When the proxy system works: SEC allows critical dividend proposal at GE


As I pen this article on this day of remembering/honoring Martin Luther King Jr., an icon of activism, I am elated to share great news for General Electric (GE) and all public equity shareholders alike: the Securities and Exchange Commission has informally ruled that GE cannot omit my proposal from its 2012 Annual Meeting and proxy statement. In short, my proposal involves allowing shareholders to vote whether GE’s board should reexamine the company’s dividend policy. This may not sound terribly important in light of MLK’s efforts and accomplishments, but believe me, in light of the injustice that has taken place at GE (and at other listed companies), the SEC’s ruling is significant. Allow me to explain some of the procedure and reasoning behind my proposal, as well as GE’s reaction thus far.

First, know that seemingly most shareholder proposals face company “no-action” requests with the SEC (presumably no matter how closely written per SEC guidelines), and proposals involving dividends have been particularly difficult to pass to given restrictions on what can be said about them in terms of resolution. Any shareholder that has submitted a proposal knows well how stringent the guidelines can be. In addition, some companies have gone to lengths to deny that their own shareholders are in fact shareholders; in some cases, shareholders have been barred from annual meetings or worse. The United States Proxy Exchange has documented such cases. My proposal submission faced first-round scrutiny in early November by GE’s corporate legal staff that found I had exceeded the 500-word maximum when they counted dollar and percent symbols, and when they counted hyphenated words as more than one word. This is one tactic that a company can use to try and thwart a proposal.

My revised proposal went on to face scrutiny from the law office of Gibson Dunn. This is the point where proposals go through an especially tight wringer at who knows what cost in billable hours. In the supporting statement for my proposal I explained that GE:

“… sadly and embarrassingly has a poor track record of significant corporate value destruction via stock repurchases, and demonstrates a dubious willingness to continue such treacherous buybacks while hoarding cash and placing shareholder returns via dividends at a lesser priority.”

Gibson Dunn calls this and my evidence a “tirade.” I call it the truth. It is unequivocal that shareholder value has been destroyed thanks to share buybacks: between 2005 – 2007 GE repurchased $25 billion-plus of stock when it traded between $32 – $42, and it repurchased another $1.25B in 2008, before it was forced to raise capital by issuing $12 billion of common stock and sold $3 billion of costly preferred stock to Berkshire Hathaway (BRK.A) (BRK.B), both were sold in the low-$20s. GE would go on to trade as low as $5.72/share, but not a single share was bought back below $10; its repurchase plan was under suspension. GE eventually began to buyback shares again from Sept. 2010, but I have found that through Jun. 2011, its $2.7B+ spent to reduce share count by 90 million equates to spending around $30/share, which at times was double GE’s market price.

GE 5yr chart

I have more findings that show CEO Jeff Immelt and CFO Keith Sherin are saying one thing (e.g. desire to reduce share count) but support another (e.g. buybacks) that is not in the best interest of shareholders — this wouldn’t be the first time of misleading shareholders (hyperlink to pending lawsuit). Dubiously timed and sized option grants post-’08 crisis exacerbate the situation (see here; though they are proving tax beneficial). GE had approved dry powder of around $12B when it began repurchasing shares again in 2010, but trying to go from 10.6 billion shares outstanding to 10.0 billion is not going to be possible unless it diverts more capital to buybacks. Meantime, GE has continued to call its dividend a priority, but token penny-per-share type hikes suggest otherwise, especially as cash mounts on the balance sheet by the billions to total around over $91B at the end of June (the reference point for my proposal given its submission due date). GE is now awaiting approval, which it expects to receive this year, to begin paying dividends again from GE Capital to the parent company. This would be the ultimate catalyst for dividends to be hiked much more meaningfully; it would be the perfect opportunity for a meaningful special dividend.

In my resolution, I mention both the disapproval by shareholders of GE’s record of value-destruction by share buybacks, and GE’s own executives’ acknowledgement of the company’s “financial strength.” Accordingly, I ask that the Board of Directors “reexamine the company’s dividend policy and consider special dividends as a means of returning excess cash to shareholders.” Somehow, Gibson Dunn decided to go with an argument that I had not presented a proposal for action; it tried to argue that I was seeking a referendum that shareowners were dissatisfied. Mysteriously, it also argued that my proposal relates to GE’s ordinary business operations — in effect, with some circular logic Gibson Dunn appears to be saying that I did present a proposal, but that it deals with ordinary business, and thus is excludable per SEC guidelines. I am happy to report that although informal, the SEC ruled last week that it is unable to concur in GE’s (Gibson Dunn’s) view that GE may exclude my proposal on either basis. Most interesting and important of all is the SEC staff’s view on dividends:

The Commission has found that dividend matters do not involve “ordinary” business matters because such matters are extremely important to most security holders and involve significant economic and policy considerations. (Citation) […] this proposal, which does not concern the form, method or procedure for dividend payments (and which does not relate to a specific amount of dividends (Citation)), involves a matter of policy outside the realm of GE’s ordinary business operations.” (NB: emphasis added)

I italicized “should” at the outset of this article (excerpt: “… my proposal involves allowing shareholders to vote whether GE’s board should reexamine the company’s dividend policy”) because unlike some countries (for instance, Japan, believe it or not), a shareholder resolution in the U.S. is not binding, but rather is advisory or precatory. Let’s make no mistake, however. As the SEC staff stated, and as I often hear from all types of GE shareholders, dividends are “extremely important.” Most alarming to GE should be the hits its retirees have taken. Longer term GE shareholders have suffered not insignificant reductions in principal value and dividend income (GE’s dividend was cut by 68% in ’09 and remains nearly 50% below its ’08-level). Tens and now hundreds of millions of annual options grants and the obligatory share repurchases come at a high cost, taking away from the many to benefit the few. Thankfully the SEC saw through GE/Gibson Dunn’s false claims against my proposal.

I will be posting updates when appropriate. Suffice to say shareholders deserve a vote on dividend policy. My hope is that beside GE, shareholders of other companies will take notice and be able to refer to my proposal as a model and for inspiration. Meantime, readers can review my past articles about GE (here), and remember GE reports Q4 and full year earnings on Friday, January 20th.