Climate change and political giving top 2008 U.S. shareholder concerns

The investor community is one of GRI’s key stakeholder groups and the GRI Guidelines have an essential role to play in ensuring that there is consistent and reliable information on sustainability performance available to shareholders. For this reason GRI has invited, Heidi Welsh from the financial research provider RiskMetrics Group as a guest contributor for this month’s GRI newsletter. She explains how shareholders in the United States are trying to hold businesses to account on sustainability issues through shareholder activism during the current shareholder meeting season.

The 2008 spring shareholder meeting season in the United States is in full swing and investors have filed a record 392 proposals on social and environmental issues so far, up 12 percent from just five years ago.  Shareholder activism, a key component of investor pressure in the United States, has been on a roll for the last several years, with increasing levels of support for a growing number of proposals. 

65 climate change proposals, with a handful from global warming skeptics, account for the largest single category. These are closely followed by 57 resolutions that ask companies to report on political contributions and related issues.  The 35 requests for companies to implement equal employment opportunity policies, mostly relating to sexual orientation non-discrimination, are about tied for volume with the 34 proposals asking companies to review or report on sustainability. Human rights resolutions round out the list of the top five issues raised by American activist investors this year.  (See pie chart for an issue breakdown.)

Increasing levels of support

Measuring success in the shareholder resolution arena depends on where you sit, but it is hard to ignore dissidents when they attract support from 20 to 30 percent of shareholders.  Votes on shareholder proposals rarely receive a majority, so companies are usually able to say the proposals are soundly defeated.  Proponents in the past have been able to point to some relatively high votes, though; those above 10 percent were perceived as respectable and above 20 percent as high.  But between 2004 and 2007, the average level of support for environmental and social policy shareholder resolutions rose from just 9.8 percent to 15.3 percent.

With the mainstreaming of Environmental, Social and Governance (ESG) concerns and a growing sense that these non-financial risks can impact on the bottom line, visible fissures are appearing in what had been an edifice of fairly broad U.S. investor indifference. There is clear and growing interest in integrating ESG analysis into financial assessments, as recent developments attest.  And, on the shareholder proposal scene, a critical marker may be the recent big jump in the number of resolutions that earn more than 15 percent support.  Voting results for 2008 are not yet available, but between 2004 and 2007, the proportion of resolutions passing this threshold rose from just 7.4 percent to more than 32 percent—the highest on record representing more than a three-fold increase.  The issues that achieved the most support in 2007 appear in the accompanying table, along with their average support levels. 

Withdrawals

Another key measure of success—for both proponents interested in winning concessions from companies and from management eager to keep controversial public policy issues off the annual meeting agenda—is withdrawals.  Proponents generally withdraw resolutions after negotiations that often prompt more substantive corporate disclosure.  Proponents have withdrawn 25 percent to 30 percent of all proposals filed in the last five years.  

In 2008, sustainability reporting proposals have prompted the highest proportion of withdrawals.  Only six proposals from religious groups working with the Interfaith Center on Corporate Responsibility, social investment funds and pension funds now look likely to come to be voted on, while proponents have withdrawn resolutions at 22 firms. One noteworthy deal occurred at Dillard’s (see case study below), where the same proposal got 46.4 percent support last year. The shareholder resolution campaign results on this issue seem to underscore a growing willingness by U.S. firms to embrace more detailed reporting, although they still are generally behind their European counterparts in setting detailed sustainability policies and disclosing related performance data.  It remains to be seen how many of these 22 companies will use the GRI framework in their promised reports.

Religious and labor groups have withdrawn more than half of their proposals requesting companies to endorse principles for U.S. health care reform. Thirteen companies have agreed to take action on or adopt the principles, which promote the novel idea (for Americans) that health care should be universally available and affordable.  U.S. firms face increasing problems with competitiveness in the world economy, partially because they end up subsidizing the large number of people—18 percent of the population under age 65—who have no health insurance.   

Many proposals that ask companies to include sexual orientation and gender identity in their non-discrimination policies also have been withdrawn after agreements with 15 companies—about half the total proposed.  The New York City pension funds have led this campaign for several years; the city and fellow activists Calvert Asset Management and Trillium Asset Management helped win this year’s agreements.  The campaign was initiated because U.S. federal law does not protect employees against discrimination on the basis of sexual orientation.

Proponents have had fruitful negotiations in several other areas. Pension funds, religious groups and SRI funds working with the Investor Network on Climate Change have withdrawn 19 (just under 30 percent) of climate change proposals, usually because companies have agreed to increased reporting and disclosure of greenhouse gas emissions and related challenges.  Likewise, another broad coalition of investors coordinated by the Center for Political Accountability has withdrawn 16 proposals (28 percent of the total) on political contributions as companies generally have agreed to disclose their contributions.

EEO lawsuit

Despite widespread investor support for extending corporate non-discrimination policies to gay employees, on March 5 the SEC staff told Apache Corp., a Texas oil and gas company, that it could leave off the ballot New York City’s proposal that it adopt a sexual orientation non-discrimination policy.  On April 9, the city filed suit.  It holds more than $100 million of the company’s stock and is seeking a court order for Apache to send out supplementary proxy materials to investors with its proposal. Apache has also gone to court, trying to block any delay of its May 8 annual meeting.  At stake is a long-established precedent that sexual orientation non-discrimination proposals may appear on corporate ballots; an adverse ruling could cast a pall over this and other social policy shareholder resolutions in the future.  The city won a previous legal battle over the same issue at Cracker Barrel Old Country Stores in 1992.

Case Study

The U.S. department store chain, Dillard’s, in 2007 disclosed no data on environmental or social performance and the only detailed policy information it made available about labor rights issues in its supply chain was a ten-year-old policy.  The company is based in Little Rock, Arkansas, and owns a chain of about 325 stores in U.S. South and Midwest.

At the company’s May 2007 meeting, Christian Brothers Investment Services, Amalgamated Bank’s Long View Collective Investment Fund and the New York City and Connecticut state pension funds, which together owned more than 216,000 shares, presented a shareholder resolution asking the company to prepare a sustainability report.  Management urged its investors to vote the proposal down, arguing it had sufficiently addressed the proposal’s concerns. 

But investors were clearly skeptical and instead voted 46.4 percent in support of the resolution—a record for the year and one of the highest votes of 2007.  CBIS returned to the company with the same proposal this year and got quite a different reception.  By November 2007, Dillard’s had posted to its website a detailed labor and human rights policy that, if implemented, will meet all the International Labor Organization’s core conventions and incorporate independent third-party monitoring of its entire supply chain.  Julie Tanner of CBIS said the company agreed to report by its 2009 annual meeting on the results of its factory audits and the actions it has taken to correct any violations.  CBIS therefore withdrew the proposal, although it and the other proponents will be watching to see if Dillard’s follows through with its commitment. 

Separately, in another recent move that prompted the withdrawal of a shareholder proposal, Dillard’s told the Connecticut Retirement Funds that it would respond to the Carbon Disclosure Project’s survey on greenhouse gas emissions and related policies for the first time.  About 56 percent of the Standard & Poor’s 500 responded to CDP in 2007, but only a little more than a third of Consumer Discretionary sector companies such as Dillard’s responded, the lowest of any sector.   

By Heidi Welsh, Riskmetrics Group

Heidi Welsh has analyzed proxy season voting trends for RiskMetrics Group and its predecessor companies for 20 years. She can be reached at heidi.welsh@riskmetrics.com