The first ESG proxy contest under the SEC’s “universal proxy” rules

Here’s news from Michael Levin of “The Activist Investor“:

For over a year, we and others speculated ESG proponents would pounce on universal proxy card (UPC) as a way to escalate efforts to exert influence over companies. Since UPC became mandatory in September 2022, we have seen exactly zero proxy contests from the usual ESG shareholders.

Until last week. The Strategic Organizing Center (SOC) notified Starbucks (SBUX) of its intent to nominate three director candidates to stand for election at the 2024 AGM. In addition to the first ESG-based proxy contest under UPC, it could become quite a show overall. We think the more likely outcome is a quiet settlement between SOC and SBUX sometime in the next few months.

Who is SOC?

A long-time coalition of three unions: SEIU, CWA, and UFW. Based on the available information, SEIU will drive this, as it led most of the union organizing efforts at SBUX in the past few years. The initial SEC filing lists only SEIU leadership, too.

SOC is related to but not the same as SOC Investment Group. SOC Investment Group represents pension funds affiliated with the SOC unions. It researches subjects of interest to the unions and pension funds, and advocates for them with companies. It submits the occasional shareholder proposal, too.

SBUX previously announced the AGM for March 13, 2024. SOC filed its notice around November 21, just before the nomination window closed on November 24. SOC owns the SBUX shares that allows them to nominate directors, 161.627478 of them to be precise, or about $16,000 worth.

Why SBUX?

Even with the obvious long-time conflict between SEIU and SBUX, there are some curious elements to this specific situation that make it especially interesting.

As far as we know, SOC has not run a proxy contest before. And, last week it not only made its first SBUX SEC filing, it made its first SEC filing ever at any company. It evidently has no experience with shareholder proposals, much less proxy contests. SOC Investment Group has not filed anything at SBUX, either. So, SOC decided to escalate its organizing strategy to the SBUX BoD without any of the usual intermediate steps. We rather suspect SOC surprised SBUX with this, and possibly didn’t even attempt to negotiate a BoD seat before sending its notice.

In the past several years, SBUX saw but a single labor-related shareholder proposal. Trillium Asset Management, a skilled ESG proponent, and three others jointly filed one at this year’s AGM. It demanded SBUX assess compliance with its stated goal of allowing its workers to organize. The proposal won 52% of the votes at the AGM, after ISS and Glass Lewis supported it. SBUX indicated it would release the assessment by October 1, 2023, then postponed it to Q4 of FY 2024.

The result for the Trillium proposal contrasts with largely positive shareholder sentiment for the past few years. Since 2014, SBUX saw at most a couple of precatory shareholder proposals per year. None won a majority of votes – one achieved 44%, while most languished in the single digits. This year, shareholders voted on five proposals, including Trillium’s. One on CEO succession saw 21% support, while the other three received less than 5%.

Shareholders also support the BoD. At the 2023 AGM, the director with the least support received 84% of votes cast. Two directors received 99%.

SOC Starts Well

For a newcomer to proxy contests, SOC has put together a promising effort. It intends to nominate three people for the eight-person SBUX BoD: Maria Echaveste, Josh Gotbaum, and Wilma Libman. All are prominent attorneys and staunch Democrats with extensive experience in labor relations and a few public company boards among them. They connect well with SOC goals for SBUX: “help the Company address its significant human capital issues” arising out of recent union organizing efforts.

SOC also assembled a high-level advisory team: Schulte, Roth & Zabel (attorney), Okapi Partners (proxy solicitor), and Longacre Square (public relations). All three routinely work with the biggest, baddest activists around, and none come cheap. While Schulte represents only activists, Okapi and LS work for both activists and companies. They apparently think the benefit of a novel proxy contest for unions opposing SBUX outweighs how doing so affects their profile among companies.

UPC Questions

After one year of experience with proxy contests under UPC, we have some comments and questions.

Why three BoD nominees? That’s fairly significant for an eight-person BoD. It also presumes substantial shareholder support, with SOC expecting well over one-third of the shares to vote for its nominees based on the voting math of UPC. Lately shareholders mostly voted for SBUX and against activists, so more than one-third might be ambitious.

Who will SOC target? Activists succeeded under UPC by comparing and contrasting their nominees with specific incumbents. SOC should guide shareholders to voting for its three nominees, and against three current SBUX directors. We see no obvious weak directors, though.

Above all, UPC allows SBUX shareholders to express their preferences with more precision than before. While they might not support all three nominees, they might consider one, which of course UPC makes easy. The material chance that shareholders will support at least one SOC nominee suggests to us that SOC and SBUX will settle this before the AGM.

A Settlement Makes Sense

SBUX shares have done well lately, so investors might hesitate to change the BoD. And, they have a history of supporting management. On the other hand, investors might consider voting for perhaps one of the three SOC nominees, after all of the recent conflict between management and its employees. SOC has a plausible thesis for its effort, between the need to improve labor relations and the success of the Trillium proposal that SBUX has yet to fulfill.

SBUX doesn’t want to become the first company to lose a proxy contest to an ESG proponent, or the next to become a meme stock based on a BoD election, of all things. Retail shareholders hold one-quarter of SBUX shares, enough to matter if the situation becomes contentious and SEIU turns the proxy contest into a social media spectacle.

With a relatively small BoD for a prominent company, SBUX has room to expand the BoD by one person and add an SOC nominee. SOC wisely recruited three candidates that would likely be acceptable had the Nominating Committee found them. SBUX certainly will improve its reputation with union organizers by appointing someone that SEIU suggests.

They might do so relatively soon, too, before SOC spends seriously on its advisors, SBUX becomes too distracted by what should be a routine BoD election, and both make each other and each others’ nominees look really bad.

Now that would be something: SEIU designates a SBUX director, all because of shrewd moves under UPC. Activists of all stripes would take notice then.