Why Is Whole Foods Afraid of Its Shareholders?

Whole Foods is so terrified that shareholders might consider voting for someone other than the management-selected candidates for the board that they have taken the extreme and outrageous step of postponing their annual meeting.
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Whole Foods is so terrified that shareholders might consider voting for someone other than the management-selected candidates for the board that they have taken the extreme and outrageous step of postponing their annual meeting.

Here are the names of the people who are so afraid of their own investors that they cannot face a vote for an advisory proposal asking them to consider allowing shareholder nominees for the board.

The Whole Foods Board of Directors:
Dr. John B. Elstrott, John Mackey, Walter Robb, Gabrielle Greene-Sulzberger, Hass Hassan, Stephanie Kugelman, Jonathan A. Seiffer, Morris Siegel, Jonathan D. Sokoloff, Dr. Ralph Z. Sorenson, William A. (Kip) Tindell, III

New York Times columnist Gretchen Morgenson dubbed this move "ham-handed." I call it being a bully. Apparently, if they can't be 100 percent sure that the shareholders will have no alternative but to vote for the company-sponsored nominees, they will not let them vote at all.

It gets even more absurd.

No one is running against the company's own candidates for board positions this year. What has sent the company scurrying into ostrich mode is a non-binding proposal known as "proxy access." A shareholder named James McRitchie has asked the company to allow shareholders who together represent three percent of the stock to be allowed to submit candidates and have their names included on the proxy sent to all shareholders.

Many other shareholders, including the New York City pension funds, have filed similar proposals at other companies and they generally get substantial support, sometimes even majority votes in favor. But even if every one of the company's shareholders vote for the proxy access proposal, the company is not obligated to adopt proxy access.

If a majority support it and then the executives decide to adopt it, and then some day three percent of the stockholders, representing some $600 million of stock, get together and nominate director candidates, it would still have no effect unless they got more votes than the management candidates.

If more than 50 percent of the company's shareholders, representing $10 billion of stock, representing a broad sweep of long-term investors like pension funds, mutual funds and endowments, think that the management-nominated directors can be improved upon, then they should be replaced.

This is how scared they really are. Whole Foods, knowing that this proposal would be popular with its shareholders, originally tried to block it via the Securities and Exchange Commission, which initially ruled in their favor, then reversed to allow the proposal to go forward. This was too much for Whole Foods, which has now postponed the shareholder meeting entirely. Faced with some non-binding news they do not want to hear, their decision is not to have to hear it.

If Whole Foods has confidence in its board, why is it afraid to make that case to shareholders?

Whole Foods is not alone in overreacting to the idea of being asked to consider allowing the shareholders to nominate directors. The powerful Business Roundtable blocked an SEC rule that would have required all publicly traded companies to allow proxy access-style nominations, as directed by Congress following the financial meltdown. Now that investors are trying to raise the issue themselves, executives have no hesitation about spending the shareholders' money to make sure they never have to hear from them. They have encouraged their members to consider filing lawsuits against shareholders who file proxy access proposals.

Would a company sue a customer for raising concerns about the product? On the contrary. They welcome feedback and suggestions for improvement. Shareholders are customers of the company's stock. Executives and directors should encourage their engagement, not obstruct it.

Independent advisor Institutional Shareholder Services (where I worked from 1986-1991), has recommended that shareholders vote in favor of proxy access proposals like the one submitted by McRitchie and the BlackRock investment management firm and many other large institutional investors endorse them as well.

So it is disappointing that Vanguard has announced its support only for proxy access proposals that impose insurmountable thresholds to qualify for nominating candidates. Vanguard should recognize that their duty is not to corporations but to the individuals who entrust them with their savings. This is a common sense right that will only increase the value of the company's stock by demonstrating a commitment to making sure they have directors who are vitally and clearly committed to shareholder value.

As boxing champ Joe Louis said about Billy Conn, the executives and directors of Whole Foods can run, but they can't hide. The law requires them to reschedule the annual meeting within the next few months. If they do not want shareholders to submit their own nominees for the board, then give them better management-sponsored candidates, ones who know their job is to respond to shareholders, not to obstruct them.

No one is more committed to shareholder value than the people who put their money at risk. A strong, independent board has nothing to worry about from shareholders because it welcomes their engagement, recognizing that they are on the same side.

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