Getting the Commission Out of the Way of Corporate Responsibility

Its one thing to promote an affirmative, positive agenda for the Commission that is designed to assist shareholders and investors.  It is an entirely other thing to ask the Commission to stop interfering with existing governance rights.  This occurs with unfortunate frequency in connection with Rule 14a-8 and proposals sought to be included by shareholders in a company's proxy statement. 

The staff position with respect to Rule 14a-8 needs serious reexamination.  The decision of the Commission to refer a shareholder proposal to the Delaware Supreme Court was a deliberately anti-shareholder decision.  Similarly, the staff emphasize the use of precatory proposals as a means of avoiding exclusion under Rule 14a-8 but these proposals, if adopted, can be ignored by management.

The most recent example of a questionable, anti-shareholder proposal occurred in connection with a no action letter issued to Verizon Communications.  Verizon sought the exclusion of a proposal that called for the board to form a committee to monitor corporate responsibilities.  Specifically, the proposal provided:

• "Verizon Stockholders hereby requests that without delay the Board of Directors form a Corporate Responsibly Committee charged with monitoring continuously the extent to which Verizon lives up to its manifold and oft-repeated claims pertaining to integrity, trustworthiness, and Reliability.

The basis for excluding the proposal?  Subsection (i)(7) of Rule 14a-8.  The subsection allows for the exclusion of matters relating to "the company's ordinary business operations".  Verizon argued that the proposal could be excluded "because the matters covered by the Proposal - monitoring customer
satisfaction with Verizon's products and services and compliance with its code of business conduct - fall squarely within the scope of Verizon's day-to-day business operations."

The proposal and supporting statement could have been drafted in a clearer fashion and they did speak to issues of reliability.  Nonetheless, the supporting statement indicated concern not with day to day oversight of customer complaints but with issues that resulted in "massive corruption" and "devastating losses" to stockholders.   The statement noted that Verizon "devotes a great deal of time and effort" and spends "enormous amounts of stockholder money" assuring investors, customers, government agencies of its "corporate integrity and trustworthiness" and that Verizon is reliable.  The committee, therefore, was necessary to provide "careful and continuous" attention to these promises.

This proposal, like most in this area, almost certainly would have failed.  It was proposed not by an institutional shareholder but an individual who owned 207 shares of common stock.  Nonetheless, it would have provided shareholders with an opportunity to send management a message about the importance oof board oversight in this area.  Given the lack of meaningful standards imposed under Delaware law for board behavior, this is a legitimate area for shareholders to express concern and seek to induce change.

By excluding the proposal, the staff at the Commission essentially barred a shareholder voice in this area.  It reflects the philosophy of the current Commission, something that will hopefully change on January 20.