In the shareholder voting at Chipotle Mexican Grill Inc. on May 11, a shareholder proposal trounced a management proposal on the same issue: proxy access. The management proposal received 23.6% of the vote in favor, while the shareholder proposal received 57.3%, according to a company filing with the Securities and Exchange Commission.
Having two proposals on the same issue at the same time in the proxy statement would never have happened without a ruling by the SEC last fall that gave shareholders the capability.
In fact, one way corporate managements have been able to prevent the inclusion of shareholder proposals was to introduce their own proposal on the same subject.
Management proposals often provided for less-favorable shareholder rights. Even so, management could often count on a majority of shareholders to support the company-sponsored proposal because it advanced — at least to some margin — shareholder rights. Better to have a glass half full than empty.
Shareholders no longer have to settle for second-class proposals.
That new shareholder capability should make corporate boards of directors more responsive to shareholders. In the case of proxy access, it should compel corporate boards to be less entrenched and change the director nominees more frequently to bring more transparency and accountability.
In the case of Chipotle, health issues at its restaurants and management handling of them during the past year raised shareholder concern about board oversight of risk management, giving more weight to a need for proxy access, which enables shareholders to use corporate proxy materials to nominate directors.
The votes at Chipotle in favor of the shareholder proposal put more pressure on its board of directors to adopt the winning proposal, which is non-binding.
Because of the SEC decision Oct. 23, shareholders now have a new capability for competing with corporate boards and management on proxy proposals. That SEC decision made it tougher for companies to exclude shareholder proposals that appear to compete with management proposals.
In a staff legal bulletin, the division reversed a position the SEC took in December 2014. At that time, it issued a no-action letter enabling Whole Foods Market Inc. to exclude a shareholder proposal on proxy access on the grounds the company planned to offer its own such proposal.
In doing so, it enabled Whole Foods to exclude a shareholder proposal whose terms were more favorable to shareholders than the proposal the company introduced.
In the SEC interpretation to Whole Foods, Evan S. Jacobson, special counsel in the SEC division, wrote, “There appears to be some basis for your view that Whole Foods may exclude” a shareholder proxy access proposal because the company plans to sponsors its own such proposal, which would have tougher thresholds for shareholders to nominate directors. Two proposals would present “conflicting decisions for the stockholders and would create the potential for inconsistent and ambiguous results.”
The new interpretation last October stated: “We will not ... view a shareholder proposal as directly conflicting with a management proposal if a reasonable shareholder, although possibly preferring one proposal over the other, could logically vote for both.”
The SEC division made the right call in reversing its earlier decision. Companies should let shareholders, through their votes, decide which proposal should prevail.