2
The New Suffragists
The Fight for Meaningful Corporate Elections
There are many reasons why banks and corporations are not particularly afraid of either the Securities and Exchange Commission (SEC) or Congress, even during rare phases when they become muscularly pro-regulation. One reason why is because, for a time, industry captured the U.S. Court of Appeals for the District of Columbia Circuit, a federal appeals court, and used it to undermine congressional and regulatory interventions against business interests. The “D.C. Circuit,” as it is known, is the most powerful of the thirteen federal appeals courts because it hears appeals related to agencies of the federal government based in the capital. True, the U.S. Supreme Court is the ultimate legal authority in the land. But the Supreme Court hears about eighty cases per year. The D.C. Circuit hears around 1,100.1 As a practical matter, the D.C. Circuit has the final say on far more cases of import than does the Supreme Court. The most well-funded and well-connected inside-the-beltway lobbyists understand the power of the D.C. Circuit and concentrate their legal and lobbying efforts accordingly.
From 2008 to 2010, Democrats controlled the White House and both houses of Congress, triumphing in the aftermath of the worst financial crisis since the Great Depression.2 Corporate lobbies and temporarily disenfranchised Republicans opposed to the sweeping financial reforms adopted in that period quickly devised a legal strategy designed to use the courts to undo them. That strategy focused successfully on the D.C. Circuit. And in the case of Business Roundtable v. SEC in 2011, these efforts inflicted a deep blow against working-class shareholder activists.3 But, ironically, this same case, and its aftermath, became one of the best examples of how these same activists—like New York City comptroller Scott Stringer—ultimately outmaneuvered Republican judicial opposition to succeed where Congress and the SEC failed.
“Proxy access” is, in Sean Harrigan’s words, “the mother lode of meaningful corporate reform.”4 Imagine if a president of the United States seeking reelection could require that his name be the only one appearing in voting booths. Someone could still run against him, but the challenger would have to incur the enormous cost of paying to circulate ballots with her name to voters, while the incumbent’s name would automatically appear on ballots at taxpayer expense. The challenger would have to individually mail entirely separate ballots to voters, who would have to bring those ballots with them to use on Election Day. If the challenger failed to mail her ballots, or if she mailed them but voters did not bring them to the polls, then the only available ballot in the voting booth would be the one with the incumbent’s name on it. Voters could still abstain, or they could vote for the incumbent, but they could not vote for the challenger.
If this took place in actual U.S. presidential elections, it would be flatly unconstitutional. But this is how corporate elections work. Corporate boards nominate themselves for election or reelection and put only their own names on the “proxy,” or corporate ballot, that is sent to shareholders at company expense before any shareholder meeting. Others can choose to run against these board members if they want to. But to do so, they have to pay to create their own separate proxies, track down all of the company’s investors, mail them to those investors, and then exhort them to use the new ballots in the election. That costs many millions of dollars. Only the most affluent and concentrated investors—hedge funds—can afford to challenge corporate boards by printing and mailing their own proxies to run competing candidates in what is called a “proxy fight.”5
Even hedge funds only run a proxy fight in the most exceptional circumstances, because the cost is so high. For everyone else, such a fight is insane. That’s exactly how the two most powerful business lobbies, the Business Roundtable and the U.S. Chamber of Commerce, like it. They like a world in which shareholders who want to challenge directors like Safeway’s Steven Burd, William Tauscher, and Robert MacDonnell—or, for that matter, Disney’s Michael Eisner—have no practical choice but to run a “just vote no” campaign, rather than run a competing candidate. Historically, the best an opponent could hope for in a “just vote no” campaign, or a “withhold vote,” is that the reelection total was so low that it shamed the board into removing a board member who was technically reelected but with an embarrassing vote total. That’s what happened to Eisner. But overall, the fact that it is almost impossible to get a competing candidate on the ballot is one of many reasons why corporate elections have always been a joke, an oxymoron. It’s why people who understand corporate elections scoffed when Justice Anthony Kennedy wrote in his 2010 Citizens United opinion that, if shareholders were unhappy with a company’s political expenditures, they could take action against management “through the procedures of corporate democracy.”6
The Proxy Access Rule
Proxy access would help fix the enormous imbalance favoring incumbents over challengers in corporate elections. It would not mean that anyone could nominate themselves to be included on the corporate ballot. But it would give certain shareholders direct access to the proxy. It would allow a limited number of long-term, diversified shareholders (like pension funds and mutual funds, not short-term-trading hedge funds) to directly place their own competing nominees on the same proxy as the board’s nominees, at no cost.7 In my hypothetical presidential election above, it would mean nothing more than letting the challenger’s name be printed on the same ballot as the incumbent’s. Not any challenger, but an established challenger. Access means nothing more than adding a few lines of text to a piece of paper that must be printed and mailed regardless. And yet, the Business Roundtable and the U.S. Chamber of Commerce have fiercely opposed this simple reform by every means available.
Efforts to adopt proxy access in the United States go back as far as the 1940s, but the contemporary story has its origins in the early 2000s. In 2001, the American Federation of State, County, and Municipal Employees (AFSCME), a prominent public employees union, began drafting proxy access shareholder proposals and submitting them to a handful of companies.8 The effort was led by two activists: Rich Ferlauto, a former young Republican who became one of the leading architects of labor’s shareholder power, and Beth Young, an attorney who runs a solo law practice out of her apartment in Flatbush, Brooklyn, and whose behind-the-scenes strategic and legal influence on labor’s shareholder activism has played a pervasive and under-acknowledged role in many wins of the last decade. Both Ferlauto and Young embody qualities shared by many of the shareholder activists I have met or interviewed—they combine a shrewd tactical sense with a romantic, idealistic view of their jobs. (Young told me that a line from Hamilton: An American Musical keeps popping into her head while she’s working: “How does a ragtag volunteer army in need of a shower somehow defeat a global superpower?”)9
AFSCME’s initial proxy access proposals were a direct response to the Enron and WorldCom accounting scandals, in which two Fortune 100 U.S. companies collapsed within a year of each other—causing a combined $85 billion in losses—because they were engaged in massive accounting frauds. Suddenly, questions of corporate governance, of corporate accountability, were injected into the public debate. Although AFSCME had a team of research analysts, none of them focused exclusively on issues of corporate governance. That had been Ferlauto’s specialty when he worked at Institutional Shareholder Services (ISS)—the proxy advisory firm mentioned in Chapter 1—shortly before joining the union’s shareholder activism team. AFSCME’s leader at the time, Gerald McEntee, wanted to expand the union’s corporate governance activism precisely because the retirement funds of its many members were invested in the largest public pension funds, which faced enormous risks from fraud in the marketplace. The best way to generate corporate accountability, reasoned Ferlauto and Young, was to make shareholder voting a meaningful exercise through tools like proxy access.10
Initially, AFSCME hoped that proxy access might be included in the Sarbanes-Oxley legislation of 2002, which imposed new governance and accounting requirements on public companies in the aftermath of Enron and WorldCom. But when it became clear that would not happen, Ferlauto and Young filed shareholder proposals seeking proxy access at half a dozen companies. (Shareholders have the right to submit their own proposals to be included in the proxy and voted on at the annual meeting, though they must meet certain legal requirements and are almost always opposed by the board.) All of Ferlauto’s and Young’s shareholder proposals were opposed by their respective boards, and the SEC sided with the corporate boards every time, permitting exclusion of the proposals. In other words, the SEC—the commission that is supposed to protect investors—allowed companies to ignore these proposals and not submit them to their shareholders for consideration at their annual meetings. In 2003, when the SEC let yet another company, AIG—the same AIG that, four years later, would lead the country and the world into the financial abyss—ignore yet another AFSCME proxy access proposal, the union finally got fed up and sued, winning a surprising reversal at the Second Circuit Court of Appeals in New York.11
At this point, the SEC announced it would review the court’s legal opinion and consider instituting a proxy access rule of its own.12 But the SEC never followed through. This death-by-delay approach was consistent with the SEC’s phlegmatic pace of regulation and enforcement in the George W. Bush era, particularly under the leadership of Bush’s first and third commissioners, Harvey Pitt and Christopher Cox.
Then came the financial crisis of 2008, and the strong desire of Senator Chris Dodd of Connecticut and Congressman Barney Frank of Massachusetts to leave a legacy of financial reform before retiring from Capitol Hill. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 finally gave shareholder activists the opportunity—and the SEC the political and legal cover—to draft a proxy access rule, or so they thought. Falling under the subtitle “Strengthening Corporate Governance,” a section of the act entitled “Proxy Access” authorized the SEC to make a rule requiring the corporate ballot to include “a nominee submitted by a shareholder to serve on the board of directors.”13 In other words, shareholders—rather than just the board itself—could nominate board candidates and have those nominees listed on the ballot. Fearing a legal challenge, Congress sent a strong signal to the courts that it expected deference to the proxy access rule, which it left the SEC to implement. The legislative history of the act explicitly states that the SEC should be given “wide latitude in setting the terms of such proxy access.”14
Perhaps the drafters of this language hoped to test the principles of conservative judges who had long attacked liberal “judicial activism.” Conservatives have repeatedly decried purportedly unaccountable activist federal judges who were too quick to overrule legislation adopted by Congress or to apply new meanings to constitutional provisions. That’s why Chief Justice John Roberts, in his Supreme Court confirmation hearing, famously described the role of a justice as a passive umpire: “It’s my job to call balls and strikes and not to pitch or bat.”15 The legislature clearly indicated that it expected the SEC to be given wide range on proxy access, a signal to the judiciary to abide by its role of interpreting laws passed by Congress, not legislating on its own.
The rule that the SEC actually proposed was comfortably among the more conservative versions of what Congress itself had considered. It limited the use of proxy access to long-term shareholders only, barring its use by shareholders—most likely hedge funds—who were looking to move into the stock, engineer a quick price increase, and then sell. In other words, the rule flipped the status quo so that hedge funds would still have to pay to circulate their own ballots but long-term, diversified shareholders could nominate candidates whose names would appear on the proxy. Rather than empowering any shareholder to use proxy access, the rule also required that the shareholder own 3 percent of the company, or join a small group of investors that reached the 3 percent threshold combined. That number may sound small, but it’s not. Even the very largest pension funds own less than 1 percent of the companies they invest in. As a practical matter, the 3 percent threshold would almost always require a group of large investors to work together to reach it and nominate a candidate, eliminating outlier or gadfly candidates. (As it happens, 3 percent was the same threshold Ferlauto and Young had fought for several years earlier in their AFSCME shareholder proposals. That’s not altogether surprising, given that Ferlauto was then working at the SEC on the proxy access rule itself.)16
The rule also required that only shareholders who owned a stake in the company for a minimum of three years be allowed to use proxy access. By limiting its use to long-term shareholders who owned a substantial stake in the company, and forcing those shareholders to team up with others who likewise had significant holdings, Congress and the SEC empowered primarily retirement funds like state and local public pension funds, labor union funds, and mutual funds. These funds are “universal owners,” that is, they are diversified investors who own most of what’s for sale in the stock market and invest over a thirty- to fifty-year time horizon. Presumably, these are the same investors whose interests are best aligned with long-term economic growth, precisely the shareholders we would want to empower in a proxy access rule. Finally, the rule allowed proxy access to be used for no more than a quarter of the total outstanding board seats.17 So, if a corporate board had twelve seats, proxy access could be used to contest no more than three of them per election. The other nine directors could still run effectively unopposed. It was hardly the French Revolution, but it was a start.
There’s no doubt that Congress fully understood that proxy access would empower state and local public pension funds and labor union funds, that is, working-class shareholders. First, any action that empowers long-term, diversified investors empowers working-class shareholders, period. That’s not just because working-class shareholders are themselves long-term, diversified investors striving to pay out benefits to workers who contribute to them, decade after decade. It is also because other types of long-term, diversified shareholders, like mutual funds, which primarily invest the retirement savings of white-collar workers, engage in comparatively little activism since they face conflicts of interest. Activism tends to antagonize its corporate targets, like CalPERS’s challenges to Disney and Safeway. Unlike public pension and labor union funds, mutual funds (like Vanguard and Fidelity) profit from having their 401(k) plans on the platforms of large public corporations, again like Disney or Safeway or, for that matter, Wal-Mart. These funds do not want to antagonize corporate managers who can punish them by removing their 401(k) plans from the list of those offered to a company’s employees. For example, according to a recent study by the 50 / 50 Climate Project, Vanguard voted against management at energy companies 22 percent of the time, but it supported zero challenges to companies where Vanguard serviced retirement plans.18
Mutual funds also compete with each other, unlike pension funds and labor union funds. You can’t take your pension away from CalPERS and give it to New York State’s retirement fund—your pension is directly tied to your job. But you can take your 401(k) from Fidelity and give it to Vanguard; investors often “roll over” their 401(k)s and other investments from one mutual fund to another. To the extent that mutual funds were to expend resources on activism that would benefit all shareholders, they would be benefiting their competitors too. Using your own resources to help your competitors is not what good capitalists do. It’s called the free-rider problem. Why should I bear the cost of an activist play that will work to the advantage of my competitors?
Mutual funds also remain passive because mutual fund analysts prize their ability to obtain information about company performance from CEOs or CFOs, who are much less likely to return their phone calls or respond to their requests if their funds are simultaneously challenging the corporate leaders. Also, mutual fund managers populate the same class as corporate managers: they travel in the same social networks, attend the same business schools, join the same clubs, send their kids to the same schools—unlike the trustees of public pension funds, who are teachers, firefighters, and other public employees. Consequently, mutual funds have remained largely inactive. It is true that some mutual funds have recently begun to dip their toes in activist waters, most notably State Street’s 2017 sponsorship of the Fearless Girl sculpture opposite the Wall Street bull in lower Manhattan, coinciding with its announcement of a new shareholder voting policy favoring women board members. Similarly, Vanguard and BlackRock in 2017 supported environmental proposals—made by other investors—at a couple of energy companies. But overall, mutual funds are far less likely to make use of proxy access than public pensions. For this reason, almost any reform that empowers long-term, diversified shareholders primarily empowers the subset of those investors who are willing to use that power: working-class shareholders like public pension funds and labor union funds. Of course, in order for these shareholders’ candidates to actually win, they would need the support of other shareholders.19
Moving beyond the logic of the marketplace, Congress had an excellent way of knowing that public pension and labor union funds would be empowered by proxy access: they were the ones lobbying for it. The Council of Institutional Investors (CII), a coalition of public pension funds, labor union funds, and a limited number of corporate pension funds, lobbied intensely for proxy access and against an earlier version that would have set a higher threshold of 5 percent stock ownership available only to single shareholders. “A 5 percent ownership requirement would effectively shut out those large, long-term, responsible investors—largely public and union pension funds—most willing to engage companies and hold them accountable,” CII told Congress.20 In other words, a 5 percent threshold would hardly have been proxy access at all. So Congress abandoned that idea.
Congress could also have gone in the opposite direction, by establishing effectively no shareholding threshold, so that anyone who owned even one share for a short period of time could access the proxy. But there is little point in accessing the proxy if you have no reasonable chance of nominating a candidate who can win. Working-class shareholders have the clout to nominate serious challengers, and to the extent that individual, small-stakes shareholders ever make proposals, those proposals have zero chance of passing without public pension and labor union support. Congress clearly grasped this. It is crucial to understand this point if we are to understand what was so wrong about the D.C. Circuit’s decision in this case. Congress knew perfectly well who it was empowering when it adopted proxy access: public pension funds and labor union funds.
There were two basic reasons for Congress to empower these shareholders. First, the Democratic Congress liked these shareholders’ left-leaning politics; they were natural allies. Additionally, Congress believed that empowering these shareholders, even with their “special interest” concerns about workers and jobs, would benefit all shareholders by holding corporate managers accountable. Congress had made precisely the same policy decision fifteen years earlier, under Republican control. In 1995, Congress passed the Private Securities Litigation Reform Act, which placed institutional investors like public pension funds in control of class-action lawsuits brought on behalf of defrauded investors, such as those against Enron and WorldCom for accounting fraud. The Republican Congress did so out of concern that plaintiff-side class-action lawyers—who not coincidentally contribute heavily to Democrats—were reaping too much of the benefit of shareholder lawsuits for themselves, settling cases too quickly and too cheaply, and charging high attorneys’ fees. Institutional investors with large losses could help monitor lawyer behavior, assuring better outcomes for shareholders. Regardless of its political motivations, this reform worked. The evidence is clear that when public pension funds take control of these suits as lead plaintiffs, defrauded shareholders recover higher damages and pay lower attorneys’ fees.21 That doesn’t mean these funds never have special interests. It means that their activism can benefit everyone with a stake in making sure that companies are well-governed.
Ultimately, whatever motivated Congress to empower working-class shareholders matters little to the legal analysis, because Congress has the power to adopt proxy access. Conservatives were perfectly entitled to disagree with proxy access on policy grounds. But when they lost that fight, they did what members of both parties do: tried to find something “illegal” about a policy choice they disagreed with.
Dodd-Frank, including proxy access, was signed into law on July 21, 2010. Barely a month later, on August 25, 2010, the SEC adopted its proxy access rule. Five days after that, the Wall Street Journal ran an overwrought op-ed, “Alinsky Wins at the SEC”: “Sold in the name of ‘shareholder democracy,’ ” the Journal opined, “this new rule will mainly be used not by mom and pop investors, but by union funds and other politically motivated organizations seeking to force mom and pop to support causes they otherwise would not.”22
The Wall Street Journal’s argument that protecting corporate board members from having to run against actual competitors was for the benefit of “mom and pop,” not the boards themselves, is perverse. (The paper advocated instead for rules making hostile takeovers easier.) The op-ed further credited the new rule as a victory for Saul Alinksy, the famed activist and author of Rules for Radicals. In his 1971 book, Alinsky identified shareholder activism as an important tool for advancing progressive interests.23 Important as Alinsky’s contribution was, two other books written just a few years later came closer to predicting working-class shareholder activism in its current form: Peter Drucker’s strange and somewhat paranoid The Unseen Revolution: How Pension Fund Socialism Came to America (1976), and a better book, Samuel Rifkin and Randy Barber’s The North Will Rise Again (1978). There have also been numerous subsequent academic treatments of the topic.24 Still, Alinsky remains a bête noir for the American right, and his name is often trotted out purportedly to discredit anything associated with it. It was also no coincidence that the Journal op-ed said “Alinsky Wins at the SEC,” not “Alinsky Wins in Congress,” which is in fact where he won. By blaming the SEC instead of Congress, the Wall Street Journal mapped out the legal and public relations attack that would follow: don’t blame the democratically elected Congress for proxy access; instead, blame a purportedly rogue federal commission, the SEC.
On September 28, 2010, just two months after Congress included proxy access in Dodd-Frank, barely more than a month after the SEC adopted the rule, and just weeks after the Journal screamed about it, the Business Roundtable and the U.S. Chamber of Commerce sued the SEC—not on behalf of corporate boards and managers, but on behalf of mom and pop.25
Suing the SEC over Proxy Access
No one was surprised when the Roundtable and the Chamber chose Eugene Scalia as their lawyer. Scalia was the son of then-sitting conservative Supreme Court justice Antonin Scalia and the primary legal mastermind of the Republican strategy to dismantle Dodd-Frank, at least until the Trump administration took office in 2017, when a legislative strategy became feasible. (As of this writing, legislation passed in the House of Representatives has not been taken up in the Senate). To date, Scalia has filed at least six lawsuits aimed at undermining Dodd-Frank, all in the D.C. Circuit.26 More dismaying to proxy access advocates was the randomly selected panel of D.C. Circuit judges who would hear the Roundtable’s case: Judge Douglas Ginsburg (no relation to Justice Ruth Bader Ginsburg), Judge Janice Rogers Brown, and Judge David Sentelle, all three Republican appointees.27 These judges would decide whether to uphold a rule adopted by a Democratic SEC empowered by a statute named for two Democratic legislators, signed by a Democratic president, and passed in Congress with zero House Republican support and just two Senate Republican votes.28 Judge Ginsburg and Judge Brown were particularly concerning. Brown had previously described the New Deal and minimum wage laws as “the triumph of our socialist revolution” and proclaimed that “private property, already an endangered species in California, is now entirely extinct in San Francisco.”29
The presence of Ginsburg on the panel caused even greater concern. His legal smarts and conservative credentials were sterling enough to earn him President Ronald Reagan’s nomination for a seat on the Supreme Court of the United States. Had the fact that he smoked marijuana as a law professor remained secret, he would be sitting on the Supreme Court today. After his drug use was exposed, his candidacy collapsed. Justice Anthony Kennedy was appointed to the seat that would have been Ginsburg’s.30
There was nothing subtle about the support Ginsburg and the other D.C. Circuit judges showed for the agenda of Scalia and his fellow travelers. In an article published in the University of Chicago Law Review (years after the Business Roundtable case), Cass Sunstein and Adrian Vermeule criticized the D.C. Circuit for “moving in libertarian directions without sufficient warrant in existing sources of law, including the decisions of the Supreme Court itself.” Sunstein and Vermeule further accused Judge Ginsburg, in particular, of having an “identifiable ideological valence.”31 In a vigorous reply to Sunstein and Vermeule, Ginsburg did not deny the charge but justified the valence, arguing that it is the role of the court to stand up to the administrative state, that is, to serve as a check on the SEC (and the Environmental Protection Agency, the Internal Revenue Service, the Department of Education, etc.). President Donald Trump’s Supreme Court appointee, Neil Gorsuch, has expressed similar views in even more strident terms.32
Even granting the point that judicial deference to federal agencies is different from judicial deference to Congress itself, in the case of proxy access, Ginsburg was not standing up to just the administrative state but to Congress. He criticized what he characterized as “doctrines of extreme deference [to administrative agencies] by which the Supreme Court has relieved the judiciary in all but the most egregious cases of its responsibility to provide meaningful review.” In Business Roundtable v. SEC, Ginsburg gave insight into what he meant by “meaningful review.” During oral argument, he honed in on the fact that the proxy access rule empowered working-class shareholders, emphasizing Scalia’s point that these union and pension shareholders have different interests than other shareholders. Therefore, the rule facilitated challenges by entities that did not have broader shareholder interests at heart. The SEC’s lawyer, Randall Quinn, responded that the commission considered the special interest of pension funds and union funds but concluded that, even with these special interests, these funds could still take actions beneficial to all shareholders: “There’s a potential benefit here of a board being responsive to those narrow shareholders [like union and public pension funds] who … might have ideas that would benefit the company as a whole.”33
Several key points emerge from this exchange. First, the SEC adopted this rule knowing that it would empower working-class shareholders, because these shareholders are the only ones willing to speak up and challenge corporate management, even if they do have special interests. More importantly, this rule is what Congress wanted when it put it in Dodd-Frank, and Congress has the power to do so if it chooses. Congress does not have to justify this choice to the D.C. Circuit, and cleverly, Ginsburg and the other judges never discuss the fact that Congress included a proxy access provision in Dodd-Frank. They also never mention that Congress stated that the SEC be given “wide latitude in setting the terms of such proxy access.” (In fairness to the court, the SEC’s lawyer, Quinn, never mentioned this either, and should have.) Congress and Dodd-Frank were not mentioned at all during oral argument.34 Instead, Ginsburg and the other judges acted as if the proxy access rule had been made up by the SEC entirely on its own initiative. By ignoring Congress and pinning everything on the SEC, Ginsburg made it sound as if the D.C. Circuit were out to stop a rogue federal agency from imposing some poorly thought out rule of its own making, when in fact, all the SEC was doing was implementing the direct will of the people’s elected representatives in Congress, as it was ordered to do.
Ginsburg, Brown, and Sentelle unanimously voted to strike down the proxy access rule, directly defying the will of Congress and the expertise of the SEC. That meant it left the old rule in place, in which there was no way to run against the board unless you were willing to print up your own ballots to circulate to shareholders. A defender of this decision might argue that Congress said to create proxy access but also passed a separate law telling the SEC to conduct cost-benefit analyses of new rules. Therefore, the court just emphasized one congressional command over another. But courts, lacking independent economic expertise, have historically deferred to entities with such expertise, like the SEC, unless their action is so unreasonable as to be “arbitrary and capricious.”35 That’s what Ginsburg, the non-economist with only law clerks working for him, declared about the SEC’s cost-benefit analysis conducted by its staff economists—that their analysis and the rule it produced was arbitrary and capricious.36
Multiple subsequent studies have shown that the market viewed the SEC’s proxy access rule—exactly as written—as increasing shareholder value.37 For example, one Harvard Business School study showed that the market reacted negatively when the SEC stayed implementation of its proxy access rule because of the Business Roundtable lawsuit, and again responded negatively when the D.C. Circuit stuck the rule down, two findings that are “consistent with the view that financial markets placed a positive value on shareholder access, as implemented in the SEC’s 2010 Rule.”38 Thus, Ginsburg placed himself in the role of guardian of the markets from public pension funds and labor union funds when the markets themselves valued the rule empowering these same funds against corporate boards.
The SEC decided not to appeal Ginsburg’s decision. The ideological opposition to proxy access in the Supreme Court at that time, including from Scalia’s father, would not have been very different from what the SEC encountered before the D.C. Circuit. (Nor would it be that different today, given that Gorsuch replaced Scalia.) Proxy access, discussed as far back as the 1940s, proposed and litigated by AFSCME in the early to mid-2000s, stifled inside the SEC by lobbying from the Chamber of Commerce, resurrected after the financial crisis and adopted in Dodd-Frank, once again seemed finished. For Scalia, the Roundtable, and the Chamber, the victory was resounding because of the muscular precedent it set for the D.C. Circuit in striking down other aspects of Dodd-Frank and financial regulations more generally.
What Ginsburg’s decision also triggered was a shareholder activist response that, as of this writing, seems destined to win the proxy access fight anyway.
The Resurrection of Proxy Access
Scott Stringer grew up in the Washington Heights neighborhood of Manhattan, recently gentrified like much of the city, but not an affluent neighborhood in his childhood. He attended public school and graduated from the John Jay College of Criminal Justice. Starting at the bottom of the political ladder, Stringer steadily climbed rung by rung, first working as a legislative assistant to assemblyman Jerry Nadler, then, after Nadler won a seat in Congress in 1992, winning Nadler’s seat in the New York State Assembly to represent the Upper West Side of Manhattan. Stringer spent the next thirteen years in that office. He lost a race for New York City public advocate in 2001 before winning the Manhattan Borough presidency in 2005. Eager to advance, Stringer repeatedly found himself thwarted by more affluent and better-connected politicians. Mayor Michael Bloomberg even suggested eliminating the office of Manhattan Borough president while Stringer occupied it.39
In 2009, Stringer considered a primary challenge to incumbent senator Kirsten Gillibrand, a fellow Democrat, but backed down at the behest of the Obama administration. He ran for New York City comptroller in 2013. The comptroller is the chief financial officer of the city, “responsible for providing an independent voice to safeguard the fiscal health of the City, root out waste, fraud and abuse in City government and ensure the effective performance of City agencies.” One of the comptroller’s most important functions is overseeing New York City’s five pension funds, including the massive New York City Employees’ Retirement System (NYCERS). In total, these funds invest $160 billion in city employee pensions.40
The New York City (NYC) funds, combined, are among the largest in the United States. Historically, they have been activist and influential. For instance, consider the reaction of NYCERS to a 1991 decision by the Cracker Barrel Company to fire its gay employees. The company’s press release stated that “Cracker Barrel is founded upon a concept of traditional American values, quality in all we do, and a philosophy of 100% guest satisfaction. It is inconsistent with our concept and values, and is perceived to be inconsistent with those of the customer base, to continue to employ individuals whose sexual preferences fail to demonstrate normal heterosexual values which have been the foundation of families in our society.” NYCERS responded by filing a shareholder proposal that would require the company to implement a policy prohibiting discrimination on the basis of sexual orientation. NYCERS was blocked from proceeding with that proposal by the SEC for seven years in a row—just like the SEC would later block AFSCME’s proxy access proposals in the 2000s—before the commission finally relented in the face of ceaseless pressure by the fund. Likewise, in the 1980s, NYCERS submitted dozens of successful shareholder proposals opposing South African apartheid.41
Through NYCERS and the other NYC funds, the New York City comptroller wields enormous clout in the investment world, much as Harrigan did through CalPERS. Not surprisingly, the comptroller job attracted stiff competition. Stringer’s formidable foe in the 2013 campaign was disgraced former New York governor and attorney general Eliot Spitzer. Spitzer wanted the job to launch his comeback, stating, “There’s substantial authority here that I think can be used in exciting ways.” Stringer outpolled Spitzer 52 percent to 48 percent for the Democratic nomination, saying afterward, “Sometimes the guy without the resources but with a lot of heart can win the election.” Stringer did so with unanimous support from the city’s unions.42 After winning the general election that November, he quickly became one of the most creative and influential shareholder activists in the country, prioritizing proxy access.
Stringer’s approach to the proxy access problem in the aftermath of the D.C. Circuit’s decision reminds me of a standard plot twist in war films ranging from Lawrence of Arabia to the Lord of the Rings. In such films, the ambitious protagonists learn early that a particular path to success is forbidden to them. They can’t go through the desert, or the woods, or the mountains because some overwhelming menace lurks within. It’s inevitable that toward the end of the film the protagonists realize that the only option left is to go across that desert, those woods, those mountains, to accomplish their goal. They enter the forbidden space, defeat the bad guys, roll credits, collect Oscar, etc., etc.
Through the years of struggle over proxy access, there has always been a “desert” option, the path not taken. That option is to fight for access one company at a time. AFSCME dabbled with that strategy at a half-dozen companies in the 2000s, mostly in the hope of triggering an SEC response. There are reasons why such an approach is viewed as a desert. There are roughly five thousand public companies in the United States.43 Fighting for access company by company would seem to be an overwhelming task, even more so than getting Congress or the SEC to adopt a rule granting access to all of those companies at once. Imagine litigating a civil rights issue, like gay marriage, in five thousand states, not fifty. That’s why access advocates initially targeted their hopes at Washington (ultimately in vain), and it explains why the D.C. Circuit decision seemed to be such a devastating setback. But again, like in the movies, because the desert option seemed impossible, the bad guys didn’t bother to defend against it. The Chamber, the Roundtable, and their allies have never bothered lobbying or pushing for a legal defense that would bar the path to a company-by-company campaign.
A year after winning the comptroller election, Stringer initiated the Boardroom Accountability Project (BAP), designed to take the fight for proxy access directly to the companies in which the NYC funds were invested. In Stringer’s view, pension funds across the country were all working on different pet issues leading to change that was “too incremental.” He wanted to unite pensions under the banner of a single issue that could advance the interests of the NYC funds “while also moving the needle on issues like diversity, climate change, and executive compensation.” This point is key. It demonstrates how labor’s capital has attained success by building broader political alliances. Michael Garland played a key role in the NYC funds’ proxy access effort. He is the assistant comptroller for corporate governance and responsible investment, a position he had assumed under Stringer’s predecessor, John Liu. Garland had started out in the AFL-CIO’s Office of Investment. He filed a proxy access proposal for the AFL-CIO as early as 2003. Garland subsequently moved to Change to Win, another labor organization where he had pursued shareholder activism before joining the comptroller’s office. Under Liu, the comptroller’s office had pursued the occasional shareholder proposal on human rights or majority voting. In the aftermath of Business Roundtable v. SEC, Garland suggested that that the NYC funds consider filing proxy access shareholder proposals at ten companies, picking up where AFSCME had left off a decade earlier. Stringer’s response: “Ten proposals? Why not eighty?” The Boardroom Accountability Project was born.44
In its own words, BAP is “a national campaign to give shareowners a true voice in how corporate boards are elected at every U.S. company. If we want systemic change to ensure that companies are truly managed for the long-term, we need more diverse, independent and accountable directors. The ability to nominate directors is a fundamental shareowner right and the starting point for this transformation.”45
Stringer, Garland, and their team devised a plausible way to structure and win such a campaign, involving a combination of targeting large, high-profile companies and directly campaigning for proxy access at those companies, building shareholder allies, and a related campaign of public shaming. From the beginning, the ambitious hope was that if the project were successful in its earliest, most high-profile fights, other companies would implement proxy access on their own rather than wait to endure the humiliation of having it imposed upon them by their shareholders. It quickly became a “put all our eggs in one basket” strategy, said Garland, in that his office of eight people would devote the entire proxy season to this one issue, risking a season of futility if the proposals failed.46
The NYC funds filed seventy-five proposals in the first year of BAP, fifty targeted at S&P 500 companies, a figure that increased the following year. True, while the S&P 500 represents just one-tenth of all U.S. public companies, it covers 80 percent of total market capitalization, meaning that those five hundred companies comprise 80 percent of the value of the entire U.S. market. Stringer and Garland hoped to target as many as half of all S&P 500 companies in the early years of BAP. The logic of this approach speaks for itself, but it is noteworthy that BAP targeted smaller companies too, since the NYC funds own around 3,500 stocks. Likewise, while the NYC funds filed all the proposals, they did not work alone. They aligned with other large pensions like CalPERS, CalSTRS, and Norges Bank (the Norwegian Central Bank, which oversees the Government Pension Fund of Norway, the largest fund of any kind in the world). These funds provided support to the campaign ranging from joining solicitations to sending staff to shareholder meetings to advocate for the proposals.47
How that initial target list was selected is of interest. Stringer and Garland targeted carbon-intensive industries, homogeneous boards, and companies with executive pay problems, including “33 carbon-intensive coal, oil and gas, and utility companies; 24 companies with few or no women directors, and little or no apparent racial or ethnic diversity; and 25 companies that received significant opposition to their 2014 advisory vote on executive compensation, or ‘say-on-pay,’ ” meaning places where shareholders were unhappy with how much the CEO was making.48 In short, BAP utilized what critics of labor’s shareholder activism call “political criteria” to select the targets for its investment-related goal of obtaining proxy access.
The NYC funds’ target selection illustrates a split in the shareholder activist community. It echoes a set of choices faced by the Safeway campaigners, one that shareholder activists always face. When it comes to investments in carbon-intensive industries, there are “divesters” and “engagers,” namely those who favor dropping carbon companies from investment portfolios and those who advocate remaining invested, engaging management, and working for change from within. The Boardroom Accountability Project and Stringer come down on the side of engagement, pushing for proxy access to maximize shareholder voice within the company, rather than exit the investment. Similarly, diversity issues in general, and board diversity issues in particular, are frequently coded as “political” rather than “investment” issues. Regardless, public pension funds generally, and the NYC funds in particular, are disproportionately composed of female beneficiaries (for instance, the vast majority of public school teachers in New York City and elsewhere are women) and minorities (from 20–33% of public employees are African American, compared to 12% of the U.S. population). Given at least mixed evidence that improved board diversity affects returns—evidence cited by State Street in adopting its pro-women board members voting policy and sponsoring the political art Fearless Girl on Wall Street—the question of whether investment funds like the NYC funds may pursue such objectives seems self-evidently in the interests of plan participants and consistent with fiduciary duty.49
Stringer and BAP filed shareholder proposals at targeted corporations that mimicked, word for word, the rule that Congress and the SEC implemented before Ginsburg struck it down. They proposed that companies adopt a three-year / 3 percent ownership / 25 percent of the board threshold for proxy access, to be voted on a company-by-company basis.50 It is difficult to overstate how well this strategy worked. In 2014, the first year of the campaign, 1 percent (5) of S&P 500 companies had proxy access. One year later, 117 companies had adopted proxy access, including 21 percent of the S&P 500 and several non-S&P 500 companies. By the beginning of the 2015 proxy season, that number had nearly doubled to 35 percent. The pace of change stunned corporate watchers, with a reform sought for nearly seventy years ripping through company after company with hardly a fight.51
By the end of the 2015 season, for the NYC funds alone, forty-three of their sixty-six shareholder resolutions calling for proxy access that actually went to a vote were passed by a majority of shareholders. Things improved further in the 2016 season. The NYC funds submitted seventy-two proxy access proposals. Fifty-two companies surrendered without a fight, avoiding a shareholder vote by adopting the NYC funds’ proposed rule. Eighteen companies decided to take it to a shareholder vote: of those, the proposal prevailed at thirteen. And over the two-year period from 2014 to 2016, seventeen companies targeted by NYC funds for lack of boardroom diversity added either a woman or minority to their board.52
NYC funds also picked up allies along the way. TIAA-CREF, the mutual fund that invests the retirement savings of college teachers, wrote a hundred letters to investees requesting that they adopt proxy access along lines similar to those initially proposed by the SEC. By early 2016, thirty-nine of those companies had adopted it, and eventually seventy-three companies agreed. These were not formal shareholder proposals, and therefore required no actual shareholder vote, but a letter from such a large shareholder contributed to companies’ adopting proxy access, as did the NYC funds’ proposal work at other corporations. What explains many of these adoptions is the straightforward realization that the momentum was entirely on the side of the activists, and that there was little point in waiting for one to come calling. One company, 3M, preempted the NYC funds’ challenge when its board adopted proxy access the same day that the funds proposed it.53
These swift victories, in which substantial shareholder majorities voted in favor of proxy access, demonstrate how badly the Wall Street Journal op-ed page and the D.C. Circuit misunderstood the story. It’s not just that Alinsky won in Congress or at the SEC. He also won with shareholders generally, many of whom were fed up with the insulation of corporate boards and were willing to vote for proxy access alongside working-class shareholders, even though it would empower working-class shareholders, and even though working-class shareholders like the NYC funds were the ones proposing the rule. The SEC lawyer Randall Quinn was correct at oral argument in Business Roundtable v. SEC: “special interest” pension funds and union funds could act to improve outcomes for everyone.54 That doesn’t mean that these pension and union funds can’t use the rule to their own advantage in certain circumstances. They can. It means that, even accounting for the potential of serving narrow interests with proxy access, the market concluded that having some credible threat to otherwise insulated boards of directors outweighed that risk.
Although the SEC did not appeal the D.C. Circuit ruling, its economists followed up with a study about the ruling’s effect, and about the impact of the NYC funds’ proxy access campaign. Among other things, the study found that the surprise announcement of the Boardroom Accountability Project in November 2014 led to an immediate bump in price for targeted companies, supporting the claim that proxy access improved the value of those companies. The same study also made the point that, in some respects, companies might have been even better off had the D.C. Circuit left the rule in place.55
This study strongly supports proxy access and the Board Accountability Project. For one thing, the positive market reaction to BAP indicates that critics who decried proxy access as exclusively political are wrong, because the market bid up the price of companies targeted for access. There is no better vindication of investment purpose than that. Anyone trying to argue that Stringer and the NYC funds’ board members breached their fiduciary duties by targeting companies for proxy access based on “political” criteria like diversity and the environment is going to lose that argument very quickly, in part because of results such as these. Other studies confirm that proxy access benefits shareholders, although there are studies to the contrary, and critical voices linger. After Business Roundtable v. SEC, the CFA Institute, a prominent association of investment management professionals, conducted a comprehensive review of the existing empirical studies on proxy access and concluded, “By and large, the results of these studies show that proxy access was received more positively than negatively by financial markets.”56
Still, not everyone is persuaded, and in the field of corporate governance, people tend not to overreact to empirical studies. Clearly, it is important to consult empirical research on corporate governance reforms. But that research has well-known limitations. For one thing, it must navigate a standard challenge faced in many social sciences. It is not possible to create two identical companies, one with proxy access, one without, and then observe which fares better in the market. There are no double-blind placebo-controlled studies in corporate governance. Stock prices can move for all sorts of reasons, and it can be difficult to isolate the effect of one reform from everything else going on at the company, in the market, and in the world, all of which affect prices.
There are still other reasons to approach the governance literature with caution. The literature is entirely focused on outcomes like stock price or firm value. Whether these measures alone are the only outcomes of interest is contested within corporate law. Furthermore, shareholders often describe proxy access and other corporate governance issues as “fundamental rights.” BAP describes proxy access that way. Some investors opposed to the Financial Choice Act, the legislation designed to gut Dodd-Frank that has been passed in the House of Representatives but that has not yet been taken up in the Senate, and which would greatly restrict shareholders’ ability to file shareholder proposals like the ones that led to proxy access, described their statement against it as the “Joint Statement on Defending Fundamental Shareholder Rights.”57 Many shareholders take the position that, as investors, they ought to have input into the companies they own. From their perspective, this is an issue of both efficiency and fairness. Shareholders do not want to be told by their corporate investees that they cannot add two lines to a pre-printed corporate ballot listing their board candidates’ names. They do not want to be told that they must spend millions of dollars to separately print their own ballots if they want to exercise their right to run a competing board candidate. Some shareholders view this as an insult, and an empirical study claiming that they are better off not having a proxy access right is unlikely to persuade them to go without it.
There is one final, ironic point to be made about the D.C. Circuit’s striking down proxy access and the shareholder activist campaign that followed. Had the court allowed the proxy access rule to stand, it would likely be much more vulnerable now, under a Trump-administration SEC. The SEC can reverse itself. It’s a cumbersome process, but it is feasible. A Republican-controlled SEC could have rolled back proxy access rights. Instead, those rights are now largely beyond SEC control, having been settled by shareholder vote in the marketplace. In many respects, the D.C. Circuit’s overreaching opinion had the perverse effect of strengthening proxy access rights.58
These developments followed two others that, combined with access, have dramatically transformed the landscape of shareholder voting. The first was the move to majority voting for directors, and the second was the destaggering of corporate boards.
First, majority voting. Until very recently, U.S. corporate elections applied a plurality voting rule, that is, if you received a plurality of the vote, you won. Everyone understands what it means to win a plurality vote—it’s whoever has the most votes wins, even if the vote total is less than 50 percent. Plurality voting is an entirely sensible rule in races where there are more than two candidates. President Bill Clinton won the election in 1992 with a plurality of the popular vote, winning 43 percent compared to 37.4 percent for the incumbent President George H. W. Bush and 18.9 percent for Independent Ross Perot.59 But a plurality voting rule is pathetic in elections in which you are running unopposed. Most of these elections result in vote totals for the sole candidate in excess of 90 percent of the shareholder electorate. Should you still be able to win election with a 10 percent vote total when you run unopposed? You do under a plurality voting rule. It’s like winning gold for placing first in a solitaire competition.
Majority voting does nothing more than require that a candidate obtain over 50 percent in favor of her candidacy before she can take her board seat, even when running unopposed. The effect of this shift is obvious. In the dominant situation in which board members run unopposed—even in a world where proxy access is widely available—majority voting empowers shareholders to prevent the election of a board member they dislike by running a “withhold vote” or a “just vote no” campaign. The board member will not be reseated if he fails to reach the 50 percent threshold. That makes board candidates and board members more accountable to shareholders. The empirical evidence is mixed but, in my view, generally supportive of the connection between majority voting and firm value. Majority voting is another realm where investors view the question as one of fundamental rights, rather than just an instrument for improving value.60
As with proxy access, almost all of the shareholder proposals favoring majority voting have been brought by working-class shareholders. The United Brotherhood of Carpenters Fund, a labor union fund, has played a particularly important role in this fight. It alone filed 717 majority voting proposals between 2004 and 2014, including at American Express, Capital One, CVS Caremark, Exxon Mobil, General Electric, Halliburton, IBM, UnitedHealth Group, and Verizon. By 2010, 73 percent of S&P 500 companies adopted majority voting, numbers that rose to 79 percent in 2011, 83 percent in 2012, 87 percent by 2013, and 90 percent by 2014.61
The second major development to precede proxy access was the destaggering of corporate boards, so that the entire board is up for election every cycle, rather than just one-third of the board standing at any election. With staggered boards, it takes at least two election cycles to flip board control, which reduces responsiveness to shareholders. Substantial credit for this development belongs to Harvard Law School’s Shareholder Rights Project (SRP), a now-defunct student clinic that once operated under the auspices of Professor Lucian Bebchuk and Scott Hirst. Not surprisingly, the clients of the SRP clinic were working-class shareholder institutions including the Florida State Board of Administration, the Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Massachusetts Pension Reserves Investment Management Board, the North Carolina Department of State Treasurer, the Ohio Public Employees Retirement System, and the School Employees Retirement System of Ohio. (The Illinois and Massachusetts funds were both veterans of the Safeway fight.) These pension funds were also joined by the Nathan Cummings Foundation, a foundation that primarily focuses on economic inequality and climate change, and that uses the 96 percent of its portfolio that it does not give away every year to advance its agenda through shareholder activism.62 The Nathan Cummings Foundation’s involvement with the SRP is a small example of how working-class shareholders ally with other institutions, like foundations, to advance mutually beneficial agendas.
Over a three-year period from 2011 to 2014, the clinic filed dozens of shareholder proposals calling for destaggered boards at S&P 500 and Fortune 500 companies. It also negotiated agreements with companies not to file such proposals in exchange for the companies agreeing either to destagger their boards themselves or to put the issue to a shareholder vote. The clinic’s work resulted in the destaggering of over one hundred S&P 500 and Fortune 500 corporate boards. Currently, more than 80 percent of the S&P 500 has a destaggered board. The empirical research on whether such boards improve firm value is hotly contested.63
Will proxy access, majority voting, and destaggered boards result in an immediate, overnight transformation of shareholder elections, and of the way corporations are run? Maybe. In the short term, barring a recession, almost all shareholder elections will remain uncontested, and boards will continue to be reelected most of the time with 90 percent or more of the shareholder vote. Viewed superficially, this seems like very little change. But accountability rarely manifests itself in public rebukes of people in power. Rather than risk a rebuke, the powerful instead alter their conduct to avoid it. This is most likely where the effects of voting reform will be found: in the thousands of subtle choices the powerful make when they know they have to explain themselves to others. But I do believe that with the next recession, whenever it comes, we will see a notable increase in challenges to incumbent directors. That would conform to a historical pattern in which shareholders are more receptive to change when markets are down, much in the way that voters are more open to change in election years taking place during economic downturns.
The long term is always difficult to predict, but it is not impossible to imagine a world in which the leaders of our largest and most prominent corporations regularly face contested elections, perhaps every few years. Even if contested elections do not become the norm, the occasional successful fight waged by shareholders could be enough to send a signal to the rest of the market, and to other directors standing for election. Regardless, for the first time in the roughly 150-year history of U.S. public corporations, their leaders are now generally susceptible to being challenged and unseated by shareholders. We have attained, for the first time, meaningful shareholder voting rights. This achievement is almost entirely attributable to working-class shareholders, and it is one of the best examples yet of their power.
It is hardly surprising that those who are opposed to this transformation will do everything they can to roll it back. That reaction is already gathering pace. As of this writing, the House of Representatives has adopted the Financial Choice Act, which includes a provision that would effectively eliminate shareholder proposals by raising the required ownership threshold even above what the NYC funds could meet on their own. That would not undo all of the work that BAP and others accomplished, but it would make it much harder to continue that work going forward. Had that rule already been in place, it would likely have shut down all of the shareholder voting campaigns described in this chapter. There are good reasons to believe this act will not make it through the Senate. If it does, it would be a sharp blow to shareholder activism, but it would not eliminate the gains already made. In short, while there is more work to be done, when it comes to shareholder voting, labor picked the right battles. It fought and won them early, in ways that will make these victories difficult to dislodge.