Discussion Case: Whole Foods Adopts Egalitarian Compensation PoliciesBut Fights Back on Board Elections

In 2015, Whole Foods Markets surprised many by abruptly canceling its annual shareholders meeting, saying it needed time to respond to new rules on proxy access. This rather odd term referred to a simple concept: the right of shareholders to nominate their own candidates for the board of directors. The upscale grocer, widely known for its socially and environmentally responsible practices, apparently opposed moves by its own shareholders to expand their democratic rights. The corporate governance director for CalPERS, Californias public pension fund, called the companys action a not-so-wholesome move.

In 2015, Whole Foods was the leading retailer of natural and organic foods in the United States and a perennial member of the 100 best companies to work for list. The grocer operated around 400 stores, with more than $600 billion in sales annually. It referred to itself as a mission-driven company and stated that its purpose was not only to generate profits but to create value for all of our major stakeholders. Whole Foods promoted healthy eating and was committed to local sourcing, sustainable farming and fishing, animal welfare, and community volunteerism. It operated several foundations that gave generously to support better health and nutrition in underserved communities.

Whole Foods compensation policies, by the standards of most U.S. firms, were radically egalitarian. The average annual salary at the company for full-time employees was around $40,000. The company had a policy of internal pay equity, committing to paying no one more than 19 times the average annual wage of its full-time employees (in 2014, the salary cap was a bit under $760,000). (Some top executives earned moreup to $3 million or sowhen stock awards were included.) The company refused to benchmark its top managers pay, saying that this had been a factor in the exponential growth in executive compensation that is common at other companies. Executive officers received the same health benefits as other full-time employees.

John Mackey, the companys cofounder and, in 2015, its co-CEO (a position he shared with Walter Robb), drew an annual salary of exactly $1. I have reached a place in my life where I no longer want to work for money, but simply for the joy of the work itself and to better answer the call to service that I feel so clearly in my own heart, the founder told employees in a 2006 letter. The company also made compensation data available to all employees. If youre trying to create a high-trust organization, an organization where people are all-for-one and one-for-all, you cant have secrets, Mackey said.

The issue that Whole Foods confronted in 2015proxy accesswas one that had burst on the corporate governance scene in the 2010s. In the United States, for many years the nominating committee of the board had nominated candidates for director; their names were then placed on the proxy ballot for a vote by shareholders. Normally, dissident shareholders did not have the right to nominate their own candidates, so boards tended to fill vacancies with other like-minded individuals. This changed after 2011, when activist shareholders began filing shareholder resolutions demanding greater proxy access. In 2014, 17 such proposals were considered, garnering on average about a third of the vote.

James McRitchie, a shareholder activist and publisher of a corporate governance website, submitted such a proposal for a vote at Whole Foods 2015 shareholder meeting. Known as a three-and-three, McRitchies proposal would allow a group of shareholders owning at least 3 percent of the company for at least three years to nominate candidates for the board. (Of course, these individuals would have to receive a majority of shareholder votes to be elected, just like any nominee.) Whole Foods reacted by offering its own proposalthat would give proxy access to a single shareholder who had owned 9 percent of the companys stock for at least five yearsand asked the SEC to block McRitchies proposal on the grounds that it directly conflicted with the companys proposal. (The company later changed its proposal, saying that the shareholder would need to own just 5 percent of the companys stock.) The SEC initially agreed, but reversed itself after pressure from institutional shareholders, saying it needed to further study the issue.

In the meantime, many other companies simply loosened their own proxy access provisions without waiting for a fight with activist shareholders or a ruling from the SEC. Bank of America, General Electric, CF Industries, Yum Brands, and Prudential Insurance all voluntarily adopted three-and-three rulesa development that a representative of CalPERS called a sea change. Others in the business community objected, however. The Chamber of Commerce and the Business Roundtable, for example, warned that greater proxy access could give unions and other outside groups too much power.

Why did Whole Foods take such a strong stand against proxy access? The company declined to explain its position against greater shareholder rights, simply saying that it had a policy of not commenting on proxy-related matters. Some thought that the companys actions were inconsistent with its commitment to broad responsiveness to stakeholders. But others thought that Whole Foods was simply trying to protect its distinctive corporate culture from investors who might be single-mindedly focused on raising the companys share price.

Discussion Questions

1. If you owned shares of stock in Whole Foods, would you support McRitchies 3-and-3 proposal or the companys 5-and-5 proposal ? Why?
2. How do Whole Foods executive compensation practices compare with those of other firms, as described in this chapter? Do you think Whole Foods approach is better or worse than that of most other companies, and why?
3. Some companies described in the case have voluntarily supported greater proxy access for shareholders. What do you think has motivated them to do so?
4. Several business support groups mentioned in the case have opposed greater proxy access for shareholders. What do you think has motivated them to do so?
5. Do you believe Whole Foods opposition to expanded proxy access is consistent or inconsistent with other aspects of the companys culture and policies?