Diversity, Shareholder Proposals, and Public Debate: The Case of Canada

We have been discussing on this Blog, off and on, the inconsistencies that arise out of the staff's interpretation of the "ordinary business" exclusion in Rule 14a-8. Part of the difficulty arises from the disconnect between the exclusion and the purpose of the proposal.

Shareholder proposals that are critical of some aspect of a company's business rarely pass.  Moreover, even if they did, they are usually precatory so the board could ignore them.  Thus, they pose little or no risk of actually interfering with the day to day business of the company.

Instead, they are mostly designed to be critical of particular corporate practices.  By including a proposal that will almost certainly fail, shareholders publicize the practice at the company's expense.  The publicity may cause other, non-shareholder interest groups to put pressure on the company.  As we have noted:

• the proposals are in reality mostly efforts by shareholders to bring public attention to potentially embarrassing corporate practices. Management, predictably, seeks to omit them not because they will actually affect the board‟s authority but because they will generate a public pillorying and result in pressure for change, often from non-shareholder groups. As a result, the staff‟s role is less about determining the balance of authority between directors and shareholders and more about arbitrating disputes between two conflicting interest groups.  Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors.

Thus, there is a disconnect between the proposals and the legal approach contained in Rule 14a-8.  The proposals are not designed to directly affect the day to day business of the company yet they are analyzed under an exclusion that treats this as the overriding issue.

We mention all of this because of the recent stories about proposals in Canada designed to encourage companies in that country to achieve gender parity on the board.  They have been voted down overwhelmingly by shareholders.  One suspects that proposing shareholders knew this would happen.  Yet the proposals have highlighted the lack of gender diversity among Canadian companies.  Almost certainly pressure will grow on these companies to improve their diversity record. Moreover, the publicity generated by the defeated shareholder proposals will contribute to that crescendo.

In short, shareholder proposals are often submitted with no expectation that they will, in a straight line fashion, result in a change to a company's ordinary practices.  Yet by bringing the matter to the attention of non-shareholder groups, the long term effect may be exactly that.  Perhaps this reality needs to be better reflected in the applicable legal framework under Rule 14a-8.