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The rising tide of shareholder activism

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Courtesy of AHC Group

In this article, IRRC's Meg Voorhes examines the recent growth in shareholder advocacy, as evidenced by both the number and range of shareholder resolutions proposed at corporate AGMs, with a particular focus on how institutional investors are dealing with proposals that ask companies to respond to climate change issues or report on sustainability.

By any measure, shareholder activism has grown dramatically in recent years. More institutional investors are accepting the view — once limited largely to religious investors and firms that specialize in socially responsible investing — that their portfolio companies' handling of environmental, labor, and human rights issues can help or hurt shareholder value. While many segments of the institutional investor community continue routinely to vote against shareholder proposals on 'social issues,' a growing number of pension funds and investment managers appear to be giving them greater deliberation and support.

A GROWING TREND

The Investor Responsibility Research Center has tracked the shareholder proposals filed at U.S. companies since 1973. From 1973 through 2004, more than 15,000 shareholder proposals on a wide range of social responsibility and governance subjects were filed at U.S. firms. And remarkably, of that total — which spans 32 years — approximately one-quarter were filed just in the last four calendar years, or 2001 through 2004.

The rise in shareholder advocacy can also be measured in the increase in proposals coming to votes. While about 8,600 shareholder proposals came to votes over this 32-year period, more than 2,000 were voted from 2001 through 2004. Even more telling, fewer than 800 of the proposals tracked by IRRC over these three decades won majority support, but more than half of these majority votes occurred just in the last four years.

In fact, 2004 set records set records for the number of shareholder proposals filed (1,166) and voted on (628) at U.S. companies, and for the proportion that received majority votes (138, or 22 percent). And the 2005 annual meeting season is shaping up to be just as momentous.

Much of the surge in shareholder activism — and virtually all of the majority votes — are explained by shareholder interest in corporate governance in the wake of Enron's collapse and other corporate debacles. In the last few years, many more resolutions have been filed on executive pay, expensing stock options, increasing the independence of the board and its key committees, preserving the integrity of the audit, and ending classified boards. But there has also been a steady and corresponding increase in the numbers of proposals filed on environmental, labor, and other social issues. The 200 social issues proposals voted on in 2004 is the highest of any year tracked by IRRC save 1991 — the high-water mark of anti-apartheid shareholder activism, when 210 proposals came to votes, many dealing with corporate operations in South Africa, then under a white minority dictatorship.

THE ROLE OF INSTITUTIONAL INVESTORS

The proxy voting guidelines of institutional investors — even those who don't themselves file shareholder proposals — seem to be changing to allow for more nuanced views of corporate social responsibility issues, as demonstrated by the voting guidelines selected by the institutional investors who rely on IRRC to vote their proxies. While these investors have distinct, and differing, voting philosophies, they also exhibit a surprising degree of consensus on a few key social issues. Taft-Hartley Funds, religious investors and investment managers of all stripes indicate that they support requests to their portfolio companies to report on their human rights policies, to expand their fair employment policies to protect gay and lesbian employees, and to implement and monitor core labor standards in their global operations.

SUSTAINABILITY REPORTING PROPOSALS

The challenges posed by climate change have helped to spark public interest in 'sustainable development' — defined as, 'meeting the needs of the present without compromising the ability of future generations to meet their own needs' — as a goal for both countries and corporations. Advocates of sustainability assert that companies that focus on and manage sustainability issues will improve their long-term shareholder value, and they encourage companies to report on their economic, social and environmental performance.

The Global Reporting Initiative, launched in 1997 by Ceres and the United Nations Environmental Program, sets out to address the biggest challenge to advocates of sustainability reporting, namely, to provide a reporting format flexible enough for companies of all sizes in diverse industries to use, yet consistent enough to provide useful and comparative data to shareholders.

OUTLOOK

Over the past three decades, shareholder activism on corporate social responsibility has exerted increasing influence on the portfolio screening approaches, research departments, and proxy voting guidelines of a broad range of institutional investors. Activists and investors of many stripes have learned to use the shareholder resolution as a tool to attract executive attention to an issue, often without reaching a proxy vote. Shareholder campaign issues can emerge quickly and grow rapidly — often staying on the agenda for years. Executives and Directors would be well advised to keep current with trends in shareholder activism, and to educate themselves regarding how best to respond to campaigns.

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