The Walt Disney Co. could have a leading role in one of the major dramas of the forthcoming corporate governance season.
As the Council of Institutional Investors released its list of 20 underperforming companies it hoped to nudge toward improvement, Disney, a top performing company, looked like it was getting caught in the middle of a spat between large investors and the Securities and Exchange Commission over keeping workplace issues off proxy ballots.
Since 1992, the SEC has said workplace issues such as employment policies are part of a company's "ordinary business operations," and not a concern of investors.
At issue is a proposal from some Disney investors that asks the Burbank, Calif., entertainment giant to show what it is doing to ensure its suppliers are giving workers a decent wage and not exploiting them. The investors say they will appeal to the SEC chairman and three sitting commissioners if the staff lets Disney omit the proposal from its ballot.
If that appeal fails, Disney could face a lawsuit from Progressive Asset Management, an Oakland, Calif., socially minded money management firm, and the General Board of Pension and Health Benefits of the United Methodist Church, Evanston, Ill. They filed the proposal, and both are members of the Interfaith Center on Corporate Responsibility, New York, which provides legal support.
"If we think the staff is wrong, we are prepared to use whatever avenues are available to us to redress that wrong," said Paul Neuhauser, a law professor at the University of Iowa, Iowa City, and legal counsel to the ICCR members that filed the Disney proposal.
This is the first time a company has asked the SEC to exclude from its proxy an attempt by shareholders to eradicate sweatshops.
The proposal also asks Disney to report to shareholders in a year on how it reviews its suppliers' labor practices and how it encourages suppliers to improve working conditions.
But Disney already has sought SEC permission to exclude the proposal from its ballot on grounds that such matters are part of the company's day-to-day business.
"The company believes the proposal addresses matters involving the relationship between the company and its suppliers that are squarely within the ordinary business operations of the company and its subsidiaries, " said David K. Thompson, Disney assistant general counsel, in a Sept. 20 letter to the SEC.
Progressive Asset Management and the other Disney investors who submitted the resolution plan to tell the SEC why they think the pervasiveness of sweatshops is of great social concern and not simply a matter of a company's daily operations.
An SEC official declined to comment on the case; the agency is expected to announce its decision at the end of October.
And an SEC commissioner is daring the agency's staff to let Disney omit the proposal from its proxy.
Investors should "appeal any adverse ruling in this area to the commission," SEC Commissioner Steven M. Wallman told the Council of Institutional Investors conference in Chicago last week.
Mr. Wallman said he believes employment policies are "not just ordinary business. Squelching shareholder debate on issues like this is bad public policy."
The SEC, he said, should get out of the business of refereeing between corporations and investors on ordinary business matters because of the fuzziness over what constitutes day-to-day company matters.
Disney is not contesting a second proposal from the same investors criticizing the $15 million Chief Executive Officer Michael Eisner received last year and asking the company to tell shareholders how that compares with skimpy hourly wages its suppliers pay apparel workers in Haiti. The second proposal also asks the company to consider limiting the amount of money it pays top brass.
Some legal experts question whether the sweatshop proposal before Disney would make a good test case for overturning the agency's position on what constitutes ordinary business matters.
After all, the agency last year did not let AT&T Co. exclude a shareholder proposal from its proxy that attempted to raise issues of forced labor in China and the former Soviet Union countries, said Patrick McGurn, director of corporate programs at Institutional Shareholder Services, a Bethesda, Md., consulting firm.
"The problem with this rule is you never know where you are with this line, and (the SEC staff) keep changing the place where they have drawn the line," Mr. McGurn said. The SEC staff, he suggested, could argue the Disney proposal is not related to employment practices, but represents a new issue at the heart of a public debate.
Investors determined to overturn the SEC's position on ordinary business matters, however, have more shareholder proposals in their arsenal, should the Disney sweatshop resolution fail as a test case.
Executives at the United Methodist Church fund already have decided to once again present Shoney's Inc. with a proposal questioning its employment practices and urging it to disclose its record on hiring women and minorities, said Vidette Bullock-Mixon, director of corporate relations and social concerns at the $7.5 billion fund.
The restaurant chain paid $132 million in 1992 to settle a racial discrimination suit by nine former employees, and last year agreed to pay $96 million to help create jobs for minorities.
The company did not publish the shareholder proposal from religious investors in its proxy last year or give shareholders a report on its employment practices.
"We will go up to the commission on these kinds of issues as often as we need to," Mr. Neuhauser of the ICCR said. Religious and other investors intend to push Shoney's as a test case to overturn the SEC's interpretation of ordinary business matters if the Disney proposal doesn't pass muster, he said.
Shoney's also figures on the latest list of underperforming companies for the season announced last week by the Council of Institutional Investors, the Washington group representing pension funds with more than $1 trillion in assets.
Shoney's made it on the council's list for the second time.
Other companies on the council's list, based on performance over the last year as well as over the last five years, were Great Atlantic & Pacific Tea, Advanced Micro Devices Inc., Autodesk Inc., H&R Block Inc., Community Psychiatric Centers, Dillard Department Stores Inc., Fleming Cos., Giddings & Lewis Inc., Kmart Corp., Moore Corp., Navistar International Corp., Niagara Mohawk Power Corp., Nordstrom Inc., Novell Inc., Oryx Energy Co., Outboard Marine Corp., Stride Rite Corp., Unicom Corp. and Unisys Corp.
Council members frequently use the list of 20 underperforming companies to nudge them into changing the way they are run, hoping the changes will push up stock prices.
The ordinary business matters dispute dates from a 1992 SEC ruling that let Cracker Barrel Old Country Store Inc. exclude a shareholder proposal from its proxy questioning its hiring practices and discrimination against gays and lesbians.
Investors sued the SEC for its interpretation of ordinary business, but ultimately lost when a federal appeals court in New York last year said the SEC had the power to alter its interpretations without changing its rules.
