Petitioners also assert that another cost omitted by the SEC was the intended use of access as leverage by unions and public pension plans to gain unique benefits unrelated to their interests as shareholders. According to the Brief, "union and government pension funds are the most activist shareholders and would impose costs by, among other things, using Rule 14a-11 as leverage to obtain concessions from the company not related to shareholder value."
Thus, in addition to the SEC computing the costs associated with an access contest, it was supposed to assess the costs when an access contest does not occur. See Brief (costs of "succumbing to a shareholder’s demands to avoid a costly election contest, or mounting a costly campaign to avoid the “impair[ed] efficiency,” id., that results from a special interest nominee’s election.").
The evidence that this will ocurr is thin. The Brief contains a quote from a law review article published in 2000.
- Commenters excerpted a collection of essays by labor leaders and supporters in which one stated explicitly that by submitting shareholder proposals, “unions can gain access to ‘behind the scenes’ meetings with managers” in which “it is commonly understood . . . that unions may discuss labor issues as well. . . . If these negotiations proceed favorably, the notion is that the union will withdraw its shareholder proposals.
The excerpt is from an article published in the Fall of 2000. The full quote is more nuanced.
- In many situations, unions submit shareholder proposals to corporations that have neither unionized workers nor any ongoing or prospective union organizing activity. In some cases, however, unions seek to use shareholder activism at companies where they are concurrently engaged in contract negotiations or union organizing campaigns. By focusing on certain "wedge" issues that public funds support, unions can gain access to "behind the scenes" meetings with managers. Schwab and Thomas hypothesize that, "More tentatively, we suspect that unions are less able than other institutional shareholders to exercise influence through informal behind-the-scenes discussions." While it may be true that labor-shareholders do not exercise as much political power as other institutional shareholders such as CalPERS or TIAA-CREF, labor-shareholders can use their leverage to address their concerns with corporate managers who would otherwise ignore union leaders. During these meetings, it is commonly understood among those in the institutional investor community that unions may discuss labor issues, as well as corporate governance matters. If these negotiations proceed favorably, the notion is that the union will withdraw its shareholder proposals.
The quote at bests suggests that unions may use the "leverage" of a shareholder proposal to obtain a meeting with management. At those meetings, union officials may in fact "discuss" labor issues.
Even if this occurs, its hard to see the harm in this, much less the additional costs imposed on management. Moreover, the idea that this occurs as some deliberate strategy seems unlikely. Those attending a shareholder proposal meeting on behalf of management are unlikely to be the same people negotiating with the union. As for the "notion" that unions will withdraw the proposal (not as a quid-pro-quo but only because the negotiations are "proceed[ing] favorably"), the contention is not supported by citation or example. Presumably, were this a significant concern, there would be specific examples.
The argument also omits the fiduciary implications of the alleged behavior. The description of "leverage" as used in the Brief sounds an awful lot like greenmail. It suggests that boards will provide unnecessary benefits to unions in order to avoid an access challenge. This has the appearance of a board acting in its own self interest rather than the best interests of shareholders. A board's fiduciary obligations does not permit this type of behavior.
Finally, the leverage argument depends upon an ability to deliver on any threat to engage in an access contest. Unions and public pension plans individually will not, in most cases, meet the three year/3% threshold to invoke access. As a result, they will have to negotiate with other shareholders to assemble the requisite block of stock. Once having formed a block, they will, as a practical matter, lose the ability to unilaterally bargain away the right, even in return for behind the scenes benefit.
Assorted briefs and motions in this case can be found at the DU Corporate Governance web site.