Corporate Governance through Shareholder Proposals

-Regulations, Shareholders, Process, Cases and Consequences-

Institute of Global and Area Studies Center of Chongqing Technology and Business University

Jing Zhao, March 13, 2025

[1. SEC Regulations]

1.1 The Securities Exchange Act and the SEC

The Securities and Exchange Commission (SEC) is the U.S. government oversight agency responsible for regulating the securities markets and protecting investors. The Securities Exchange Act of 1934 established the SEC, mainly in response to the stock market crash of 1929 in the leadup to the Great Depression.美国证券交易委员会 (SEC) 是美国政府监督机构，负责监管证券市场和保护投资者。1934年《证券交易法》成立了 SEC，主要是为了应对大萧条前夕的1929年股市崩盘。

1.2 SEC rule §240.14a-8 Shareholder proposals[1]

This section addresses when a company must include a shareholder's proposal in its proxy statement and identify the proposal in its form of proxy when the company holds an annual or special meeting of shareholders. In summary, in order to have your shareholder proposal included on a company's proxy card, and included along with any supporting statement in its proxy statement, you must be eligible and follow certain procedures. Under a few specific circumstances, the company is permitted to exclude your proposal, but only after submitting its reasons to the Commission. We structured this section in a question-and-answer format so that it is easier to understand.本节涉及一家公司必须何时在其委托书中包含股东提案，以及该公司在举行年度股东大会或特别股东大会时在其委托书形式中指明该提案。概括来说，为了让你的股东提案被列入公司的委托卡，并与任何支持性声明一起列入其委托书，你必须符合资格并遵循一定的程序。在一些特定情况下，在该公司向委员会提交其理由之后允许该公司排除你的建议[2]。

[2. Who are the Shareholders submitting proposals?]

2.1 Large institutional shareholders such as mutual funds cannot submit proposals because they cannot represent the small investors of the funds on particular policy issues. They even cannot vote on some proposals.

2.2 Big individual shareholders (including private funds) usually fight for personal gains, such as seeking board seats, so they do not submit proposals. Only in one case, a big shareholder with about 5% shares used this method trying to replace the whole board.

2.3 Large public funds, such as the largest one CalPERS (California Public Employees' Retirement System), sometimes submit proposals too, but for other purposes, such as political gains of the managers or bosses, rather than corporate governance.

2.4 Some funds owned by unions, religious organizations (mostly, Catholic orders) and NPOs submit proposals in some particular subjects.

2.5 A few small individual shareholders (me included), persistently submitting purposeful proposals, are called gadflies. This lecture is mainly about our work.

[3.Process for small shareholders]

3.1 Select a particular company at least four-five years ago and purchase its stock (more than $4000, in case the market value going down half). Prepare to think the proposal contents when reading the company reports especially the proxy statements.

3.2 After holding the shares longer than 3 years and before the deadline of the next annual shareholders meeting (usually half year before the meeting), obtain a shares letter from the stock brokerage firm. The process starts here.

3.3 Submit the proposal to the company with the shares letter on the same day when receiving the letter.

3.4 Deal with the company’s legal department or the law firm hired by the company to exclude the proposal. Sometimes the company will allow the proposal to be voted at the annual meeting without a fight. Occasionally, the company is willing to accept partial policy of the proposal to ask the shareholder to withdraw the proposal. The mostly used “bases” by companies to exclude proposals are “macro-management of the business” and “ambiguity”.

3.5 Wait for the SEC’s decision 80 days before the annual meeting.

[4.Cases[3]]

4.1 Human rights proposals: this highly sensitive policy is directly connected to the Congress, the government and the general public, leading to a two-year long law suit at Delaware court.

4.2 CEO pay ratio proposals since ten years ago, finally leading nation-wide CEO pay ratios reduced in 2023. See the sample of proposal to Gilead Sciences 2025 annual meeting[4].

4.3 Board chairman independence: the case of Tesla 2018 annual meeting and later developments.

4.4 Board structure reform: learning from the trend in Europe the UK.

4.5 Board election reform.

[5. Consequences/巨大的社会功效与个体股东的代价]

5.1 Success and Significance

The role of the Archimedes lever/阿基米德杠杆

Three proposals I voluntarily withdrew partly because the Intel, Microsoft and Exxon Mobil improved corporate governance. One proposal withdrawal due to Nasdaq regulations.

5.2 No personal gain but human cost

"American Corporate enemy #1" John Chevedden has 1000+ proposals being voted. Because of his success and influence, companies sued Chevedden to keep his proposals off their proxies (2013).

James McRitchie, Shareholder Advocate & Corporate Governance, http://www.corpgov.net

[6. A proposal sample: will be voted at 2025 shareholders meeting on May 3]

Stockholder Proposal to Improve Executive Compensation Program

Resolved: stockholders recommend that Berkshire Hathaway (our Company) improve the executive compensation program to include the factor of the highest NEO’s pay ratio.

Supporting Statement

The Economic Policy Institute found that “from 1978–2023, top CEO compensation shot up 1,085%, compared with a 24% increase in a typical worker’s compensation.”[5] America’s ballooning executive compensation is not sustainable for the economy, and there is no rational methodology to decide the executive compensation, particularly because there is no consideration of the CEO pay ratio.  The increase of disparity of income has a direct negative impact on American social disorder. The CEO pay ratios of big Japanese and European companies are about the same level of the CEO pay ratios of big American companies in the late 1970s and early 1980s.

The American corporate boards and executives have become a class of oligarchy, as defined by Aristotle, according to his _Politics_. In this great classic, Aristotle demonstrated that in a stable community (polis), the ratio of the rich citizen’s land to the poor citizen’s land should not be over 5 to 1.  Our Company did not reveal the highest NEO’s pay ratio. This is against the spirit of Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act Item 402(u) of Regulation S-K which requires the CEO (the highest NEO) pay ratio disclosure.  Our Company’s highest NEO’s pay ratio for 2023 is 20,016,500 to 76,726 = 261 to 1 (Proxy Statement 2024).  The shareholders in JPMorgan Chase & Co., Intel, Netflix, Salesforce and other big companies rejected sky-high executive pay packages in 2022, 2023, and 2024.

Adam Smith said:  “Wealth, as Mr Hobbes says, is power.”  As a social contract, the American public gives the corporate board the power and trust to run the corporate business without the employee representation in the board; and the board is nominated and elected without any competition (the number of candidates is the same number of board’s seats).  To make the executive wealth abnormally far above the employees and the American people is to abuse the power and trust. 

Human nature has not changed so much since Aristotle.  The Company has the flexibility to reform the Compensation and Human Capital Committee to improve the executive compensation program, such as including the factor of the highest NEO’s pay ratio.

[1] https://www.sec.gov/divisions/corpfin/rule-14a-8.pdf

[2] 彭静蓝译，2024。

[3] Jing Zhao, Shareholder Proposals股东提案 2021-25-美国企业治理的范例与过程-, https://cpri.tripod.com/proposals21-25.pdf

[4] According to Forbes 2024 October-November , the 400 richest people in America are currently experiencing a "rollicking time" with a record combined wealth of $5.4 trillion, marking a near $1 trillion increase from the previous year; this includes a record number of individuals with over $100 billion in net worth.

[5]By Josh Bivens, Elise Gould, and Jori Kandra, September 19, 2024.