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March 27, 2000

Shareholders Weigh in on Proxy Advisor Scheme

At the Whole Foods annual meeting today, shareholders voted on a pioneering proposal to hire an proxy advisory firm, giving them a more independent and informed voice. -- Although shareholders are ostensibly the owners of corporations, their influence is often hampered by inadequate information, lack of independent nominating committees, and other corporate governance issues. A new shareholder proposal this year, Shareowners' Alternative Voting Information (SAVI), could mark the beginning of more democratic and informed shareholder participation in corporate decisions.

Today's annual meeting of Whole Foods Market in Chicago was the first shareholder vote on SAVI (pronounced "savvy"), a proposal to hire a proxy advisory firm chosen by shareholder vote to give them a more independent and informed voice in corporations. The resolution was presented by the Corporate Monitoring Project (CMP), a San Francisco-based corporate governance advocacy group.

"CEOs still run 'their' companies like kings (or queens), although institutional investors have increased their influence in the last ten years," said Mark Latham, Coordinator of CMP. "The SAVI proposal is a first step, but I think it will lead to a fundamental power shift in favor of shareowners, with pervasive effects. It will replace corporate monarchy with corporate democracy."

Only about half of individual shareholders vote their proxies, according to Latham, and most of them merely vote with management, due to inconvenience or lack of information. The internet could go a long way toward making proxy voting more convenient, but SAVI proponents suggest that further moves are needed to provide shareholders with more useful independent information.

In theory, board directors are elected to look after the interests of shareholders, but in practice shareholders have minimal influence in their election. SAVI provides for an alternative: shareholders would vote to choose proxy advisory firms to look out for their interests. These firms would provide the same benefits of independent information enjoyed by large institutional investors.

The SAVI proposal was submitted to 11 large companies, including General Motors, Pfizer, and Citigroup, but company management in each case has consistently resisted it. Whole Foods was the only company management that didn't try to keep it off the proxy, but they did recommended voting against it on the grounds that it would be an additional cost to shareholders with only marginal benefit.

At the shareholder meeting today, Whole Foods CEO John Mackey rebutted Latham's proposal during the question and answer period, asserting that the board is doing its job and adequate corporate governance guidelines are in place. But he wished
Latham luck with other companies that might be in greater need of corporate governance improvement.

Of the remaining target companies only Washington Mutual, the Washington-based financial services company, was not able to get the SAVI proposal omitted by the Securities Exchange Commission (SEC). The SEC merely asked the proponents to reword the resolution in the form of a recommendation or request, rather than a mandate, before it was presented at their annual meeting in April.

All the other companies succeeded in getting the SAVI proposal omitted by the SEC, under rule 14a-8(i)(8), "as relating to an election for membership on its board of directors." With this legal precedent, future resolutions will have to recommend restricting the proxy advisors to covering issues other than director elections.

"We will continue to submit the SAVI proposal at more companies, with the goal of getting a majority vote," said Latham. "It takes time to build understanding and acceptance of a new idea."

"I believe the SAVI resolution will grow quickly once it becomes known," said James McRitchie, Editor of "Corporate Governance," "especially among those, such as unions and social investors, who are thinking long-term in a market dominated by short-term thinking. The concept will help them tie their own resolutions to shareholder value in order to pick up the endorsement of proxy advisors."

The SAVI proposal is only the tip of a broader vision of Latham's to develop a system of Corporate Monitoring Firms (CMFs) that would enhance shareholder power within corporations. He foresees proxy advisory firms expanding to more proactive roles as CMFs, such as negotiating management compensation packages and nominating directors, and vying for shareholder interest based on their record and position on issues.

"In companies adopting Corporate Monitoring, the main arena for determining corporate policy on controversial issues may be in the platforms of competing Corporate Monitoring Firms," said Latham. "One CMF may position itself as more environmentally friendly, for example. I see it as something like political parties."

Although Corporate Monitoring Project's vision of corporate democracy may be far fetched to some, their SAVI proposal could go a long way toward making individual shareholders more informed and involved corporate owners. The Whole Foods vote may be only the beginning of an uphill battle for SAVI proponents, but there is still room for optimism that this idea will catch on in years to come.

"I see the proposal as another good governance measure like independent directors and believe that forward looking companies will come to embrace the concept," said McRitchie of "Corporate Governance." "Companies with justifiable measures on their ballots concerning compensation, mergers, or other corporate issues, should welcome independent analysis and verification."

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