"And those of us who manage the public's dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day, because only then can we restore the vital trust between a people and their government.
***[t]his crisis has reminded us that without a watchful eye, the market can spin out of control. "
The new era of accountability and responsibility heralded by the inauguration of our new leader flags outstanding questions about the ongoing bank bailouts. An enormous amount of taxpayer money is currently being managed by private companies. The two companies that received the most money from the Troubled Assets Relief Program (TARP) are Bank of America and Citigroup. Together they have received nearly $100 billion in taxpayer assistance. With so few strings attached by the outgoing Bush administration, the responsibility for holding those who are managing these public funds accountable seems to have fallen by default upon the board of directors of those companies or their shareholders.
One effort to bring some accountability has been initiated by shareholder John Harrington of Harrington Investments. He has filed shareholder resolutions at both companies that would amend the corporate bylaws to establish a board level committee on US economic security. The role of such a committee would be to identify whether the company’s policies adequately support US economic interests, especially in light of the receipt of these billions of dollars in taxpayer funds.
Having received the funds with so few strings attached, the companies apparently do not want to start accounting for the return on American taxpayers' investment now. So the companies have filed massive No Action letter request with the Securities and Exchange Commission, asking the SEC to allow these companies to exclude the bylaw amendments from their 2009 proxy statements. (Company requests: Citigroup letter; Bank of America letter) As counsel to Harrington Investments I filed rebuttals to these letters on Monday of this week. (Proponent replies: Citigroup letter; Bank of America letter)
The companies make some remarkable assertions in their attempt to block these bylaw amendments from appearing on the corporate proxy. For instance, Bank of America, attempting to cast the resolution as “ordinary business” asserts audaciously that “a review of the corporation’s policies to determine their impact in the US Economic Security do not raise any significant policy issues to be contemplated by 14a-8(7).” While shareholders normally have the capacity to raise major policy issues with the Board of Directors through the shareholder resolution process, the company is essentially asserting that it is none of the shareholders’ business or interest whether the company’s expenditures of the TARP funds benefit the US economy. This is a remarkable assertion, given the impact of the company’s decision-making regarding the well-being of the US economy, whether it be the extent of mortgage foreclosures in the US, the impact on wages of US workers and other questions of investment in the US economy.
Both companies also assert in essence that Delaware law prohibits shareholders from amending the bylaws of the corporation to create a committee on a specific topic, because to do so would limiting the discretion of the Board of Directors to decide whether or not that is an appropriate topic for the board to address. This is an amazing and unprecedented suggestion for a limitation on the shareholders’ franchise. Neither company could cite any legal precedents that would bind the courts to find in favor of the companies on this point. As we argued in our letter, this is clearly an unsettled question of Delaware law, and as such, the companies have not met the burden of proof that would be needed for exclusion of the resolutions from the proxy statements.
Bank of America attempts to take the plain language of the resolution and imposes an aura of vagueness as another grounds for excluding the bylaw amendment. This stuff almost looks like it was written with tongue planted firmly in cheek but somehow it winds up in their opposition letter:
- The Proposal does not define "economy of the US." Does economy refer to an economic measure, such a gross domestic product or inflation? Should the Corporation be analyzing the Proposal in terms of macro or micro-economic indicators? Should regional or global economies be factored into the analysis? Do the stock markets or the Corporation's stock price factor into the economic analysis? Should the Corporation's policies impact" the long term health of the economy of Corporation focus on the trade deficit or measures that may balance the federal budget? The proposal leaves numerous unanswered questions for the proposed Board Committee, the Corporation and its stockholders.
- The Proposal's definition of "US Economic Security" also requires the proposed Board Committee to consider the "economic well-being of US citizens, as reflected in indicators such as levels of employment, wages, consumer installment debt and home ownership." While the proposed Board Committee can review these macro-economic items, it is unclear what the actions they are expected to take to shape corporate policy to support these economic indicators.
The question of the “vague and indefinite” exclusion is whether the shareholders would have enough of an idea about what they are voting on to make an informed choice to vote for or against the resolution. The resolution is quite clear that shareholders would know that they would be creating a committee on US economic security to examine policy issues relative to the impact of the company on the US economy; that the chairman of the board would appoint the members; and that the committee would have a fair amount of flexibility in defining the scope of its activities, but would also have some guidance in terms of the set of suggested issues to consider the possible inclusion. We argue that this is ample guidance for shareholders to know whether they want to vote in favor of the bylaw or not.
Here's hoping that the Securities and Exchange Commission staff, under its new leadership, recognizes the importance of this new day in America, and will support the shareholders' role in bringing accountability to US Economic Security for those in the private sector who are now "managing public funds".
- Sanford Lewis
[You can also listen to audio commentary on this topic by Investor John Harrington at Sea Change radio]
