A Stitch in Haste

A basic premise of corporation law is that shareholders, in exchange for the protection of limited liability in the case of bankruptcy, also have limited input regarding how the business is actually run. Shareholder power is for most part limited to voting for directors (who in turn appoint the officers), and ratifying certain major events, such as a merger, share repurchase, name change, and so on. All decisions regarding the day-to-day operations of the firm are supposed to be at the sole discretion of the officers and not the shareholders.

So when activist shareholders attempt to interfere in the operations of the firm via proxy contests, the firm is legally permitted to refuse to put the initiatives on the shareholder ballot. This is not at all unusual or controversial. See SEC Rule 14a-8, Question 9, Part 7.

What is unusual is for the SEC to intervene in these disputes in a patently improper way:

Ford Motor Co. shareholders will decide whether to amend the company's equal employment policy to exclude sexual orientation after the U.S. Securities and Exchange Commission denied Ford's request to keep the issue off its proxy statement, the automaker said Tuesday.

Ford's policy now says the company won't discriminate on the basis of sexual orientation, gender, religion and other factors. Shareholder Robert Hurley of Alton, Ill., has submitted a proposal recommending Ford change its policy to exclude any reference to sexual interests, activities or orientation.

Ford asked the SEC to exclude the proposal from its proxy statement... But in a recent decision, the SEC said Ford can't exclude the proposal. The SEC said a rule that allows companies to reject proposals that deal with "ordinary business operations" doesn't apply to this case.

Oh really? Crafting your hiring, firing and recruitment policies does not fall under "ordinary business operations"? Go figure.

There is really no debate here. Ford is 100% right and the SEC is 100% wrong. The SEC is supposed to be an independent agency insulated from petty politics. But one has to wonder who pressured whom to craft an unprecedented and nonsensical interpretation of such a straightforward rule. Some things just aren't up for a shareholder vote, no matter how much the bigots' sensibilities are offended. The SEC should know better.

As for the outcome of the bigot proxy proposal, it will of course fail by an embarrassing margin. Members of the Ford family control something like 20% of Ford stock, and institutional investors certainly won't be swayed by this Klaxon of bigotry.

Ford has enough problems without bigot policies imposed on it by bigot shareholders. How sad that the SEC has so improperly chosen to compound the company's woes with this distraction.

(Cross-posted at Spectrum Bloggers.)

UPDATE: Similar shenanigans against Kraft Foods.

POST SCRIPT: The vote was 95% against the proposal.