Companies face proposals on employee representation

At least six US companies have received investor requests to put proposals to a vote at their AGMs on the topic of employee board representation.

Starbucks’ 2021 proxy statement, for example, includes a proposal from James McRitchie – the investor behind the flurry of filings on the topic – that if passed would call on the coffee company’s board to adopt a policy of ‘promoting significant representation of employee perspectives among corporate decision-makers by requiring the initial list of candidates from which new director nominees are chosen by the nominations and governance committee to include (but need not be limited to) non-management employees.’

The measure will be put to a vote at Starbucks’ March 17 virtual AGM. The supporting statement points to what it calls a growing consensus that including employees on boards can contribute to long-term corporate sustainability. It cites the National Bureau of Economic Research as saying that such representation increases female board representation and raises capital formation.

It notes that employees are also often more diverse than boards in terms of race, gender and wealth, and argues that the German ‘co-determination’ model of shared governance ‘is lauded as an excellent check against short-term capital allocation practices.’

Starbucks’ board is recommending that shareholders vote against the proposal. It states in part: ‘Embracing diversity encourages innovation and allows us to succeed and grow. Accordingly, we seek diversity in all forms in all areas of our business, from our partners to our board of directors. The board has considered this proposal and concluded that its adoption is unnecessary and not in the best interest of our shareholders, our company or our partners.’

The board argues that its nominating/governance committee is best placed to assess the particular qualifications of, and make recommendations regarding, potential director nominees. It adds that the proposed change is not necessary in light of a ‘robust director nominating process, the diversity of our board, our commitment to strong corporate governance practices, our existing, varied open channels of communication with our partners and our continued dedication to investing in our partners and their experiences.’

A request for comment from Starbucks was not returned.

Shareholders of The Walt Disney Company will vote on the same proposal, also filed by McRitchie, at the company’s virtual AGM on March 9. Disney’s board recommends that shareholders vote against the proposal, stating in part that ‘the governance and nominating committee’s thorough process of evaluating potential director candidates already ensures a diversity of perspectives and the addition of non-management employees would decrease the level of independence on the board.’

It adds that, in developing criteria for open board positions, the committee takes into account factors that may include: the existing composition of the board and expected retirements; the range of talents, experiences and skills that would best complement those already on the board; the balance of management and independent directors; and the need for financial or other specialized expertise.

The company had requested that the SEC grant no-action relief for excluding the proposal, in part under Rule 14a-8(i)(7), which it stated permits a company to do so if a proposal ‘deals with a matter relating to the company’s ordinary business operations.’ The SEC did not agree with this argument.

A request for comment from Disney was not returned.

According to McRitchie, he has also filed proposals on the topic with Citigroup, Edwards Lifesciences Corporation, WD-40 Company and Woodward. The first two companies have yet to publish their proxy statements so it is unknown whether the measure will end up being withdrawn following engagement, put to a vote or excluded under SEC relief.

A Citigroup spokesperson declined to comment.

An emailed company comment from Edwards Lifesciences reads: ‘We have received the shareholder proposal and Edwards Lifesciences’ board recommendation will be included in the proxy statement when it is filed at the end of March.’

The measure received roughly 3 percent support at WD-40’s December 2 AGM. It received roughly 7 percent support at Woodward’s shareholder meeting on January 27. Each company’s board had recommended that investors vote against.

Requests for comment from WD-40 Company and Woodward were not returned. 

BIGGER PICTURE
This year’s proposals are not the first on employee board representation but they are uncommon and have not always attracted significant support. Alphabet in 2019 faced a proposal on the topic. In its proxy statement, the company explained its process for selecting board directors, including a requirement for directors to have served as a public company CEO or CFO. The measure received 1.8 percent support among votes cast and was not on the company’s 2020 proxy statement.

At Walmart’s 2019 annual shareholder meeting, Senator Bernie Sanders, I-Vermont, in a largely symbolic gesture presented from the floor a shareholder proposal requesting employee representation. It received just 3,916 votes for and 2,379,343,435 against. 

Despite these results, worker representation has some support in Congress in addition to Sanders. Elizabeth Warren, D-Massachusetts, has introduced legislation that would enable employees to elect at least 40 percent of board members. In 2018 a group of US senators asked the SEC to consider implementing reforms that would ‘promote worker engagement, drive long-term growth and investment and give workers a greater voice in public companies by allowing [them] to be elected as company board members.’

With the Democratic Party now holding narrow majorities in Congress, as well as holding the White House, such sentiment carries greater weight.

The proposals are also being filed in a broader context in which the value of employees, human capital management in general and diversity and inclusion have taken on greater significance amid the Covid-19 pandemic and the Black Lives Matter movement.

Timothy Smith, director of ESG shareowner engagement at Boston Trust Walden, tells Corporate Secretary that in this environment expectations of companies taking their employees seriously and protecting them have ‘grown considerably.’ He says investors are studying and considering whether direct board participation by employees is a good approach or whether ideas such as employee councils might work as a way to take employees seriously.  

In the meantime, Smith says proposals being filed on employee representation help open the door to discussion on the issue within the companies facing them and stimulate discussion at other companies.