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2150 Kittredge St. Suite 450
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www.asyousow.org
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Berkeley, CA 94704
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BUILDING A SAFE, JUST, AND SUSTAINABLE WORLD SINCE 1992
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Notice of Exempt Solicitation Pursuant to Rule 14a-103
Name of the Registrant: O’Reilly Automotive Inc. (ORLY)
Name of persons relying on exemption: As You Sow
Address of persons relying on exemption: 2150 Kittredge St. Suite 450, Berkeley, CA 94704
Written materials are submitted pursuant to Rule 14a-6(g)(1)
promulgated under the Securities Exchange Act of 1934. Submission is not required of this filer under the terms of the Rule,
but is made voluntarily in the interest of public disclosure and consideration of these important issues.
O’Reilly Automotive Inc. (ORLY)
Vote Yes: Item #6 – Material Human Capital Risks and Opportunities
Annual Meeting: May 14, 2020
CONTACT: Andrew Behar | abehar@asyousow.org
THE PROPOSAL
Shareholders request that the Board of Directors issue a report
to shareholders describing the company’s policies, performance, and improvement targets related to material human capital
risks and opportunities by 180 days after the 2020 Annual Meeting, at reasonable expense and excluding confidential information,
prepared in consideration of the metrics and guidelines set forth in the SASB Multiline and Specialty Retailers & Distributors
standard’s provisions on workforce diversity and inclusion and labor practices requirements.
RATIONALE
FOR A YES VOTE
Human capital management disclosures are garnering attention
in Congress1 and the SEC.2 Proponents are requesting human capital management disclosure that is financially
material to investor decision-making. This disclosure concerns both diversity and inclusion, and fair labor practices.
Diversity reporting is financially material for O’Reilly
Automotive’s investors. As the Sustainability Accounting Standards Board (SASB) notes,
_______________________
1 Dana Wilkie, “Workplace
May Be New Battleground for 2019-20 Congress,” November 7, 2018. Available at https://www.shrm.org/hr-today/news/hr-news/pages/2018-mid-term-election-workplace-legislation.aspx
2 Securities And Exchange
Commission 17 CFR 229, 239, and 240 [Release Nos. 33-10668; 34-86614; File No. S7-11-19] RIN 3235-AL78. Modernization of Regulation
S-K Items 101, 103, and 105. Available at https://www.sec.gov/rules/proposed/2019/33-10668.pdf
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[t]he Multiline and Specialty Retailers & Distributors
industry is consumer-facing and relies on the ability to communicate effectively with customers during the sales process and adapt
to changing consumer demands for products. As the populations of many developed markets undergo a massive demographic shift, including
increases in minority populations, companies in this industry can benefit from ensuring that their company culture and hiring and
promotion practices embrace the building of a diverse workforce at management- and junior-level positions. Retailers that respond
to this demographic shift and employ staff who will be able to recognize the needs of diverse populations may be better able to
capture demand from segments that have traditionally been overlooked, which can provide companies a competitive advantage. Furthermore,
such companies may benefit from decreased legal and regulatory risks, as well as improved reputational value.3
The SASB has created financially material disclosure standards
based on decision-useful, comparable metrics that allow investors to measure the impact of workforce diversity on operating performance
and financial condition. The metrics referenced by the SASB standard are “[p]ercentage of gender and racial/ethnic group
representation for (1) management and (2) all other employees,” and “[t]otal amount of monetary losses as a result
of legal proceedings associated with employment discrimination.”
The SASB has also opined on the financial materiality of labor
practices in the specialty retailer industry: “The low-average wages in the industry, which help companies maintain low prices
on products, may increase…labor-related risks. Since customers regularly interact directly with employees, companies can
face a decrease in market share and revenue from negative consumer sentiment due to public disagreement between companies and their
workers.”4 The metrics referenced by the SASB Labor Practices standard are “[a]verage hourly wage and percentage
of in-store employees earning minimum wage,” “[v]oluntary and involuntary turnover rate for in-store employees,”
and “[t]otal amount of monetary losses as a result of legal proceedings associated with labor law violations.”
The proposal requests nothing more than enhanced disclosure
concerning financially material human capital management metrics. Investors deserve to be informed of these metrics so that they
can appropriately evaluate the risks to our company from its human capital policies and procedures.
The Board’s opposition
to the Proposal centers on:
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·
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Its belief that the Company’s existing public disclosures adequately
describe its approach to, and the importance to the Company of, material human capital risks and opportunities, including
workforce diversity and inclusion and labor practices;
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·
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The Company’s commitment to workforce diversity and promoting
an inclusive environment, also its commitment to sound labor practices;
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·
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Its belief that the requested report would not provide sufficient
benefits to justify the required time and expense, particularly in light of the information already
available on the Company’s website or otherwise publicly available.
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_______________________
3 MULTILINE AND SPECIALTY RETAILERS & DISTRIBUTORS,
Sustainability Accounting Standard, Prepared by the Sustainability Accounting Standards Board, October 2018, p.16. Available
at https://www.sasb.org/wp-content/uploads/2018/11/Multiline_and_Specialty_Retailers_Distributors_Standard_2018.pdf
4 Id. At 13.
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The Company’s commitments to workforce diversity and sound
labor practices are appreciated and laudable. Unfortunately, O’Reilly’s extant reporting doesn’t satisfy the
needs of investors who require material disclosure to monitor the progress of its human capital management practices.
Material disclosure is the
basis of the Proposal, and the basis of federal securities law
Disclosure is the bedrock concept of federal securities law.
As the Supreme Court has stated, “‘[t]his Court “repeatedly has described the ‘fundamental purpose’
of the [1934 Securities Exchange] Act as implementing a ‘philosophy of full disclosure.’”5 The most
salient aspect in considering whether disclosures are helpful to investors is related to materiality, a concept which has been
considered “the cornerstone of the federal securities laws since Congress incorporated this principle in the first of these
laws in the 1930s.”6
The Supreme Court took up the definition of materiality in 1976’s
TSC Industries v. Northway.7 The Court arrived at a definition of materiality that is now widely known:
What the standard does contemplate is a showing of a substantial
likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the
reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have
been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.8
The Court’s exposition of materiality therefore highlighted
that the essential aspect of the materiality test was that a fact be decision-useful in the eyes of the reasonable investor. Decision-usefulness
necessarily implies comparability, as “…investment decisions essentially involve a choice between competing investment
alternatives.”9 Comparability is stifled, however, in the absence of metrics.
_______________________
5 Basic v.
Levinson, 485 U.S. 230 (1988).
6 Business Roundtable, The Materiality Standard for
Public Company Disclosure: Maintain What Works, 3 (Oct. 2015), http://businessroundtable.org/sites/default/files/reports/Materiality%20White%20Paper%20FINAL%2009-29-15.pdf
7 TSC Industries, Inc. v. Northway, Inc., 426
U.S. 438 (1976).
8 Id. at 449; See also Basic
v. Levinson, 485 U.S. 224, 232 (1988) (“We now expressly adopt the TSC Industries standard of materiality for
the § 10(b) and Rule 10b-5 context.”); Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2413
(2014) (reaffirming this standard of materiality).
9 40 Fed. Reg. 51,662 (Nov. 6, 1975)
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The Increasing Materiality
of Human Capital Disclosures
The SEC has recognized the increasing materiality of human capital
disclosures. Last year, the Commission issued a release proposing for public comment amendments to modernize the description of
business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K.10
Among the discussion topics proposed for “Narrative Description of Business,” Item 101(c), were proposals for the modernization
of human capital management disclosures. The Commission noted that, “[b]ecause human capital may represent an important resource
and driver of performance for certain companies, and as part of our efforts to modernize disclosure, we propose to amend Item 101(c)
to refocus registrants’ human capital resources disclosures.”11 One important source for input on this matter
is a report submitted by the SEC Investor Advisory Committee (IAC).12 The IAC found that, “[i]nstitutional and
retail investors have a pronounced interest in clear and comparable information about how firms approach [Human Capital
Management]. This interest is reflected in ongoing projects by the Sustainability Accounting Standards Board (SASB) (emphasis
added).”13 Among the IAC’s specific material disclosure recommendations were those concerning “the
stability of the workforce, including voluntary and involuntary turnover,” and “race/ethnicity and gender diversity
data.”14 SEC Chair Jay Clayton, in addressing the IAC with reference to Human Capital Management, re-iterated
that the Commission’s disclosure requirements must be rooted in the principles of materiality and comparability, and noted
that, “for human capital, I believe it is important that the metrics allow for period to period comparability
for the company (emphasis added).”15 Investors have a right to material and comparable Human Capital
Management disclosure metrics from O’Reilly Automotive.
The dearth of metrics in
sustainability disclosure has frustrated the reasonable investor
The SASB has produced a series of exhaustive analyses of U.S.
issuers’ financial disclosures.16 It found that while most issuers already address most SASB topics in their filings
(“73 percent of companies in the analysis reported on at least three-quarters of the sustainability topics included in their
industry standard”),17 “most sustainability disclosure consists of boilerplate language, which is largely
useless to investors: The most common form of disclosure across the majority of industries and topics was generic boilerplate language,
which is inadequate for investment decision-making.”18 Moreover, “[s]ustainability performance metrics are
rarely disclosed and lack comparability when they are: Companies used metrics—obviously more useful to investment analysis—in
around 29 percent of the cases in which a disclosure occurred. Importantly, even in these cases, the metrics were non-standardized
and therefore lacked comparability from one firm to the next.”19 The SASB sums up the issue of ESG disclosure
with the statement, “…by and large, companies continue to take a minimally compliant approach to sustainability disclosure.”20
_______________________
10 SECURITIES AND EXCHANGE
COMMISSION 17 CFR 229, 239, and 240 [Release Nos. 33-10668; 34-86614; File No. S7-11-19] RIN 3235-AL78. Modernization of Regulation
S-K Items 101, 103, and 105, https://www.sec.gov/rules/proposed/2019/33-10668.pdf
11 Id. At 48.
12 Recommendation of the Investor Advisory Committee,
Human Capital Management Disclosure, March 28, 2019. https://www.sec.gov/spotlight/investor-advisory-committee-2012/human-capital-disclosure-recommendation.pdf
13 Id. At 2.
14 Id. At 4.
15 Remarks for Telephone
Call with SEC Investor Advisory Committee Members, Chairman Jay Clayton, Feb. 6, 2019. Available at: https://www.sec.gov/news/public-statement/clayton-remarks-investor-advisory-committee-call-020619
16 Sustainability Accounting
Standards Board [SASB], State of Disclosure Report 2017, (2017) https://www.sasb.org/wp-content/uploads/2017/12/2017State-of-Disclosure-Report-web.pdf
17 Id. at 2.
18 Id.
19 Id.
20 Id. at 3.
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Investor frustration with the lack of metrics in sustainability
reporting is palpable: According to PwC, “[m]ore than nine out of ten investors (92%) say companies are not disclosing ESG
data in a way that makes it easy to compare to other companies...”21
Because the SASB’s standards are exclusively concerned
with comparable, material disclosures, they have attracted wide support from the investment community. The SASB Investor Advisory
Group, 48 global asset owners and asset managers, includes seven of the world’s ten largest investment advisers. Members
of this group “[b]elieve SASB’s approach—which is industry-specific and materiality-focused—will help provide
investors with relevant and decision-useful information,” and “[b]elieve that SASB standards can inform integration
of sustainability factors into investment and/or stewardship processes, such as corporate engagement and proxy voting.”22
Members of the SASB Investor Advisory Group and SASB Alliance, “a growing movement of organizations that believe standardized,
industry-specific, and materiality-based standards help companies and investors adapt to the market’s expectations,”
comprise among others pension funds of six states.23
Clearly, disclosure that is not grounded in metrics, or relies
on metrics that are not comparable, cannot meet the test of being decision-useful to the reasonable investor. If the Company’s
disclosure does not qualify as decision-useful in the eyes of a reasonable investor, then it does not meet the materiality standard
requested by the Proposal. This point was thrown into sharp relief when O’Reilly requested that the SEC allow the company
to exclude this proposal from the proxy on the basis that it had been substantially implemented.24 The SEC was unable
to concur with the exclusion.25
Material diversity proposals
are supported by investors
Shareholder resolutions regarding diversity, and those explicitly
referencing EEO-1 category percentage disclosures, receive increasing support over time. This table summarizes numbers of EEO-1
resolutions filed, and average level of shareholder support, that are available in the Ceres and Trillium databases by year since
2015:26
_______________________
21 PWC Governance
Insights Center, Investors, Corporates, and ESG: Bridging the Gap, 6 (Oct. 2016), https://www.pwc.com/us/en/governance-insights-center/publications/assets/investors-corporates-and-esg-bridging-the-gap.pdf.
22 https://www.sasb.org/investor-use/supporters/
23 https://www.sasb.org/alliance-membership/organizational-members/
24 RE: O’Reilly Automotive, Inc. Securities
Exchange Act of 1934 – Rule 14a-8 Exclusion of Shareholder Proposal of Terry L Miller, Debra Shank Miller, The Virginia Lopez
Family Trust and Yu & Ho Liv Tr Sep Prop. Available at https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2019/asyousowmillers122719-14a8-incoming.pdf
25 2019-2020 Shareholder Proposal No-Action Responses.
Available at https://www.sec.gov/divisions/corpfin/shareholder-proposals-2019-2020.pdf
26 https://www.ceres.org/resources/tools/climate-and-sustainability-shareholder-resolutions-database;
https://trilliuminvest.com/approach-to-sri/shareholder-proposals/?wpv-company=0&wpv-issue-type=workplace-diversity&wpv_filter_submit=Search
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Year
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Number of proposals filed
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Average support level (%)
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2015
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3
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24.4
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2016
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4
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27.0
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2017
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9
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32.4
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2018
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9
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40.6
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2019
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5
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42.6
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CONCLUSION
O’Reilly Automotive Company opposes issuing financially
material disclosure that provides decision-useful investor protection as it serves the public interest. We therefore urge a “Yes”
vote for Proposal 6 on the 2020 O’Reilly Automotive Proxy Statement.
--
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DISSEMINATING THE FOREGOING INFORMATION TO SHAREHOLDERS IS BEING BORNE ENTIRELY BY ONE OR MORE OF THE CO-FILERS. PROXY CARDS WILL
NOT BE ACCEPTED BY ANY CO-FILER. PLEASE DO NOT SEND YOUR PROXY TO ANY CO-FILER. TO VOTE YOUR PROXY, PLEASE FOLLOW THE INSTRUCTIONS
ON YOUR PROXY CARD.
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