profitability. Alternatively, a proposal could advocate for the elimination of dual-class share structures, which could empower shareholders and potentially enhance corporate governance.

While the legal enforceability of non-binding shareholder proposals may be limited, their ability to sway public opinion, generate media coverage, and put pressure on companies to take action should not be underestimated. As shareholders continue to leverage the power of persuasion through non-binding proposals, we can expect to see an ongoing evolution in corporate America's approach to addressing the concerns and preferences of its investors, both from ESG and wealth maximization perspectives.
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