Tuesday, July 26, 2005


One of the true joys in writing a book is that it not only gets your creative juices flowing,it's very cathartic. You begin to tell the story of your life through others you've experienced things with. With each person that you meet on the journey, comes a new story, a new awakening, a new adventure, a new learning experience or simply a time to just share the moment. Since announcing to my friends, colleagues and associates that I was writing a book, many have sent me relevant articles of interest. I truly appreciate their contributions and will acknowledge them with each entry. Today, I will post an article sent to me by Bruce Stewart, a well known publisher and resident expert on varied topics, who co-hosted a business talk radio show with me. You can contact him at bruce@bastewart.com. His specialty is "STEWARDSHIP". (CEO,Senior Management, Corporate, Organizational). The following article has relevance to our discussion of THE NEW ERA- The shift towards "Enlightened Capitalism" and Social Entrepreneurism, how does one becomes an "enlightened capitalist", and more specifically an "enlightened shareholder".

Shareholder Activism: Policy Battlefield of the Future
By Bart Mongoven

Activists demonstrated outside the offices of university pension manager TIAA-CREF on July 18, calling for the massive fund to exercise more power within the companies in which it owns stock. If TIAA-CREF, which holds more than $300 billion in assets, starts to take this sort of assertive stance, companies will have to listen. Meanwhile, on July 21, International Shareholder Services (ISS), an adviser on shareholder proxy votes, announced that it had purchased the nation's leading social investment advisory group, Investor Responsibility Research Center (IRRC). This merger suggests that the mainstream financial community, ISS's clientele, increasingly is asking about social-focused shareholder resolutions.

The two events point to the increased role that corporate shareholders will have in making public policy in the United States, and suggest that corporate decision-making could change dramatically in the coming years.

The coming shift will prompt most corporations to exercise more caution in several aspects of their businesses, as shareholders increasingly can be expected to demand that companies avoid social and environmental pitfalls that could affect the long-term value of their holdings. The caution will be apparent in corporate operations -- including the products companies make, their advertising, the places they do business and the relationships they have with certain governments. Though issue-oriented activists will have an indirect impact on corporate policies, the new social, labor and environmental policies that corporations follow will reflect primarily the work of shareholder groups. These groups are using increasingly sophisticated market analyses to show corporate managers (and fellow shareholders) the wisdom of following a voluntary course of action in areas of potential social criticism.

Since the 1970s, social and environmental activists have used proxy voting and public companies' annual shareholder meetings as a platform to push for new public policies. The early shareholder activist and "socially responsible" investment movements achieved their most significant victory in the 1980s, when heavy pressure forced major U.S. and European multinationals to withdraw from South Africa and contributed significantly to the end of the apartheid regime. By the end of the apartheid era, few major multinationals dared do business in South Africa lest they be seen as endorsing its racist political, social and economic structure.

Shareholder activism does not depend on gaining the support of the majority of a company's shareholders in order to be effective -- proxy votes are nonbinding. Instead, it changes corporate policy when management sees that a strong minority of shareholders (usually 20 percent will do) find the company's policies troublesome. Senior executives begin to fear that significant amounts of management's time, energy and attention will be diverted to addressing the issue. To reach that threshold of effectiveness, activists try to recruit the support of as many large shareholders as possible -- beginning with small social-oriented firms such as Calvert, then progressing to socially-oriented pension funds such as CalPERS (and potentially TIAA-CREF, if the demonstrators get their way). Still, most successful campaigns need significant rank-and-file shareholder support and that of at least one major mainstream investor.

That said, shareholder activism is poised to emerge as a central policy-making vehicle for three reasons. First, there is the deregulatory political culture that dominates federal policy-making. A second element is growing economic globalization -- coupled with the removal of trade barriers -- which has led to a recognition of the important role (positive and negative) that corporations can play in developing countries. The third major reason is the increasing accountability and transparency demanded by shareholders and required by securities regulators in the wake of the corporate scandals of the 1990s.

The most significant catalyst of the emerging movement in shareholder power is the deregulatory mood that holds sway at the federal level. This trend toward deregulation (or at least a reluctance to impose new regulations) began in 1995 and gained momentum when President George W. Bush took office. With Bush's election, traditional liberal lobbies concluded that new and more stringent federal regulation of corporate activities was unlikely, so they began to focus on alternative areas in which they could exert power over corporate activities. Most of these lobbies determined that they would do better with calls for action at the state level, through international treaties and through shareholder activism. All three of these trends continue to dominate new regulatory policy-making in the United States. Of the three, shareholder activism is emerging as the most powerful avenue for changing corporate policy over the long term.

This strategy is most visible in the climate change debate, where a number of corporations -- including many energy companies -- have adopted climate change policies as a result of shareholder pressure. No action is likely at the federal level on climate change for at least a couple of years. Many influential shareholder activists argue that regulation is inevitable and that, consequently, companies should begin to change their internal mechanisms now in order to prepare for dramatic regulatory changes and potential liability.

Under this kind of pressure, some major oil and electricity generating companies have adopted policies that commit, at the very least, to measure their financial vulnerabilities in a "carbon-constrained" economy. Many have gone further and adopted policies that give consideration to climate change in their internal decision-making processes. The law has not changed, but under shareholder pressure the vast majority of the energy industry is preparing for the day when it will.

New arguments following this "climate risk" logic -- that is, environmental and social concerns are not just public relations problems, but carry serious financial liability risk for companies and must be addressed in that light -- have been raised recently in various industries, including against mining, chemicals and consumer products companies. The central premise of these new shareholder campaigns is the notion that society's ethics and mores are constantly changing, and the best corporations will adjust their policies before they feel the brunt of changing values. The use of child labor in developing countries, for instance, recently was accepted practice in certain industries, but now allegations of child labor represent significant risk to corporate brands -- just ask Nike or Kathy Lee Gifford.

Similarly, it was once de rigueur for multinational construction companies and extractive industries to build large infrastructure projects that required relocation of significant numbers of indigenous peoples in developing countries. These projects usually had World Bank funding. Now the Bank won't fund such projects, and corporate managers are increasingly wary about these kinds of proposals.

Merrill Lynch recently released a report titled "Energy Security & Climate Change: Investing in the Clean Car Revolution," which concludes that there are solid investment opportunities in those automakers that have developed (or are developing) advanced clean technologies. Although Merrill Lynch understands perfectly well that "clean tech" investments tend to perform poorly in strict efficiency terms, it likely is betting that the shifting line of acceptable industry behavior will render these investments profitable nonetheless.

Examples such as these reverberate throughout industry and shareholder groups. They suggest that sound management requires acting quickly (and often on limited information) to quell potential problems, and that there is considerable risk in ignoring potential social problems. Nike's image has never completely recovered from the allegations that it used child labor, even though it is now one of the most transparent companies in the world when it comes to its supply chain. Shell continues to spend millions of dollars to rebuild its reputation after controversies in the late 1990s. (Interestingly, the cost to Shell is best measured in recruiting difficulties: New graduates, particularly in Europe, prefer not to work for a company embroiled in human rights or environmental controversies.) And as Merrill Lynch's report suggests, socially responsible shareholder groups are increasingly successful in bringing this same argument to mainstream investors.

The degree to which shareholder activism is emerging as an important element in policy-making is epitomized by ISS's acquisition of the IRRC proxy advisory business. ISS specializes in advising major pension funds and investment houses on the business implications of important votes raised at corporate annual meetings. It prepares analyses of mergers, of significant changes in pension fund management and of other similar issues relating to corporate governance for its clients.

Only rarely has ISS taken positions on social or environmental resolutions. IRRC, on the other hand, specializes in the analysis of environmental and social shareholder resolutions. This merger signifies the degree to which demands for restricting corporate behavior -- once seen as the demands of an activist fringe and thus as issues that could be safely ignored -- are now being incorporated into standard corporate-governance conversations. With this merger, ISS is acknowledging that advice on social-related shareholder activism is in sufficient demand that its portfolio needed IRRC.

As the lines of communication and credibility are strengthened between the socially responsible investment community and the mainstream investment community, activists will be able to expand their demands even further and leave their mark on how business is conducted. Further, because of recent rule changes by the Security and Exchange Commission, all financial services firms, including pensions and mutual fund companies, must make their proxy votes public. This will ease the politicization of proxy voting, as companies with strong brand names -- such as Fidelity and Merrill Lynch -- will have to tell clients how they voted on the social demands placed before shareholders.

Ultimately, these changes likely will result in corporations adopting policies that are more cautious, better thought out and significantly more responsive to public concerns. They also will usher in a fundamental shift in policy-making in government, particularly as business threatens to get far ahead of the federal government in the United States. The two traditional types of public policies -- those demanded by the marketplace regardless of law, and the demands of government -- will at least for a time diverge. Whether this new era of responsiveness satisfies society's need for regulation of business practices, however, remains to be seen, as do the larger implications of all of this for notions of democracy.


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