Shareholders Push Firms on Social Issues
GREGORY CONNOLLY relishes his role as a shareholder gadfly with a social conscience. In 1987, he invested $1,000 in each of six United States tobacco companies, just enough to propose his own shareholder resolutions.
Dr. Connolly, along with New York City-based Interfaith Center on Corporate Responsibility, submitted four resolutions with tobacco giant Philip Morris this year. One requested that Philip Morris help tobacco farmers convert to other crops. Another asked the company to stop pursuing lawsuits that challenged research into the health hazards of passive smoking.
Connolly and ICCR won only around 5 percent of the vote for their proposals. But 10 percent of the vote would have been considered a major victory. Their strategy: Garner a sizable minority vote - often by filing year after year - until management relents and negotiates.
``We have a long-term outlook on our campaigns,'' says Diane Bratcher, director of communications at ICCR, an association of 250 religious institutions with $40 billion in investments. ``Witness the South Africa struggle. That went on for 20 years, yet it was the most successful campaign of corporate responsibility ever waged.''
US companies and the Securities and Exchange Commission often see these demands as political soapbox issues, out of place in the world of bottom-line decisionmaking.
``Shareholder proposals should not be used to force companies to be good corporate citizens,'' SEC Commissioner Richard Roberts says. ``As I envision it, they are designed to allow shareholders imput on the performance of a company, return on investment, financial operations, [and] liquidity.... Some social and political resolutions would make that connection, many would not.'' In 1991, the SEC began more closely scrutinizing such resolutions.
Activist shareholder trends emerging this year include:
* The Securities and Exchange Commission crackdown on certain types of social resolutions, and subsequent court cases, leaves their future murky.
* The number of resolutions fell after 1991 to 230 this year, but shareholders are raising a wider range of issues. The environment topped the list.
* Resolutions are winning more votes, partially due to financial worries about environmental liabilities.
Activist shareholder proposals began in the early 1970s. For the first decade, resolutions concerned primarily South Africa, weapons production, and minority hiring.
That has changed. This year, shareholders are also voting on Unocal's investments in Burma, Upjohn's drug-pricing strategies, and AT&T's maquiladora operations in Mexico.
Besides religious investors, New York City's pension fund, with close to $50 billion in investments, has filed social-issue proposals. So has Franklin Research and Development Corporation, a Boston investment firm. Friends of the Earth, the Amalgamated Clothing and Textile Workers Union, and senior citizens groups are among other organizations sponsoring these resolutions, according to the ICCR.
These resolutions are winning over more shareholders, says Tim Smith, ICCR's executive director. ``In the mid-1970s, we were lucky to get 3 percent,'' Mr. Smith says. ``Now, on issues like equal employment reports, we are winning 10 [percent] to 25 percent.''
The power of filing resolutions, Smith explains, is that shareholders speak directly to top management and boards of directors at annual meetings. ``[A resolution] gets their attention. It is leverage that often results in [management] sitting down and working out an agreement.''
That is why Smith views withdrawing resolutions from proxy ballots as equally important.
This year, shareholders withdrew around 80 resolutions after reaching agreements with company management.
Those agreements take many forms. When Time Warner agreed to meet with ICCR members for three hours to discuss tobacco advertising, shareholders withdrew their 1994 resolution, Smith says.
Companies can also omit certain resolutions from their proxy ballots, usually after seeking SEC approval. This year, for example, Texaco, Amoco, and Pepsico asked to leave resolutions off their ballots concerning their investments in Burma.
Increasingly, financial worries, particularly regarding liabilities from environmental damage, motivate resolutions for corporate disclosure.
``An activist shareholder could be one person with two motivations: one financial, the other social change,'' says Grace Pownall, professor of accounting at Emory University's Goizueta Business School.
``If you knew a firm had an extra $4 billion in liabilities from environmental problems dating from the 1950s, that would affect the share price,'' Dr. Pownall says. That is one reason shareholders promote disclosure of environmental liabilities and adoption of environmental standards.
Because institutional investors hold large blocks of shares, they do not have the luxury of selling their stocks to soothe their conscience, James Melton, author of the Socially Responsive Portfolio, says. ``[Selling] might not be a good fiduciary practice. If a company has a big position, [selling] would affect the share price, and it may not be a good time to sell.''
``Religious groups need the money too,'' Ms. Bratcher says. ``[They] are serious investors who need good performing corporations in their portfolios. They also want corporations that pursue fair employment, pay fair wages, and are good for the environment. Those are all part of the bottom line.''