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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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2004 Proxy Season Review
Bruce Herbert, AIF and Larry Dohrs, Newground Social Investment
The 2003 proxy season was a watershed year in the way shareholders at large view proxy voting. The
2004 season consolidated this new perspective into a definable trend that embraces shareholder
activism as practiced by an increasingly powerful and assertive investor class. These investors are
energized by the ongoing reports of corporate scandal and abuse, which makes suspect any suggestion
that Enron, WorldCom and the like are anomalies or "bad apples," unrelated to mainstream corporate
life.
Last year, the previously distinct worlds of traditional institutional investors
and socially-concerned shareholders found common cause in efforts to bring control, transparency
and accountability to the nation's executive suites and boardrooms. This year, that cooperation
both widened and deepened, and evidence suggests that this unity of focus will continue to grow
over time. This is in part due to increasing indications that social and environmental issues
significantly impact financial performance, and that good corporate governance correlates with
improved environmental, social and financial performance.
More than 1,145 resolutions were
filed in 2004 - an increase of more than 40% over 2002. Resolutions were put forward by a range of
socially responsible mutual funds, including Calvert, Christian Brothers, Domini, MMA and Pax
World. They were filed by hundreds of faith-based institutional investors - most as members of the
Interfaith Center on Corporate Responsibility (ICCR). They were filed by a variety of public
interest groups affiliated with CERES (the Coalition for Environmentally Responsible Economies), by
foundations such as the Nathan Cummings Foundation, and by the large public pension funds of
California, Connecticut and New York.
Labor pension funds, including those of the New
York City Police and Fire Departments, are becoming much more active - in many cases providing a
bridge between traditional social investors and the large institutional funds. State pension and
health benefit funds are starting to see themselves as permanent investors - investors who need to
pay benefits to retirees on a perpetual, ongoing basis. As a result, they now ask companies in
their portfolios: "Are you operating so as to allow us to provide benefits to our beneficiaries in
perpetuity?" This long time horizon - 10, 20, 30 years out - is very different from a focus on the
next quarter's numbers. The nature of the questions asked and how funds are invested as a result
creates a heightened emphasis on sustainability.
Hot Topics in 2004
The Disney Corporation may have received the most public attention this year, as disappointed
shareholders voted in large numbers against the chairman, Michael Eisner. Though the issue at hand
was not critical per se to social or environmental advocates, it was nevertheless significant. It
helped the public and mainstream investors to understand that they have a seat at the boardroom
table and that all they have to do is to sit down and begin exercising their power. Whether or not
Mr. Eisner continues at the helm of Disney is unimportant in the big picture, but the highly public
process surrounding the contest at Disney catapulted the understanding that being active as
shareholders is the best way for investors to protect their interests.
Global
Warming and Climate Change
Global warming and climate change issues were among
the most hotly contested in the 2004 proxy season. Shareholders asked energy companies in
particular to provide comprehensive reports on their "carbon footprint," so as to understand each
company's impact on climate. Disclosure is the first step toward action. While this effort is
championed by some investors because it is critical for the environment, it is supported by others
- including major insurance companies - because the financial risks associated with climate change
have become increasingly apparent. Working together, these two blocks of shareholders achieved
significant votes this year, for example: Marathon Oil, where the climate change resolution
received a 24.8% vote. At ExxonMobil the tally was 21%, at Apache 37%. A similar proposal received
27% at American Electric Power, following which management agreed to undertake the reporting
requested by shareholders. This illustrates that at forward-thinking companies, progress can be
made without a majority shareholder vote.
At ExxonMobil, CEO Lee Raymond remained
combative toward shareholders concerned about global warming; brushing off questions as to how the
company treats the financial risks associated with climate change. Increasing investor interest in
undisclosed liabilities - such as those created by irresponsible environmental and social practices
- may force ExxonMobil to change its attitude. Investors argue that market theory requires
management transparency when accounting for assets and liabilities, otherwise the market cannot
accurately value companies and their shares.
An important new facet of the broad strategy
to address climate change issues was the call from a group of 13 pension funds (representing over
$800 billion), who lobbied the SEC in April asking for immediate clarification that climate change
is a material risk which must be addressed in mandatory disclosure filings. The group argues that
climate change may emerge as one of the most significant financial risks of our time. Companies
increasingly recognize that they may be held liable for refusing to provide investors with
financial data on climate change risks - and this fear of liability is changing behavior.
Equality
Key successes were seen in the field of gender equality, an
area where shareholder advocates have been active for years. At Fifth Third Bancorp's shareholder
meeting, 63% voted FOR a resolution that requested a company nondiscrimination policy. One month
later, management made the change. Similar resolutions at Dover Corporation, Goodyear and Smurfit
Stone Container were successfully withdrawn prior to the annual meeting when management agreed to
shareholder requests.
HIV/AIDS
Activists also succeeded in
efforts to increase corporate awareness of the HIV/AIDS pandemic. The Coca-Cola board of directors
took the nearly unheard of step of supporting (rather than opposing) a shareholder resolution
asking for a report on the company's response to the AIDS pandemic. 97% voted in support. Weeks
later, PepsiCo acceded to a similar request. Similar resolutions filed by ICCR members were
withdrawn at Ford, Johnson & Johnson and Eli Lilly due to successful negotiations.
Systemic Reform - Proxy Vote Disclosure & Board Nominations
While the
main focus remains on resolutions filed to address specific issues on a company-by-company basis,
critical work is being done by shareholder advocates to promote systemic reforms.
In
2003, a key rule was changed at the SEC that now requires mutual fund managers to disclose proxy
voting guidelines and actual votes to investors. The first mandatory reports are due August 31st
2004, and the rule change has already improved the way mutual fund managers vote. Previously,
managers felt unrestrained from currying favor with companies by voting against shareholder
proposals.
In 2004, an SEC proposal is still under consideration that would create
greater (but still highly conditioned) opportunities to nominate independent directors for
company's boards. Despite its many restrictions, the proposal has drawn fierce resistance from
corporate chiefs.
Other important issues to watch for in future years include disclosure
of corporate political contribution and lobbying costs, and more rigorous reporting of the
financial consequences of environmental and social liabilities.
More Work Lies
Ahead
Attack on Shareholder Free Speech
While
companies are generally seen as being more receptive to shareholder concerns (as illustrated by the
many resolutions successfully withdrawn in 2004), there are still significant gray clouds on the
horizon. Cintas Corporation filed a lawsuit against social investment leader Tim Smith of Walden
Asset Management for comments made while formally presenting a proposal at the 2003 annual meeting,
where Smith challenged the company's use of a notorious sweatshop manufacturing facility in Haiti.
Shareholder advocates feel this is a punitive tactic to suppress free speech at annual meetings -
despite the fact that these meetings are the only day each year that executives must face the
company's shareholders.
Executive (Over-) Compensation
Despite
a great deal of time and effort committed to the issue by shareholders and others, executive
compensation still spirals out of control. In a July 2004 study, the Corporate Library found that
executive compensation (at 1,400 companies surveyed) rose by 15% between 2002 and 2003. At S&P 500
companies, executive pay shot up more than 22%. Four CEOs (from Apple, Oracle, Yahoo and
Colgate-Palmolive) saw their pay packages rise by 1,000%. This contrasts with a wage rise of only
3-3.5% for the average American worker.
In Conclusion
In sum,
the 2004 proxy year consolidated prior shareholder gains. Traditional social investors (who pay
attention to environmental, worker rights and human rights issues), are learning to work with large
institutions that have traditionally focused on corporate governance issues (like board
independence and expensing of stock options). This alliance shows every sign of solidifying over
time, and savvy corporate managers recognize that shareholder concerns must be taken seriously and
dealt with sincerely.
As the social investment industry increasingly turns its attention
toward structural reforms and economic democracy, the goal of shareholder resolutions and proxy
votes will be to support the emergence of a more sustainable, just, and environmentally sound
economic system for all.
Article written by Bruce Herbert, AIF and Larry Dohrs
Newground Social Investment
http://www.newground.net
Additional resources
http://www.socialinvest.org
http://www.SocialFunds.com
http://www.InstitutionalShareowner.com
http://www.shareholderaction.org
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