Shareholder Advocacy 2003:A Great Leap Forward

By Conrad MacKerron

Shareholder advocacy exploded in 2003 with a dizzying series of historic events and broken records likely to change the landscape on which advocacy is played for years to come. Corporate governance scandals pushed angry shareholders to file a record number of resolutions. For the first time ever a social resolution received a majority vote. Federal regulators, following up on new governance laws aimed at restoring trust in corporate management, forced mutual funds and investment advisors to disclose their proxy voting records. Further, regulators are considering changing proxy rules to allow for genuine contested elections for corporate directors to replace a process now controlled by management.

I. Voting Highlights

Shareholder anger over massive losses to their portfolios related to corporate malfeasance resulted in a record 1,082 resolutions filed this year as of the end of June – two thirds of which deal with corporate governance. This year “investors stood up to be counted using their voice and vote to press corporations to live up to best practices on corporate governance and to be responsible leaders in the areas of corporate, social and environmental responsibility,” said Tim Smith, President of the Social Investment Forum and Senior Vice President at Walden Asset Management.

About half the governance resolutions (400) were filed by labor pension funds. A record 130 resolutions received more than 50% support from shareholders so far. At least 25 companies received majority votes in support of expensing stock options; nine companies had majority votes favoring submission of executive severance packages to shareholder vote.

A resolution filed by Walden Asset Management asking for annual election of directors got an astounding 80.5% vote at Avon and 63% at Gillette. A third resolution on this issue at Stanley Works co-filed by Calvert got 55%. “Shareholders see a clear connection between stronger governance and improved corporate responsibility, on the one hand, and better financial performance and enhanced shareowner value on the other,” said Barbara Krumsiek, President and CEO of Calvert.

Social Issue Leaders
A resolution to bar sexual orientation discrimination at Cracker Barrel Old Country Stores’ parent company CBRL Group got a resounding 58% vote at the company’s annual meeting. It was the highest shareowner vote ever on a social policy resolution and the first one to receive a majority vote, according to Patrick Doherty of the New York City Pension Funds, filer of the resolution. The company’s board then voted unanimously to amend its policy to include protection against sexual orientation discrimination.

For the first time, social issue resolutions posted vote averages in excess of 15% in four separate issue areas: board diversity (26%), sustainability reporting (25%), diversity (25%) and climate change (17%), according to Meg Voorhes, director of the Social Issues Service at the Investor Responsibility Research Center.

Calvert got strong showings on the board diversity issue at three companies: Gentex, 38%, Danaher, 28% and Grant Prideco at 26%. In an unusual development, a proposal by the New York City pension funds to J.C. Penney on sexual orientation non-discrimination was endorsed by management and received 93% support. A similar resolution filed at Dover Corp. by Walden got 42%; and another New York City resolution on non-discrimination at ExxonMobil got 27%.

The strength of the sustainability reporting resolutions was surprising because this was only the second year in which they had been filed. The resolutions, ask companies to discuss how their operations ensure economic, social and environmental sustainability in the areas in which they operate. A second-year resolution co-filed at Cooper Industries by ICCR and Domini got 44%; A Trillium resolution on this topic at YUM! Brands (KFC, Pizza Hut, Taco Bell) got 39%.

Global warming-related resolutions received strong support at several companies. A resolution calling for a report on renewable energy alternatives at ChevronTexaco got 32% support, the highest vote in this category. A closely watched vote at ExxonMobil on the same issue got 21% support, up slightly from last year. A new resolution at the oil giant asking for a report on global climate change risk got 22%.

II. Focus on Global Warming
A shareholder coalition led by the Interfaith Center on Corporate Responsibility (ICCR) and CERES achieved impressive votes at oil companies and electric utilities on global warming and climate change issues. The 2003 global warming shareholder campaign focused on the heaviest carbon dioxide emitting sectors: electric power, transportation, oil and gas, and manufacturing. CERES and ICCR members filed 31 resolutions with 28 companies (23 U.S. and five Canadian).

An unusually strong body of scientific evidence of global warming threats and insurance industry risk estimates form a solid business case for investors. A key element in the high vote results this year was the recommendation by Institutional Shareholder Services, a leading proxy advisory firm, that shareholders support the resolutions.

Also crucial to these successful votes was growing support from public pension funds led by the New York City Funds and the Connecticut Retirement Plans and Trust Funds. Connecticut became the first public pension fund to serve as a primary filer of a climate change resolution when they filed a resolution with American Electric Power last year. New York State Comptroller Alan Hevesi and Vermont Treasurer Jeb Spaulding also supported the resolutions. This group of state and city treasurers and comptrollers represents approximately $190 billion in assets.

Sister Pat Daly, executive director of the Tri-State Coalition for Responsible Investing, lead filer of the risk resolution, said investors had a banner year on climate-related resolutions and the ExxonMobil vote was a high point in that process. “We made a major effort to attract the support of institutional investors who could be made to appreciate the very real hidden risks associated with companies that refuse to reckon with the consequences of their contributions to global warming. The ExxonMobil vote makes it official that climate-related risks are now a mainstream concern shared by mainstream investors,” she said.

Strong double-digit showings were also achieved at three utility companies with resolutions that asked for reports on reducing greenhouse gas emissions (American Electric Power 26%, Southern Co. 24%, and TXU Corp. 23%). On the heels of those votes, CERES released a report from a joint dialogue with several energy companies with approximately $55 billion in annual revenues asserting that climate change is a serious environmental and financial threat and asking government to act to cap emissions. But they still must confront the problem that “financial and electricity markets do not reward, and in some cases punish, proactive efforts that anticipate environmental issues such as climate change.” They asked for the government to enact a national mandatory market-based climate change program to limit greenhouse gas emissions and to create certainty for both electric utilities and investors. It was the first time that companies such as Wisconsin Energy and PPL Corp. had endorsed emission caps.

Pat Daly was also at the forefront of an agreement brokered with Ford Motor Co. In exchange for a commitment by Ford to address the contribution of its product fleet to greenhouse gas emissions and to help frame new policy alternatives to promote greater fuel efficiency, shareholders withdrew a global warming resolution at the U.S. auto g
iant in May. In an unprecedented move, Ford decided to publish the proposal and their response for shareholder review even after the resolution had been withdrawn. Daly cautioned that the victory with Ford was only a first step, however, saying that “what will prove most important is that Ford follows through with a substantive commitment to reduce the total greenhouse gas emissions of their fleet.

III. Other Success Stories

Environmental Justice
Shareholder activists chalked up a promising environmental justice success story this year at Xcel Energy. For the past two years an investor group led by As You Sow, the Evangelical Lutheran Church and the General Board of Pensions of the United Methodist Church has been assisting the Pimicikamak Cree Nation (PCN) in dialogue with Xcel, the fourth largest U.S. public utility. Xcel gets 4% of its energy from the Canadian utility Manitoba Hydro, which has caused devastating ecological social impacts on Cree land from its hydropower projects. In 1977 Manitoba Hydro agreed to address the adverse impacts of its dams on affected peoples such as the PCN but never followed through. As Manitoba Hydro’s largest customer, Xcel has been criticized by political and religious leaders and by human rights and environmental organizations for its role in contributing to the destruction of indigenous communities.

After two years of shareholder dialogue and resolutions (distinguished by large scale shareholder solicitation and media campaigns), grassroots pressure, and litigation – the Manitoba government unveiled an action plan in December 2002 to implement key parts of the 1977 agreement. Shareholder pressure led Xcel’s CEO and senior management to visit the PCN on their native lands and develop a dialogue with PCN and other impacted tribes. Significantly, Xcel has agreed to monitor and report back to shareholders on the actions taken by Manitoba Hydro to implement the 2002 action plan. Furthermore, the shareholder-company dialogue has expanded to cover other related issues of indigenous rights, renewable energy, environmental impacts, and labor standards, and to consider a new Board committee on corporate responsibility. Encouraged by Xcel’s responsiveness, all 2003 resolutions were withdrawn by the shareholders. Shareholder proponents were further encouraged by these comments from PCN Chief John Miswagon: “I wish to thank you from the bottom of my heart – While we waited 25 years for this first sign of justice, we know we might have had to wait many more years if people like you had not become involved to support us – You have brought hope to my people.”

Computer Recycling
An initiative to encourage major computer companies to develop world-wide computer recycling and product recovery goals took a major leap forward earlier this year. Dell Computer agreed to set global take-back goals for its products by March 2004; Dell is the first U.S. computer company to make such a commitment. As You Sow, Calvert and Walden were the initial leaders of this effort, joined more recently by Green Century Funds, Pax World Funds, and ISIS Asset Management. While an estimated 40 million computers are discarded each year, only about 10% of those machines are recycled each year. The group is also challenging Apple, Hewlett-Packard and IBM to match Dell’s commitment.

IV. Looking Ahead
In July the SEC took the first step toward opening up proxy ballots to genuinely contested elections for board positions. At present, management controls all board nominees using a slate of uncontested candidates. SEC staff recommend that large shareholders be allowed to nominate directors, although a detailed proposal will not be made available until fall.

Mutual funds companies may adopt proxy voting guidelines and publish their voting records but there is no guarantee they will support more social issue resolutions than they do now. SRI activists may need to mount efforts to encourage the development of proxy voting policies that support social issues. Also, if shareholders of mainstream mutual funds do not vocally support the new policy, fund companies may well return to the SEC to seek repeal of the rule. Likewise, while open board elections would be a welcome advance, the new policy may open the door to large shareholders more interested in corporate takeover than good governance. SEC must ensure that the new rules guard against corporate raiders who would use their influence to pack boards with their cronies and effectively control companies without owning them.

Ironically, these new opportunities to strengthen the impact of social shareholder efforts and corporate governance occur as SRI firms’ capacities to capitalize on them are flat or shrinking. Few SRI firms have adequate staff to engage or lead more than a few dialogues. The sad truth is that shareholder efforts of for-profit SRI firms remain dwarfed by the strategic efforts of the non-profit religious powerhouse ICCR operating on a very modest budget. The Social Investment Forum’s Shareholder Action Network (SAN), a catalyst in moving Forum members on key issues, has been woefully under-funded since inception and largely supported by foundation grants. As foundations cut back due to the market downturn, SAN faced the prospect of shutting down this summer for lack of support at the time of greatest opportunity in the history of shareholder activism. At a recent board meeting, the SIF Board moved to protect SAN’s near-term existence but its long-term future is still in doubt. To fully take advantage of the opportunities presented by this year’s momentous changes, SRI firms need to seriously rethink their priorities and increase staffing to defend recent progress and greatly increase their ability to manage many new shareholder actions.

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