It doesn’t take a majority to make a revolution, particularly when old paradigms have developed deep fault lines. A significant and growing portion of investors think the companies they own need to take more proactive, transparent action on a broad range of social, environmental and governance issues, to protect long-term shareholder value. One measure of support for this view is the global group of 870 investors who manage more than $25 trillion and have signed on to the UN Principles for Responsible Investment. Another is the Carbon Disclosure Project, which now boasts support from investors with $71 trillion of AUM and presses companies to disclose how they are reducing their carbon footprints. Clearly there is an explosion of involvement by investors—“shareowners,” not just passive shareholders—who work to integrate ESG issues into their investment decisions and engagements with companies.
Additional hard evidence of sentiment favoring reform comes from the recently concluded 2011 proxy season, which arguably marks a new tipping point for social and environmental issues. Active shareowners now are voting their convictions more than ever, sending a strong message to company managements and boards. This analysis focuses on the spring “proxy season“ results as one strong indicator of the expansion of investor interest and support for company evolution to higher levels of corporate responsibility.
- The overall average support level cracked 20 percent, an historic first;
- Five (nearly six) proposals received majority support from investors; and
- Twenty-one resolutions garnered more than 40 percent support, another new record.
This article takes a close look at trends in the social and environmental space, but it is also worth noting that governance proposals to separate the chair and CEO, elect directors annually, and declassify boards continue to see significant support from investors interested in more accountability and board independence. (Proposals for board declassification now regularly get more than 50 percent support, for instance.)
Key season takeaways:
The 2011 proxy season was noteworthy for a big leap in proposals on corporate political spending—which edged out labor and human rights to become the second-most popular non-governance issue, behind the environment. Continuing previous trends, even more investors told companies they want corporate policies that protect lesbian, gay, bisexual and transgender (LGBT) rights, and more disclosure on sustainability, the environment and corporate political spending. A diverse array of proponents also expressed new concerns about banks’ foreclosure risk disclosures and saw the proposals supported with substantial votes. The total number of proposals filed and voted on is about the same as in 2010, as is the proportion excluded from proxy statements after company challenges at the Securities and Exchange Commission (SEC).
Comprehensive results are now available on all the 404 shareholder proposals filed this year, catalogued by the Sustainable Investments Institute (Si2). These proposals address in some fashion social or environmental public policy issues, and any governance proposals that have a social policy aspect, such as those about board diversity. Included here are votes on the 170 resolutions that have come to votes so far in 2011. Eight more resolutions are pending for votes this fall.
Environmental concerns continued to be the biggest single issue category, accounting for one-quarter of all filed proposals, or more than one-third when broader sustainability reporting proposals which mentioned the environment also are included. While proposals about climate change mitigation continued, support for them dropped, and coal and hydraulic fracturing proposals dominated the top votes.
Corporate political spending proposals grew by 50 percent; this presented investors with the chance to weigh in on many more angles to political spending than in the past—including lobbying and support for trade associations—although most continued to emphasize oversight and general disclosure best practices championed by the Center for Political Accountability.
The number of labor and human rights proposals dropped from 18 percent of the total in 2010 to just 13 percent this year, with many addressing perennial concerns about human rights policies by defense contractors and resource extraction companies firms operating in global conflict zones. A new AFL-CIO campaign on refinery safety, plus a sprinkling of pay disparity resolutions, rounded out the labor rights agenda. Other important topics were equal employment and diversity (12 percent of the total)—resolutions that always get high levels of support.
The final fifth of the resolution pie was split fairly evenly between animal welfare, health care, banking and proposals from conservatives. Animal welfare proposals dropped back considerably to just 5 percent of the total (down from 9 percent last year), while religious investors proffered a new set of health care affordability proposals on both insurance and drug prices (4 percent of the total). A small flurry of largely duplicative proposals to the country’s four biggest banks about the foreclosure crisis came from pension funds, churches, community groups and trade unions (4 percent of the total); those that went to votes received support ranging up to nearly 40 percent at Bank of America. Conservative groups (4 percent of the total) mostly questioned companies’ political positions but also asked companies to roll back gay rights protections and climate change policies; the average was only 3 percent.
Overall support climbs higher:
As noted above, support from shareholders for dissident resolutions continues to climb, underscoring further acceptance in the mainstream investment community for issues that got dismissed out of hand just a decade ago. For the first time, more than half of the votes—88 resolutions so far—were above 20 percent, up from a paltry 11 percent of the total (just 18 proposals) in 2002.
Top scoring proposals:
Walden Asset Management’s resolution to Layne Christensen, a water services company, got a surprise endorsement from the company in the proxy statement and topped the list with 93 percent of shares voted in its favor. But four others also earned majority votes: LGBT non-discrimination at KBR (which also has dealt with significant human rights criticisms for years), oil refinery safety disclosure at Tesoro (where an oil refinery explosion killed seven workers in 2010), political spending at Sprint Nextel (which appears to be out of step with its peers on disclosure and oversight) and coal combustion waste at Ameren (a utility which generates 85 percent of its electricity from coal and releases less information than its peers on how it is addressing coal combustion waste challenges). Only a handful of social and environmental policy proposals have received majority votes since investors started voting on them in the 1970s, and never so many in one year.
Seventeen of the 20 resolutions that earned more than 40 percent asked either for political spending oversight and disclosure or related in some fashion to the environment—be it sustainability reporting, oil refinery accident prevention, coal-related risks or hydraulic fracturing. But two—including the highest vote ever for a management-opposed social policy resolution, at KBR—asked for LGBT non-discrimination policies. Just one of the top scorers concerned human rights, at OM Group, which sources cobalt from the strife-torn Democratic Republic of Congo. The diverse array of high scoring proposals suggests that mainstream investors are willing to challenge management on many fronts.
Resolutions With More than 40 Percent Support
|Layne Christensen||publish sustainability report||Walden Asset Mgt.||
|KBR||adopt sexual orientation/gender ID nondiscrim.||NYC pension funds||
|Tesoro||report on accident prevention efforts||AFL-CIO||
|Sprint Nextel||report on political spending||NYC pension funds||
|Ameren||report on coal combustion waste and risks||Sch. Srs. N. Dame, St. Louis||
|Energen||report on hydraulic fracturing||Miller/Howards Inv.||
|R. R. Donnelley & Sons||report on political spending||NYSCRF||
|Halliburton||report on political spending||Trillium||
|Lorillard||report on political spending||NYSCRF||
|Coventry Health Care||report on political spending||NYC pension funds||
|State Street||report on political spending||Trillium||
|Carrizo Oil & Gas||report on hydraulic fracturing||NYSCRF||
|Valero Energy||report on accident prevention efforts||AFL-CIO||
|OM Group||adopt and report on human rights policy||Society of Jesus, Wisc.||
|WellCare Health Plans||report on political spending||Amalgamated Bank||
|EOG Resources||report on political spending||Mercy Investment||
|Windstream||report on political spending||CWA||
|Ultra Petroleum||report on hydraulic fracturing||As You Sow||
|Leggett & Platt||adopt sexual orientation/gender ID nondiscrim.||NYC pension funds||
|Chevron||report on hydraulic fracturing||Srs. of St. Francis||
|*Percentages presented as shares cast for divided by shares cast for and against. All proposals listed are advisory and majority votes do not legally require management action. Official passage can require other vote calculations including the consideration of shares cast as abstentions or total shares outstanding.|
Withdrawals and omissions:
About one-third of all filed proposals end up getting withdrawn each year, almost always after companies and the proponents reach an agreement addressing the concerns raised. Proposals that receive high levels of support are the most amenable to negotiated withdrawals: Fully 70 percent of the 50 proposals filed on equal opportunity and board diversity were withdrawn, for instance, as were more than half of the 37 requests on sustainability—in proportions consistent with last year’s results.
Top scoring proposals also are much less likely to be barred from proxy statements with the blessing of the Securities and Exchange Commission (SEC), after companies contend they do not follow the Shareholder Proposal Rule’s requirements. Fewer than 10 percent of popular proposals on the environment, political spending, diversity and sustainability were omitted. On the other hand, conservative activists continued to have a particularly difficult time getting past the SEC: 10 of their 18 proposals were struck after company challenges. New proposals this year from religious groups affiliated with the Interfaith Center on Corporate Responsibility on health insurance affordability all got thrown out, as well, on the grounds that this related to “ordinary business,” the most common reason for exclusion.
Political spending proposals were more varied in 2011 than in the past and received on average more support than any of the other social and environmental topic areas, reflecting continued broad investor support for more disclosure from companies about how they spend money in politics in the wake of the landmark U.S. Supreme Court Citizens United v. Federal Election Commission decision in January 2010. Average support for the disclosure resolutions proffered by the Center for Political Accountability rose to more than 34 percent, but other proposals asking for spending disclosure averaged 20 percent.
Setting the stage for more possible lobbying proposals was a precedent-setting SEC decision at IBM that allowed an AFSCME resolution on direct and “grassroots” lobbying support. (The SEC in the past has turned back lobbying proposals on “ordinary business” and other grounds.) Ninety-three resolutions were filed and 50 have gone to votes so far (four more are pending). New proposals questioned corporate support for the U.S. Chamber of Commerce and other groups that provide indirect conduits for political spending, including a set of proposals offered from the floor at five companies. Investors did not give much support (just 5 percent) to a new resolution from Northstar Asset Management to Home Depot that wanted shareholders to have an advisory vote on political expenditures, but one more vote on this resolution will occur in October at Procter & Gamble.
The highest scoring political spending proposals in 2010 were all at health care and telecommunications companies, but this year a wider assortment of firms saw votes above 40 percent: Coventry Health Care, EOG Resources, Halliburton, Lorillard, R.R. Donnelley & Sons, Sprint Nextel, State Street, WellCare Health Plans and Windstream. Proponents withdrew 24 proposals, generally after agreements for more disclosure, compared with 14 such withdrawals in 2010.
Companies and proponents were more likely to reach agreements about proposals on diversity (both to protect LGBT employees and to encourage board diversity) than for any other issue, by far, logging 35 withdrawals—70 percent of the total filed. Just two board diversity proposals were voted on, earning 23 percent at American Financial Group and 27 percent support at Urban Outfitters. But the highest votes came for proposals on LGBT policies: the extraordinarily high vote at KBR (62 percent) and the 41 percent showing at Leggett & Platt (each of these resolutions earned more than 40 percent in 2010, as well).
Investors responded positively to calls at the largest U.S. banks for more disclosure about how they handle mortgages. Only four ended up going to votes, but banks had to contend with a raft of duplicative proposals from many quarters—churches, pension funds, unions and community groups, reflecting deep public skepticism about banks. The highest vote was for a New York City pension fund resolution at Bank of America that earned nearly 40 percent. The banks argued the proposals concerned “ordinary business,” but the SEC staff opined that shareholders should be allowed to vote on them “in view of the public debate concerning widespread deficiencies in the foreclosure and modification processes for real estate loans and the increasing recognition that these issues raise significant policy considerations.”
Nearly 100 proposals were filed on environmental issues, making up the biggest slice of the proposal pie. Support for the longstanding Ceres coalition campaign to get companies to report on greenhouse gas emissions and how they are handling climate change related risks and opportunities fell substantially in 2011, perhaps reflecting more tepid investor support given the demise of national climate change legislation in the last Congress. The average vote for 12 climate disclosure and risk proposals was just above 16 percent, down from 22 percent in 2010, although proponents withdrew 15 climate resolutions, showing many companies remain open to taking action.
The natural resource management topic was dominated by 26 proposals on coal-related risks and hydraulic fracturing (“fracking”) disclosure. All but one of the five fracking resolutions earned more than 40 percent support—at Carrizo Oil & Gas, Chevron, Energen and Ultra Petroleum, illustrating strong support for more information from companies; five firms reached agreements with the proponents, who note that companies now report in much more detail in their securities filings than they did when the campaign began two years ago. The SEC recently endorsed these investor concerns when it asked for more information on fracking practices in late August. Votes on coal combustion waste risks may have been pushed upward given the possible reclassification by the EPA of such waste as hazardous, a move that could dramatically increase the costs of handling these byproducts.
Continuing a trend, proposals that requested sustainability reports averaged 34 percent; more than half were withdrawn, usually when companies agreed to produce the reports. A new proposal from the Laborers International Union and Amalgamated Bank that sought to link executive bonuses to sustainability performance did not earn much support at the four companies where it went to a vote (all got less than 7 percent). But at least three other firms persuaded the unions to withdraw after discussions on the subject, showing it has some traction in the executive suite.
Human and labor rights:
There were fewer human and labor rights proposals filed in 2011, and the highest scoring proposals in this category asked two defense contractors—General Dynamics (39 percent) and Halliburton (36 percent)—and chemical company OM Group (43 percent) to adopt broad human rights policies. Resolutions about supply chains and water earned modest support. New proposals on the labor front included AFL-CIO proposals about worker safety at oil refinery companies, prompting the high-scoring results at Tesoro (54 percent) and Valero Energy (43 percent).
Animal and agriculture:
The number of proposals on animal welfare and industrial agriculture fell by half in 2011, and these resolutions, primarily concerned with humane slaughter and laboratory animal welfare, continued to garner little investor support, earning on average less than 5 percent.
Affiliates of the Interfaith Center on Corporate Responsibility mounted a new campaign asking drug companies to restrain their prices, but got little investor affirmation. Other health care affordability resolution from the churches, which sought to address continually rising health insurance costs, were all thrown out at the SEC on ordinary business grounds.
Groups that approach the shareholder resolution arena with a conservative political viewpoint have never earned much support from investors and in 2011 got even less. Eight proposals earned on average just above 3 percent, as they questioned climate change science, diversity policies and health care reform. This was the lowest level of support for any topic.
This proxy season provides just one lens to evaluate where investors stand on the issues we have discussed. But the trend for ever-higher votes makes it clear that investor expectations of companies are rapidly evolving. Companies which “get it” will be ahead of the curve. The new breed of shareowners thinks more transparency and accountability will better serve their interests now and in the future, and they voted with these goals in mind during 2011.