In Whole Foods Backlash, A Chance to Air Out Stagnant Board Rooms

Pale, male and stale is the way corporate boards are often described, meaning that the majority of board members are while, male and old.

There have been efforts to make board rooms more representative of the economies they serve. This has predominantly affected the age factor since virtually every enterprise recognizes the impact of technology and the need to get more digitally-savvy people in positions to influence strategy.

As a result, boards are getting younger, but the other demographic characteristics remain frustatingly stable.

The issue is not simply one of equality or morality or justice, it is economic. The majority of customers being served by global corporations, especially those focused on consumer businesses are likely to be non-white and female.

As the following article explains, efforts to give shareholders a voice in board membership are often met with resistance by those who fear that their prerogatives will be constricted. Whole Foods, in particular, a company that needs, more than many others, the approval of consumers, should respect the opinions of its markets whether financial or commercial, but has resisted. This seems rather shortsighted. Unless one has better insights into the desires and needs of the company's market, it may lose its license to operate. JL

Gretchen Morgenson reports in the New York Times:

Allowing shareholders to nominate directors is common among European companies: investors owning only 1 percent of stock can do so there. But few companies in the United States want to give shareholders a role in board elections.

Large, institutional investors in the United States are generally a passive lot. In board elections and other corporate governance matters, they’re hesitant to speak up. All too often they vote their shares in lock step with management.

This passivity helps keep corporate executives pampered and boardrooms “pale, male and stale,” as the saying goes. It ill serves the investors whose assets these institutions oversee.

But every once in a while, a company does something to bestir investors. Today’s example is Whole Foods Market, the upscale grocery chain, which was ham-handed in its efforts to keep shareholders from voting on a perfectly reasonable proposal at its annual meeting this year.

Irate investors are now threatening to vote against its directors as well as against boards of other companies that mimicked Whole Foods’ action. On Feb. 13, Whole Foods postponed its March 10 annual meeting — a rare move — to give it time to decide how to proceed.

The fracas began late last year when Whole Foods tried to prevent shareholders from voting on a proposal to allow investors holding 3 percent of its shares for at least three years to nominate directors to its board.

Allowing shareholders to nominate directors is common among European companies: investors owning only 1 percent of stock can do so there.

But few companies in the United States want to give shareholders a role in board elections. And so last fall, Whole Foods asked the Securities and Exchange Commission to let it exclude the proposal from its proxy.

Whole Foods said it planned to ask shareholders to vote on a similar director nomination proposal from management; having two such proposals at the same meeting, it argued, would sow confusion.

But Whole Foods’ proposal required a longer holding period and a higher ownership threshold — 5 percent — for investors wishing to nominate directors.

As a result, some investors viewed the proposal as a cynical attempt by Whole Foods to appear to give shareholders a say in board elections while ensuring that they wouldn’t, through the use of a high hurdle.

The S.E.C. initially let Whole Foods exclude the 3 percent proposal. Then, after this column shined a light on the case on Jan. 4, the agency reversed itself, leaving Whole Foods and two dozen other companies that had put forward similar 5 percent proposals vulnerable to lawsuits if they kept the 3 percent versions off their ballots.

Investors’ ire has only increased as this drama has played out. Some large investment managers who did not previously weigh in on the issue began to speak out in support of proxy access with a 3 percent threshold.

At an S.E.C. meeting on Feb. 12, Zach Oleksiuk, a director at BlackRock who oversees its $4.65 trillion corporate governance group, said proxy access hurdles above 3 percent ownership would “result in a generally meaningless right for shareholders.” He also warned that BlackRock might vote against directors in cases “where it appears that boards are provided the opportunity to provide proxy access but do not appear to be acting in good faith to do so.”

Not all companies are battling their shareholders on this issue. General Electric changed its bylaws on Feb. 6 to allow investors holding a 3 percent stake for three years to nominate directors. “In talking with many of our share owners and as part of our annual governance review, we decided that implementing proxy access was appropriate at this time,” Seth Martin, a G.E. spokesman, said in a statement on Thursday.

Scott M. Stringer, the New York City comptroller, who has filed 3 percent proxy access proposals at 75 companies, praised G.E.’s move. “There are good actors and bad actors, and you’re starting to see who they are in this campaign,” he said in an interview on Thursday. “No one in their right mind would say our 3-and-3 proposal is radical or is going to upend corporate America.”

Opposing a 3 percent threshold certainly seems to go against the tide. When investors have voted on such proposals in recent years, an average of 55 percent of shares have been cast in support. In addition, the 3 percent level, held for three years, was deemed appropriate by the S.E.C. several years ago. Institutional Shareholder Services, the large proxy advisory firm, said last week that it favored proposals with ownership requirements no higher than 3 percent.

So it is odd indeed that the Vanguard Group, the $3 trillion mutual fund company, backs the same 5 percent threshold for proxy access that is preferred by companies and entrenched boards. Vanguard has never voted for a 3 percent proposal.

I asked Vanguard why it supports the kind of proxy access that will be difficult for most investors to meet.

“We believe that accessing the proxy is a significant, potentially disruptive step (even if justified) that should only be undertaken by some critical mass of shareholders, and we feel that 5 percent is that appropriate level,” Glenn Booraem, controller of Vanguard Funds, said in an email.

Vanguard’s concern about disorder in the boardroom is an argument made by many companies. But the fear is not borne out.

A CFA Institute report last year found that investors in countries allowing 3 percent of shareholders to nominate directors rarely wound up putting director candidates forward. Over the previous three years, the report said, those investors used proxy access to nominate board members fewer than 10 times a year, on average. Similar outcomes occur in Europe, with its 1 percent threshold.

But even only a handful of cases would help open up a broader debate between management and shareholders. Nell Minow, co-founder and director of GMI Ratings, a corporate governance ratings firm, challenged the idea that allowing 3 percent of shareholders to nominate directors would cause chaos.

“It can’t possibly be disruptive because the candidate would still have to get the support of a majority of shareholders,” she said. “Three-percent shareholders should be able to put a candidate on the ballot and let the company explain why its candidates are better.”

This is a battle about maintaining the status quo in corporate boardrooms. That system has worked well for insiders. Now it should work well for owners, too.