ANOTHER UPDATE: The First ESG Proxy Contest Under UPC

Programming note: We said we would write about something besides DIS-Trian-Blackwells and SBUX-SOC, and here we are again. This should be the last one, though, the parties in both of these have disclosed most of the interesting stuff and now they just need to go after each other and their candidates and solicit proxies.

We know somewhat more about this fascinating, novel proxy contest, as SBUX and SOC filed definitive proxy statements.

SBUX scheduled the virtual-only AGM for March 13, as it originally disclosed (below). The record date remains January 5, so SOC cannot urge people to buy and vote shares. With six or so weeks to go, SBUX seems to feel good about its chances.

SOC identifies the three SBUX incumbents it seeks to replace with its nominees. SOC picked the three principal BoD committee chairs, each with decent credentials and experience on the SBUX BoD. Persuading shareholders to replace them with the SOC nominees will take some doing.

SBUX and SOC also disclosed their estimated costs for this enterprise. Together they plan to spend about $25 million, most of it from SBUX.

SOC identifies SBUX incumbents to oppose

SOC 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. We eagerly await how SOC shows its three nominees improve on these three incumbents.

$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.

UPDATE: The First ESG Proxy Contest Under UPC

We first looked at the SOC proxy contest at SBUX a couple of months ago, when SOC disclosed its initial plans and nominees (below). Very little happened publicly until last week, when both SBUX and SOC filed preliminary proxy statements. A close read reveals interesting details about what happened since we first learned about this contest, and how SBUX and SOC plan to pursue this.

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.

As before, we typically refrain from posting on individual activist situations unless they illustrate vividly one or another idea in activism. This one definitely does so, about the need to compare activist nominees to specific incumbents under universal proxy.

Since we last heard about this...

SBUX and SOC took the routine, necessary steps to get to this point. We learned SOC mostly surprised SBUX, as we surmised. 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.

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.

Aggressive SBUX Strategy and Tactics

Both SBUX and SOC reveal aspects of their plans in the latest filings. SBUX in particular has an aggressive approach.

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 not setting a date for the AGM. In fact, earlier it set an AGM date of March 13, and since then 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 that in its first preliminary proxy statement. With the record date passed, SBUX (and SOC) knows all of the shareholders to solicit. SOC can't urge retail investors to buy SBUX shares to support its nominees.

SBUX has time to figure out who supports it and SOC, and schedule the AGM accordingly. If SBUX looks like it has what it needs, it will schedule it sooner, before SOC has a chance to change some minds. If SBUX struggles to win that support, then it can schedule it later, and try to change minds itself.

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 (p. 39-41 of the SBUX preliminary proxy statement). 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.

Is SOC behind?

It has not identified the three incumbents that it plans to run against, an essential element to an election under universal proxy. Its preliminary proxy statement acknowledges three "Opposed Company Nominees", but leaves their names blank. Perhaps it waited until SBUX announced the three new directors, so SOC would have a complete view of the BoD. In any event, SOC must now contrast its three nominees with the three weakest incumbents, and guide shareholders to voting for its slate and against those three.

SOC did launch a nifty website with the usual features, including a concise case for change, nominee biographies, SEC filings, and news releases. We haven't seen any other social media efforts, though. 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.

SOC committed to spending a significant sum on the contest. While it has not yet disclosed its estimated proxy solicitation cost, it says its proxy solicitor (Okapi Partners) will have about 100 staff working on this. For comparison, in the Trian-DIS contest from 2023, Trian estimated it would spend $25 million with 200 Okapi staff.

A settlement looks unlikely right now, contrary to our earlier prediction and advice. 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. With an eight-person BoD, the voting math of universal proxy suggests winning three out of those eight was ambitious. Gaining all three out of eleven is more realistic, meaning SOC expects to win a little more than one-quarter of the vote. SBUX has made even 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.

Finally, 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. 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.