Shareholders of the global megabanks JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley have just been silenced. Previously, the shareholders attempted to exert their longstanding ability to present proposals to be voted on at the banks' annual shareholder meetings, in accordance with Section 14(a) of the Securities Exchange Act of 1934. But late last night, the Securities and Exchange Commission (SEC) updated its website, revealing that the agency had capitulated to those four megabanks' demands to block the shareholders' proposals from being voted on.
The shareholder proposals, submitted in late 2012 by the AFL-CIO Reserve Fund, AFSCME Employee Pension Plan, Trillium Asset Management and the Change to Win Investment Group, asked each bank's board of directors to appoint an independent committee to explore extraordinary transactions that could enhance stockholder value. One potential transaction that each of the shareholder proposals asked the banks to consider was separating the banks' businesses -- in other words, breaking up the banks.
Several commentators, including former FDIC Chair Sheila Bair and banking analyst Mike Mayo, have suggested that our nation's largest banks do not deliver the kind of value for their shareholders that they would if they were converted into multiple smaller institutions. As Mayo wrote earlier this year, "The largest banks have underperformed not only on returns but also on efficiency, revenue, risk, transparency, reputation and stock price ... When we ask, a large majority of investors indicate that breakups -- divestitures, downsizings and de-mergers -- would be good for stock prices."
But the banks made a concerted effort to prevent their shareholders from having a spirited debate on the merits of that exact issue. The banks' "no-action requests" sought assurances from the SEC that it would not recommend enforcement actions against them if they excluded the proposals from their proxy materials. The banks' requests plainly show that they were willing to make every conceivable argument -- and some inconceivable ones -- as to why the proposals should not be given up or down votes.
For example, the megabanks argued that the proposals should be excluded because they deal with matters related to each company's ordinary business operations. That's right, the banks argued that matters concerning the radical restructuring of their operations would be an "ordinary business decision" and therefore outside shareholders' purview. JP Morgan Chase made that argument despite the fact that such a restructuring plan would be clearly subject to shareholder approval under the controlling law in Delaware.
The megabanks also argued that the proposals were "so vague and indefinite that shareholders in voting on it would not be able to determine with any reasonable certainty what actions are required." Perhaps the banks presume their shareholders are fools and won't understand what the proposals seek to do. More likely, the banks fear that their shareholders would fully understand what the proposals seek to do -- and support their passage.
It is alarming that, despite the banks' imaginative but flimsy arguments, the SEC, without much explanation, sided with the banks, advising each institution in identical language that, "There appears to be some basis for your view that [insert megabank here] may exclude the proposal ... as vague and indefinite." The agency then punted on all of the other arguments that the banks offered, finding it unnecessary to address alternative bases for excluding the proposals from their proxy materials.
Shareholders' role in reforming corporations -- especially megabanks -- has garnered increased attention recently. For example, Bair offered this little bit of advice to shareholders last year: "So, shareholders, get ye to the boards that represent you and ask them loudly about whether your company would be worth more in easier-to-understand pieces. The public-policy benefits of smaller, simpler banks are clear. It may be in the enlightened self-interest of shareholders as well."
The megabanks should welcome the opportunity to explain to their investors why they benefit from their megabank size and structure. And the SEC should permit investors an opportunity to let their voices be heard.