The First ESG Proxy Contest Under UPC

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. For over a year after UPC became mandatory in September 2022, we saw exactly zero proxy contests from the usual ESG shareholders.

Until now. In November 2023, 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 originally thought the more likely outcome was a quiet settlement between SOC and SBUX. Since then, SOC and SBUX have escalated matters, and it looks like shareholders will decide at the AGM in March.

SBUX has an edge for now, with messages and efforts that will likely appeal to institutional investors. Yet, SOC has a credible project afoot and with the right strategy could win one or maybe two out of the three BoD seats its seeks.

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.

Last fall, SBUX 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, 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 before at SBUX, either. So, SOC decided to escalate its organizing strategy to the SBUX BoD without any of the usual intermediate steps. Based on the proxy filings from both parties, SOC surprised SBUX with this, and didn’t even attempt to negotiate a BoD seat before sending its notice. SOC requested the BoD nominee questionnaire in early November and submitted its notice by the November 22 deadline, where SBUX learned “for the first time” of the contest. After a proper books and records demand, SBUX sent a shareholder list.

Then, SBUX put SOC and its nominees through the typical, futile charade of considering the candidates for appointment to the BoD. All three met with SBUX directors, ostensibly to interview for what we know now were three BoD vacancies. SBUX determined “none of the SOC Group’s nominees possessed the mix of necessary experience, skills, qualifications, and other attributes” for the SBUX BoD. Instead, SBUX appointed three new directors its Nominating Committee recruited, expanding the BoD from eight to eleven people. We could have predicted SOC (like many others) might mistake an election for a job interview.

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 last 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. It has since published it.

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. Last 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 put together a promising effort. It will nominate three people for the eleven-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 (more below). 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.

Aggressive SBUX Strategy and Tactics

SBUX will run a virtual AGM, as it has done since 2021. This of course allows it to monitor participation closely, limit Q&A, and deal only with electronic votes, nothing in-person.

SBUX also set a record date of January 5, while at the time not setting a date for the AGM. After it announced an AGM date of March 13, its preliminary proxy filing did not have a date. It evidently decided to leave itself flexibility in the exact timing. Many companies set a record date that passed by the time it distributes definitive proxy materials, many fewer do so in the first preliminary proxy statement. With the record date passed, SBUX (and SOC) knows all the shareholders to solicit. SOC can’t urge retail investors to buy SBUX shares to support its nominees.

SBUX gave itself time to figure out who supports it and SOC and schedule the AGM accordingly. If SBUX looked like it had what it needs, it would schedule it sooner, before SOC had a chance to change some minds. If SBUX struggled to win that support, then it would schedule it later, and try to change minds itself. SBUX did schedule the AGM for March 13, as originally planned. With six or so weeks to go, SBUX seems to feel good about its chances.

SBUX also has a head start in soliciting shareholders. SBUX discloses it contacted 35 shareholders, representing almost half of outstanding shares, to talk about labor relations and corp gov. It met with 30 of them, representing over 40% of outstanding shares. It makes a detailed, credible case for progress on these issues. It’s almost certainly not enough progress to satisfy SOC and some investors. It may meet the needs of enough shareholders that, with other BoD and corp gov changes, SBUX will win sufficient votes for the incumbents.

SOC got behind and caught up

SOC took a while to identify the three incumbents that it plans to run against, an essential element to an election under universal proxy. Its preliminary proxy statement acknowledged three “Opposed Company Nominees” and left their names blank. Perhaps it waited until SBUX announced three new directors, in addition to the eight incumbents in place when it announced the contest in November, so SOC would have a complete view of the BoD.

SOC finally identified the three current directors. It seeks to replace three BoD committee chairs:

• Ritch Allison – Compensation
• Andy Campion – Audit
• Jorgen Vig Knudstorp – Nominating and Governance.

All are former CEOs and CFOs who have served on the SBUX BoD for 5-7 years. While we prefer directors with different credentials, institutional investors like this kind of experience and expertise. SOC must now contrast its three nominees with them and guide shareholders to voting for its slate and against those three. We eagerly await how SOC shows its three nominees improve on these three incumbents.

SOC did launch a nifty website with the usual features, including a concise case for change, nominee biographies, SEC filings, and news releases. We’ve seen only limited social media efforts. Success will depend on reaching smaller institutions and retail investors, ones that agree with its labor relations ideas for the company. SOC must help these shareholders navigate the universal proxy card and cast proper votes for its nominees.

$25 million

SBUX estimates it will spend $21.9 million on the proxy contest, while SOC estimates it will spend $3 million.

SBUX expects to spend $2.5 million plus expenses on proxy solicitation (Innisfree), with 150 staff involved. It has already spent $5.7 million, so another $16 million or so to go.

SOC expects to spend $300,000 plus expenses on proxy solicitation (Okapi), with 100 staff involved. It has already spent $1.2 million. While not $5,300, it’s far less than activists have spent on proxy contests of a similar scale at big companies.

Interestingly, in the Trian-DIS proxy contest, Okapi also will solicit proxies for Trian and Innisfree do so for DIS. There must be some efficiencies here somewhere.

BoD Mechanics

We wonder, why three BoD nominees? That’s huge for an eight-person BoD, and significant for an eleven-person BoD. It presumes substantial shareholder support, with SOC expecting one-third or more 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.

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 might support at least one SOC nominee suggested to us that SOC and SBUX would settle this before the AGM.

A Settlement Made 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 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.

SBUX wouldn’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.

When SOC first announced this in November 2023, SBUX had room to expand the eight-person 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 would improve its reputation with union organizers by appointing someone that SEIU suggests.

A settlement looks unlikely right now. They had ample opportunity to do that in the past couple of months. SBUX appears to have sufficient confidence in its new BoD and its contacts with shareholders that it does not worry about SOC.

SOC might moderate its expectations and look for one or maybe two BoD seats. SBUX has made that voting result less likely, after its energetic shareholder outreach and clever AGM maneuvers. At this point SOC could persuade enough shareholders that its one best nominee belongs on a BoD of eleven members.

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.