Don't Squelch The Small Shareholder

For two years in a row, the owner of 65 shares of Fleming Cos. worth little more than $1,000 has been a thorn in the side of Robert E. Stauth, chief executive officer of the $16.5 billion food wholesaler. The shareholder happens to be the International Brotherhood of Teamsters' pension fund, and in 1996 and 1997, the union has persuaded shareholders to back resolutions forcing Fleming to ditch its poison pill. "They don't own enough shares to be a concerned pension-fund shareholder," declares Stauth, eager to exclude the pesky Teamster resolutions.

While those who support shareholder democracy would argue that anyone owning shares has a right at least to raise an issue, the Securities & Exchange Commission isn't so sure. If the agency adopts proposed changes on these resolutions, Stauth can effectively shut out the Teamsters because the pension fund doesn't own the minimum $2,000 worth of Fleming. Or he could characterize the resolution as "a personal grievance" or "special interest"--other reasons to keep issues off the agenda under the proposed changes.

That's downright unreasonable. The voice of the shareholder--an owner of the company, after all--has often called attention to Corporate America's excesses and prodded reluctant corporate consciences. Indeed, more than 60% of Fleming's voting shareholders supported the Teamsters' anti-poison pill resolution. The influence of outspoken shareholders is clear in recent decisions by American Express and Digital Equipment, among others, to eliminate directors' pensions. In earlier years, shareholders pushed for policies that helped eliminate apartheid in South Africa and that prevented top managers from putting their interests ahead of those of their companies.

The current SEC effort to deal with shareholder issues can be traced to a 1994 case involving Cracker Barrel Old Country Store Inc. Then, the SEC ruled that companies could omit employment-related shareholder resolutions from annual-meeting agendas. At Cracker Barrel, the resolution in question involved an allegedly discriminatory employment policy toward gays and lesbians.

Advocates of shareholder rights pushed the agency to reconsider Cracker Barrel, and in the process the SEC decided to review rulemaking on the entire issue of shareholder resolutions. Things got complicated when the commission tried to pick a path that would appease all sides.

Solomon may have had an easier task: Everyone wants something different from the SEC. Shareholder activists are enraged that it would give managements the right to exclude resolutions merely by characterizing their motivation or because a shareholder is too small. Investors whose resolutions are deep-sixed would have to go to court to slug it out. "It would create a chilling effect on shareholder proposals," says Jon Lukomnik, deputy controller for New York City's pension funds.

Lukomnik and other activists also dislike a provision, requested by companies, to require that shareholder resolutions be backed by at least 6% of shareholders before a defeated issue could be reintroduced within five years. Currently, the bar is 3%.

Meanwhile, CEOs are leery of losing the Cracker Barrel policy. Since that decision, they have been able to reject all kinds of workplace-related resolutions.

Overwhelmed by the criticism, the SEC extended its comment period to Jan. 2 and tapped governance gurus Ira M. Millstein of Weil, Gotshal & Manges, and Harvey Goldschmidt, a Columbia University law professor, to broker a quiet resolution.

But there's really only one thing for the SEC to do. It should return to what it started to do in the first place: reverse the Cracker Barrel policy and review employment-related resolutions on a case-by-case basis, as it once did. Everything else should stay the same.

A shareholder proposal isn't a legal action but a form of dialogue. It gives management a chance to respond to investor concerns before an issue ends up in court. If that means a few CEOs put up with oddball resolutions from the peanut gallery, it is, as the U.S. founders might say, the price of democracy.

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