Coca-Cola and PepsiCo proxy clash with activist investor over sugar hints at future skirmishes


Harrington Investments is locked in a battle with PepsiCo and Coca-Cola that would require the soda giants to be more transparent about the impact their sugary drinks have on public health. Now, it just needs to hope that enough of its fellow shareholders agree.

The small California investment firm is asking shareholders to vote on a measure requiring PepsiCo and Coca-Cola to provide the information through an independent report, with a focus on beverages marketed to children and young consumers. 

“We have to put continued pressure and chip away at them and show that we’re not going away. This issue isn’t going away,” said Brianna Harrington, a research analyst and shareholder advocacy coordinator at Harrington Investments. “It’s only going to become more and more relevant. It’s only going to become more serious.” 

The ongoing fight with PepsiCo and Coca-Cola could offer a glimpse into future skirmishes down the road where shareholders seek more influence in corporate America on issues covering everything from politics and diversity to health and the environment. 

In the past, investor success has been largely relegated to topics such as board makeup or executive compensation. But there are signs environmental and social issues are garnering more attention during the annual proxy season — and gaining momentum that could one day lead to more of them winning a majority of shareholder support.  

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Harrington Investments, which focuses on socially responsible investing and shareholder rights, first introduced the sugar and public health proposal in Coca-Cola’s annual proxy in 2019. Emboldened by what it viewed as its success there, it introduced a similar resolution a year later at PepsiCo and McDonald’s. In 2020, 7% of Coca-Cola’s shareholders voted in favor of the measure, up from 4.9% in 2019. The resolution at PepsiCo received the backing of 11% of shareholders in 2020. 

“Increasing the voting threshold — that is critical just to show that there is growing support for this issue and shareholders are becoming increasingly more concerned about the issue, especially with the pandemic,” she said. 

Howard Berkenblit, a corporate and securities lawyer who oversees the capital-markets group at Sullivan & Worcester, said it’s not uncommon for a lot of these types of shareholder proposals to get low support.

“That’s why companies want to increase the thresholds [for a resolution] because it becomes … an annoyance and a hassle for the company that it has to put this in their proxy statement every year and to have to tally up the votes and explain themselves,” he said.

Soda and other sugary drinks and snacks are under fire as elevated consumption of the sweetener has become associated with a higher risk of conditions such as obesity, heart disease, diabetes and cancer. These and other ailments also have been tied to a greater likelihood of developing serious complications from COVID-19.

Harrington Investments has a small position in each beverage maker, owning 50 shares of PepsiCo and 100 shares of Coca-Cola, according to each company’s proxy. The stock was valued at $7,200 and $5,350, respectively, based on Friday’s price at the close of trading. The firm acknowledges it’s facing an uphill climb convincing otherwise reluctant companies to move forward.

“The companies may not be willing to take action, but we think it’s important for shareholders to have the opportunity to vote on this,” she said. “Shareholder pressure is critical.”

Her firm talked with the legal council from PepsiCo in January, but the New York-based company wasn’t “very eager to adopt this,” Harrington said. “They just wanted to discuss, essentially, the good things they had done and reiterate that it is unnecessary for them to do such a report.” The advisory firm hasn’t had any dialogue with Coca-Cola on the resolution this year.

‘A hassle for the company’

PepsiCo and Coca-Cola both recommended shareholders vote against Harrington’s resolution in their proxy. Owners of Coca-Cola’s stock are expected to vote on the measure during its virtual shareholders meeting on April 20, while PepsiCo’s will be up for a vote during its meeting on May 5.

Spokespersons with PepsiCo and Coca-Cola both declined to comment beyond the positions outlined by the companies in their recent shareholder proxies.

In its filing, PepsiCo’s board of directors said it remains “committed to responsibly marketing our foods and beverages, particularly to children.”

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PepsiCo added it “has set a robust and meaningful goal” for at least two-thirds of its global beverage portfolio to have 100 or fewer calories coming from added sugar per 12-ounce serving by 2025. The snack and beverage maker said it is working toward this goal by reformulating its beverages to reduce added sugar, offering low and no sugar products as well as smaller portion sizes, and introducing new offerings that lack or have less of the sweetener.

“Through our added sugar reduction effort, we believe we are not only addressing the concerns raised in this proposal but also are creating new opportunities for competitive advantage and future market growth,” PepsiCo said.

Coca-Cola’s board of directors said in its proxy that a report on sugar and public health already exists and an additional document “would not provide added value or information for our stakeholders.” The board added the proposal suggests Coca-Cola is not taking steps to help people moderate sugar consumption, a statement the company disagreed with.

The maker of Diet Coke, Sprite and Fanta noted it has accelerated the expansion of its beverage portfolio away from sugar into products like tea, dairy, water and coffee. The Atlanta company also has taken steps to reduce added sugar in its existing products. Coca-Cola cut the amount of the sweetener in nearly 1,000 beverages, including 600 collectively in 2018 and 2019, the company said. In 2019 alone, it claimed to have removed 350,000 tons of sugar on an annualized basis.

“The companies may not be willing to take action, but we think it’s important for shareholders to have the opportunity to vote on this. Shareholder pressure is critical.”

Brianna Harrington

Research analyst and shareholder advocacy coordinator, Harrington Investments

It’s not hard to see why companies often object to shareholder proposals. In addition to the unwanted exposure, they can be costly and time-consuming for companies to review as they require involvement by senior executives, the board of directors and lawyers.

Rick Hansen, previously the corporate secretary and assistant general counsel at General Motors, said in a letter to the Securities and Exchange Commission last year that the auto giant spends about 75 hours on each shareholder proposal it receives. While GM said it doesn’t attempt to assign a dollar value to each one, it agreed with commenters to the SEC in the past who estimated a cost of between $87,000 to $150,000.

Shareholder support on the upswing

There is growing evidence that momentum for so-called ESG resolutions — environmental, social and governance — are gaining support among shareholders who expect the companies they invest in to take a stand on the same issues that are important to them as investors and consumers. 

The number of shareholder proposals that went to a vote rose from 426 in 2019 to 434 in 2020 — the first increase in five years, according to data provided by Glass Lewis, a proxy advisory firm. The company noted while average investor support for shareholder resolutions declined to 31.7% in 2020 from 32.9% a year earlier, there was “a significant year-over-year increase” in the proportion of majority-supported environmental and social shareholder proposals. 

“It appears that the ground is shifting with respect to how investors are viewing shareholder proposals, and ESG-related issues, more broadly,” Glass Lewis wrote in a report reviewing the 2020 proxy season. “These proposals will continue to play an increasingly crucial role in investors’ engagement with companies on important environmental, social, and governance issues.”

Meg Jones-Monteiro, program director of health equity at the Interfaith Center on Corporate Responsibility, said consumers’ interest in being healthy and watching what they eat and drink has put pressure on companies to respond through their product mix — a shift that is being closely watched by investors who could lose money if their shares decline as sales fall or growth slows. This has naturally opened the door to companies to be more engaging on environmental and social issues, she said.

“The hope is if [consumer and investor pressure] converge, then you’re able to push companies in the right direction,” said Jones-Monteiro, whose coalition represents more than 300 global institutional investors. “The companies are also aware of this. They are recognizing that there is consumer demand, so they have to make some of these changes.”

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Shareholders could soon find it harder to submit resolutions for a vote at annual meetings. The U.S. Securities and Exchange Commission narrowly passed a rule last September that would require shareholders to hold $25,000 of stock for at least one year, up from $2,000 currently, in order to submit such proposals. For longer-term investors, that level will fall to $15,000 after at least two years and $2,000 after three years. The rule is expected to go into effect next proxy season. 

The SEC also is increasing the threshold each proposal must collect in order for it to be resubmitted for a vote to 5% the first year, 15% the second and 25% the third. Currently, the level for resubmission is 3%, 6% and 10%.

Berkenblit said while momentum is building, especially for environmental and social issues in annual proxies, proposals such as those dealing with “sugary drinks … are still lower on the radar of activist investors; they’re not part of a larger movement.”

He was doubtful Harrington would garner a “significant amount” of votes unless it spends more money or mounts an aggressive campaign. The more likely scenario, Berkenblit predicted, was the resolutions would collect the backing of 10% to 15% of shareholders.

Companies in many cases are reluctant to allow shareholder proposals, especially when it comes to an issue or an industry they believe they understand better than an outside shareholder, Berkenblit said. 

Companies want to manage their own affairs, and if you don’t like the way they’re doing things, vote against the board or vote with your feet and sell the stock,” he said, noting a stance taken by many companies.

When a shareholder requests adding a resolution to an annual meeting, companies have a few options. They can include it in the proxy — the path of least resistance — or reach a compromise with the shareholder to get the proposal withdrawn. In cases where these don’t occur, companies can apply for an exclusion from the SEC, or look for procedural hurdles to stop it, such as if the person hasn’t held the shares for long enough or didn’t get the proposal in on time to be included.

While many proposals never get approved, even ones that don’t succeed can serve as a starting point to build momentum for future action, either through other resolutions or action by the company itself. Harrington said her firm is hopeful it will receive enough support to stay on Coca-Cola and PepsiCo’s proxies for another year, but that it would “try a different approach” it has yet to define it if falls short.

“It would be a victory for us to continue to press the issue,” she said, noting the sugar and public health resolution is even more relevant than when Harrington Investments first proposed it in 2019. “Unless they receive this kind of pressure, they’re not going to probably want to make a substantial change or just do anything that we’re asking them in the resolution.”