Shareholder activism: What are its objectives?
Shareholder activism: What is it based on?
Shareholder activism: Who practices it and why?
Shareholder activism: What are its means?
Shareholder activism: What is its process?
Shareholder activism: Must institutions file proxy resolutions to participate?

Shareholder activism: What are its objectives?

Shareholder activism has two objectives: to affect a particular corporate practice and to change what the public thinks of it. A hospital may ask a restaurant chain whose stock it owns to ban smoking in its dining rooms. Or, an environmental organization may try to convince a telephone book publisher to use recycled paper. In both instances, demonstrated support of the objective by shareholders or consumers may affect the company's receptivity to the idea.

Establishing a policy and voting proxies afford an institution a unique opportunity to further its mission by telling its companies, its stakeholders, and the public about its policies and its votes. Thus, shareholder activism goes hand-in-hand with portfolio screening.

Voting proxies in accordance with social principles can be a good way for an institution to begin exploring mission-based investing, because no change to the institution's portfolio is required. Since in all likelihood the institution is already voting its proxies, the process will require relatively small amounts of staff time and resources.

Shareholder activism: What is it based on?

The investment decision-making process may factor in shareholder activism, the use of the franchise (the right to vote) conferred by stock ownership to raise issues of social concern with corporate management, and proxy voting generally.

Each year, between 60 and 120 "social issue" resolutions appear on proxy ballots. Deciding how to vote on these issues presents a board with an opportunity to define the institution's stance on issues ranging from equal employment to the environment.

A board could adopt a general proxy voting policy that reflects the institution's core philosophy. For instance, a foundation concerned with social welfare issues might adopt a policy on executive and board compensation packages. One focusing on environmental matters may decide to vote for resolutions asking for a corporate policy favoring disclosure of ecological risks

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Shareholder activism: Who practices it and why?

Until about 1990, "shareholder activists" referred to investors who raised social issues -- such as, military weapons production or South Africa^* -- often by placing resolutions on the proxy ballot for a company's annual meeting. The Interfaith Center on Corporate Responsibility (ICCR) is the leader in this area.^** While ICCR's members are faith-based organizations, its broader constituency includes many non-religious groups who look to it for guidance and co-ordination on social issues.

With the Jesse Smith Noyes Foundation, ICCR has created the Foundation Partnership on Corporate Responsibility to act as a clearinghouse for information on shareholder actions. See the Appendix of Resources for its address.

Since 1990, the term "shareholder activists" has come to include a broad swath of institutional shareholders who have focused on "corporate governance," a term whose precise meaning refers to the structures created by legal documents for the operation of a corporation. The term has come to include financial performance, board composition and terms, corporate operations, and executive compensation issues. The Council of Institutional Investors and the California Public Employees Retirement System (CalPERS) are among the leaders in raising corporate governance issues.

Some social-issue activists have recognized a commonality of interests with the corporate-governance activists, perceiving a shared focus on corporate responsibility and responsiveness. However, the corporate-governance activists have shown little interest in the societal effects of their positions or social issues generally.

Shareholder activism: What are its means?

A shareholder action is a concerted effort by shareholders to affect a corporate practice and public opinion about it. Such actions can involve the filing of a resolution to be voted on at the company's annual meeting. An institution may engage in shareholder activism whether or not it applies social screens to its portfolio.

Changing corporate policy requires the same techniques as changing government policy. The corporation is a quasi-governmental organization to which the people have granted many of the characteristics of a government unit, such as limited liability and the ability to sue and be sued. The right of those affected by corporate policies to seek change is as clear as that of Americans to seek changes in the Internal Revenue Service or California teachers in the California State Teachers Retirement System (CalSTRS). Berkeley business professor David Vogel has called this process "lobbying the corporation."^* The phrase is apt.

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Shareholder activism: What is its process? to top

Shareholder activism is a process of initiative, negotiation, and compromise. It is commonly tied to proxy resolutions. (These resolutions may deal with issues as diverse as employment practices in the U.S. and operations in Burma or Nigeria.) But shareholder activists usually file resolutions when they have failed to reach an agreement with management through other means.

Shareholder actions often begin with an attempt to engage management in a dialog on a specific issue. Sometimes they end at this stage, because it is in the interests of both sides to reach an accommodation. If one is not reached, the shareholders activists may file a resolution to be voted on by all shareholders at the annual meeting.

A proxy resolution is the proverbial "stick" that makes palatable the "carrot" of discussion. Even after a resolution is filed, compromise may occur, and the resolution may be withdrawn. If it is not, the issue goes to a vote, which shareholder activists almost never win. But, that does not mean they "lost."

The vote gives shareholders opportunities to educate their peers on their issue, as well as the public. In response to shareholder votes, companies may eventually change their practices; they may take the point. Or, the votes may mobilize internal constituencies at the corporation to press for change. Thus, while shareholder resolutions rarely pass, they bear fruit.

Shareholder activism: Must institutions file proxy resolutions to participate?

No. An institution can participate in shareholder actions by voting proxies on issues that relate to its mission. In fact, developing a policy for voting proxies can be a relatively easy -- and cost-effective -- first step toward a mission-based investment process. For example, an institution concerned with employment issues might develop a policy on proxy issues relating to the workplace. One concerned with women's issues might decide to vote only for slates of directors including women.

Controlling proxy voting can be nettlesome for institutions. Some money managers have a policy of using their own -- not the client's -- guidelines for voting, if they have investment discretion over an account and the client wants the manager to vote the proxies. Typically, the managers' guidelines will be to follow corporate management's recommendation.

Institutions wishing to control how their proxies are voted on certain issues will have to negotiate this point with their managers. ICCR and the Foundation Partnership on Corporate Responsibility (see Resource Appendix) can offer technical assistance here.

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