Question :

Explain whether shareholders should have a right to vote directly on a company's employment policies. Would this ability open the door to shareholders "micro-managing" daily operations, or is it justifiable given how such policies shape the public's perception of the company (and thus influence its profitability)? Review and comment on at least two classmates' responses.

500 word max

Case: Shareholder Rights at Cracker Barrel

Cracker Barrel Old Country Stores, Inc., based in Lebanon, Tennessee, operated a chain of restaurants and gift shops, mostly in the South and Midwest, that featured southern-style cooking. In 1991, many Cracker Barrel shareholders, along with the companys employees and members of the public, were outraged when at least 11 employees were dismissed for their sexual orientation. The g.ay and lesbian employees ran afoul of a new company policy that Cracker Barrel would no longer employ individuals whose sexual preferences fail to demonstrate normal heterosexual values or whose lifestyle was contrary to traditional American values. The fired employees had no legal protection since discrimination laws do not cover sexual orientation. The public could only boycott the restaurants by staying away, which many did. However, the outraged shareholders had a power that everyone else lacked: They were the owners of Cracker Barrel, and they could exercise their rights as owners to bring about changeor at least they thought they could.⁹⁶⁰, ⁹⁶¹, ⁹⁶², ⁹⁶³, ⁹⁶⁴, ⁹⁶⁵, ⁹⁶⁶

Cracker Barrel: Reading Deeper

The Shareholder Resolution

The $22 billion New York City Employees Retirement System, known as NYCERS, which owned 121,000 shares of Cracker Barrel stock worth around $4.5 million, proposed a resolution to be voted on at the 1992 annual meeting. NYCERs shareholder resolution was that the two words sexual orientation be added to the companys equal employment policy and that the company take steps to ensure compliance with the amended policy. The legal basis of NYCERs action was Rule 14a-8 of the 1934 Securities Exchange Act, which permits shareholders to propose resolutions to be included in the companys proxy materials that are submitted to shareholders for a vote as part of an annual meeting. At the time, the right to propose a resolution was accorded to any shareholder holding stock worth $1,000; this amount has since been raised to $2,000.

However, the shareholders were not allowed to vote on NYCERs proposed resolution. Rule 14a-8 also permits a company to refuse to submit a proposed resolution to a shareholder vote under several conditions, one being that the resolution deals with the ordinary business operations of the company. The management of Cracker Barrel judged that this shareholder resolution dealt with ordinary business operations and, thus, could legally be withheld from the companys proxy materials. A company that rejects a proposed resolution is required to notify the Securities and Exchange Commission (SEC) of the action. The SEC agreed with the judgment of the Cracker Barrel management and issued a no-action letter affirming managements decision.

This decision by the SEC constituted a significant shift of position and created a storm of protest. In 1976, the SEC interpreted ordinary business operations in such a way that a resolution could be rejected only if it involved business matters mundane in nature and did not involve any substantial policy or other considerations. Between 1976 and 1992, the SEC ruled that a number of resolutions dealing with equal employment opportunity had to be submitted to the shareholders because diversity was not a mundane matter and it involved a substantial policy given the importance of a diverse workforce for a companys competitiveness. Using the same reasoning, the SEC ruled in 1990 that AT&T was required to submit for a shareholder vote a resolution by a white supremacist group that asked AT&T to abandon its entire affirmative action program. The SECs 1992 Cracker Barrel ruling meant that shareholders had no right to vote on any resolution dealing with a companys employment policies, even when some shareholders believed that the policy, like Cracker Barrels policy decision not to hire gays or lesbians, was morally objectionable. If shareholders are the owners of a company, do they not have the right to force a vote and make their voice heard? Some people consider the right to vote on important issues a matter of shareholder democracy.

Supporters of the SECs Cracker Barrel ruling note that the shareholders have already elected the board of directors, which, in turn, selects the management team. If shareholders disapprove of the way in which the board and management are running a company, then they should attempt to vote them out. In the meantime, shareholders should leave the top executives free to run a company as they see fit and not interfere in day-to-day operations. Indeed, boards of directors typically involve themselves only in the selection of management and the overall strategy of the company and leave all other matters to the management team. However, directors are usually nominated by a committee of the board, and federal and state law does not, in general, give shareholders any right to nominate candidates of their own. Usually, the shareholders only power is to withhold votes from a slate presented to them by the current board. In response to demands for greater shareholder democracy, the SEC announced plans in 2003 to examine whether shareholders should have a greater voice in the nomination of directors. By the end of 2007, though, no changes had been made.

Limiting Shareholder Voice

Shareholder activists tend to be state and union pension funds, religious organizations, and other social action groups that use the shareholder resolution process to advance their own causes. For example, in 1971, the Episcopal Church proposed a resolution that General Motors cease operations in South Africa in protest against the countrys racial apartheid policy. During the Vietnam War, shareholder resolutions were proposed by antiwar activists to force Dow Chemical Company to stop manufacturing napalm. Typically, shareholder resolutions included in proxy materials are defeated by large margins. However, the aim of activist shareholders is usually not to affect corporate behavior but to effect larger social change by increasing public awareness of issues. Even when such activism is socially beneficial, though, critics charge that shareholder resolutions are a distraction for corporations and that social change ought to be brought about through the political process, not by means of shareholder resolutions. Some argue that people who are citizens in a democratic state do not need shareholder democracy.

In 1998, the SEC reversed the Cracker Barrel ruling and reverted to a case-by-case application of the two-part 1976 test that asked whether the resolution involved business matters mundane in nature and did not involve any substantial policy or other considerations. In announcing the change, the SEC observed that since the Cracker Barrel ruling, the relative importance of certain social issues related to employment has re-emerged as a consistent topic of widespread public debate. As a result of this reversal, the power of shareholders to vote on matters that concern them was increased.