| Socially Responsible Shareholdership in Canada |
PART B:
THE PRACTICE OF SOCIALLY RESPONSIBLE SHAREHOLDERSHIP
In practice, socially responsible shareholdership consists of a number of different but related activities. Development of proxy voting guidelines is a first step that familiarizes the investor with the social, environmental and ethical issues to be addressed in assessing corporate performance. Engaging corporate management in dialogue on these issues is an ongoing activity that is the heart of active share ownership. When other avenues to change are blocked, shareholder proposals can be submitted for circulation to other shareholders. At the company's annual general meeting, these proposals can be presented and voted upon by those present as well as by proxy. Should such avenues to change prove fruitless, divestment of shares can be used to send a final signal to corporate decision-makers. This section of the Handbook will describe these main types of shareholder actions in detail.
Proxy Voting Guidelines
As company owners, it is a fundamental right of every holder of common stock to vote on certain matters of corporate business, such as election of directors and appointment of auditors. It is also an important responsibility for owners to see that their company's policies and activities are socially beneficial as well as financially prudent. One of the main ways shareholders exercise this responsibility is through proxy voting.
Each year, companies hold Annual General Meetings (AGMs) in order to give shareholders an opportunity to assess their performance. Part of this yearly ritual entails the voting by shareholders on matters pertaining to governance and policy issues. Since most shareholders do not attend, voting is generally conducted via a nominated substitute, or proxy, who is certain to be in attendance. In such instances, a member of the company's Board of Directors is the default proxy, though the voting shareholder can appoint any attendee to vote on their behalf. Shareholders 'vote their proxies' by sending written (or electronic) notice to the company, or to a proxy-voting service, directing the proxy to vote for, against, or withhold/abstain on proposals put forth by management or other shareholders. The proposals, their background and rationale, and the voting forms are distributed weeks in advance in a proxy circular by the company, giving shareholders ample time to reflect and vote on the issues.
Many institutional investors have a set of pre-established guidelines to help them decide how they should vote their proxies. These guidelines are usually in the form of a formal document stating voting preferences on particular issues, and also the rationale behind them. Details about who is responsible for maintaining and implementing the guidelines are often included as well.
Why develop guidelines?
Active institutional investors have developed proxy voting guidelines, especially with social criteria in mind, for several good reasons:- It is an exercise in fiduciary responsibility.
A prudent investor will take into account all corporate behaviour that affects the well-being of the corporation, including those activities with social and environmental impacts. Though in Canada the laws governing fiduciary responsibility are not explicit regarding socially responsible investment practices, in other countries it is quite clear that institutional investors are permitted to take ethical as well as financial criteria into account in their investment decisions.
In the US, investors are allowed to consider social and environmental implications as long as it will not result in a subsequently lower rate of return. In the UK, the Pensions Disclosure Regulation requires that pension fund trustees disclose in their Statement of Investment Principles the extent to which social, environmental or ethical considerations are taken into account in their investment strategies.
What this means to Canadian investors is that a strong case can be made that setting proxy voting guidelines based on socially responsible investment criteria is a prudent thing to do, and the fiduciary is therefore acting in a responsible manner in creating and abiding by them.
Socially responsible institutional investors realize that their beneficiaries can indirectly benefit from the social effects of their investments as well as directly from the financial returns. Non-financial benefits such as clean air and water, job security, and decent working conditions, while worthwhile ends in themselves, are also increasingly seen to be correlated with a healthier bottom line. This makes it likelier that the beneficiaries will expect their money to be used in socially responsible ways. Clarifying the values of beneficiaries will help in the development of proxy guidelines, ensuring that the guidelines encompass social goals that resonate with the investing constituency. Such clarification can be viewed as adherence to fiduciary duty, as it helps avoid guidelines that run contrary to the interests of the membership.
It simplifies decision-making.
Most institutional investors have investments in a multitude of companies. At times, there may be hundreds of proxy proposals to consider, and not enough time to adequately assess each one individually. Without guidelines, many investors can end up defaulting to the views of company managers out of expediency. With them, most routine voting matters can be pre-decided, leaving valuable discussion time for more complex and important issues.
It sends a signal to company management.
Any investor that develops guidelines should send a copy of those guidelines to the management of the companies in which they invest. This will help corporate management get a better understanding of the views and values of their shareholders, as well as direct them in developing policies and operational strategy pertinent to issues of social responsibility.
It provides guidance to the investment manager.
Many institutional investors make use of investment management firms to handle their investments. Giving them a set of guidelines will allow them to automatically vote the vast majority of proxies on behalf of their client while filtering out and passing along only those few shareholder proposals that require active deliberation on the part of the institutional investor.
The process of creating guidelines
The easiest way to create guidelines is to adapt an existing set of guidelines that have been developed by others. More and more investors are making their guidelines public, either in booklet form or as an electronic document available on the Internet. If you find a set created by a similar organization that seems to exemplify your values, it is relatively easy to base your own guidelines on this document. A courtesy note to that other organization letting them know that you are doing this can help facilitate the growth of a shareholder network, which can prove useful in providing support for future shareholder campaigns and proposals. In many cases, however, the set of guidelines that gets developed will likely be an amalgam of many different existing sets obtained elsewhere. It is recommended that several other institutions' guidelines be reviewed to give a wider range of potential issues, responses and rationales. It is also important that trustees review the guidelines to make sure they are commensurate with the interests of their members.Though it requires more time and effort, a process can be followed which will ensure that the guidelines are well-crafted, reflect the principles of the various institutional stakeholders, and are implemented and maintained in the most efficient and effective manner. This process is laid out in the following steps:
- Create a proxy vote committee
Create a proxy vote committee, consisting of three or four members of the board of trustees, with invited input from key stakeholders who are most likely to be affected, such as investment managers or beneficiaries. Representation from any existing committee that oversees social screening on investments would be very helpful here.
Develop ethical principles with stakeholder involvement
Develop a statement of ethical principles and values that the fund espouses and upon which the fund will base its shareholder guidelines. The more detailed the principles, the more comprehensive the guidelines can be. For the sake of legitimacy, it is important to solicit input from stakeholders at this stage, perhaps through a survey of beneficiaries, or interviews with key opinion leaders. This will ensure that you can later defend your guidelines to your constituency.
Review other institutions' guidelines
Obtain a number of current guidelines, either from a public source such as the Internet, by personal contact with colleagues in similar institutions, or from commercial services (see Appendix C: Resources). If you are already using your own guidelines on corporate governance matters, they can be merged within the larger set you are creating. Carefully review the range of options, noting the rationale given for particular items, and selectively prioritize those that seem to best exemplify your principles.
Draft and discuss
Draft an initial set of guidelines and discuss them thoroughly, paying close attention to clarifying any ambiguities or contradictions. Depending on the situation, you may wish to consider an implementation strategy of phasing-in certain guidelines over time, such as concentrating on corporate governance issues first and then later introducing guidelines on social concerns.
Finalize and get a legal opinion
Once the committee finalizes the guidelines, get legal counsel on the substance and wording of the document to ensure compliance with current laws and regulations. Wherever possible, make sure the guidelines are in plain English and easy to understand.
Discuss with investment managers
Discuss the guidelines with the fund's investment managers to ensure they understand how to apply them and when to refer particular proposals back to the committee. If they have been closely involved during guideline formulation, so much the better.
For the sake of expediency, a single member of the committee should be designated as the liaison for fund managers. The managers should notify that person in advance whenever they are likely to vote against any recommendation by company management, or when they feel it is not prudent for financial reasons to vote according to the guidelines. Also, they should submit quarterly reports on their voting activities - the committee should use these reports to make sure proxies are voted in accordance with the plans' stated policies.
Develop a framework and schedule for review of the guidelines
Develop a framework for reviewing the guidelines based, for example, on assessments of the evolving nature of shareholder proposals and the difficulties in applying the guidelines to them. Two or three meetings in the first year should suffice to work out any initial implementation problems, with fewer meetings being needed in subsequent years. It would also be wise to consider maintaining the involvement of key stakeholders in the review process.
Determine the degree of publicity
Determine how much you wish to make your guidelines public. There is a growing trend, especially among larger funds, to make the guidelines widely known, not only to beneficiaries via short booklets and newsletter articles, but also to the wider public via postings to the Internet. And, as previously mentioned, it is a good idea to send a copy of the guidelines to the companies in which the fund invests.
Also, in the interests of fostering greater transparency, institutional investors should have a policy of full disclosure of all actual votes cast, and make their voting record publicly available as soon as possible following the meetings in which the votes were held.
Types of guidelines
There are two main categories of guidelines, one related to corporate governance issues, and the other related to matters of corporate social responsibility. The former concerns itself with corporate policies and behaviours that affect the structure and management of the business. The latter involves looking at the way that the company affects its stakeholders and society in general. It must be stressed that the distinction between the two areas is increasingly disappearing. Although corporate governance has historically been the main focus of guidelines, in recent years this focus has expanded to include social responsibility matters. A socially responsible investor would develop a single set of guidelines that incorporate both aspects, as they are mutually reinforcing aspects of good corporate behaviour. They are presented here in tandem solely for the sake of clarity.Corporate governance
Corporate governance issues are many and varied, indeed the great majority of shareholder proposals to date have been submitted on governance matters.Guidelines in this area have often been developed with consideration of existing standards of corporate governance. In Canada, such standards have been created and successfully promoted by several organizations, including the Toronto Stock Exchange (TSE) and the Pension Investment Association of Canada (PIAC).
The TSE's standards are based on the 1994 Dey Report on corporate governance. What has made these standards so effective is that the TSE made it a requirement for larger (i.e., Tier 1) TSE-listed companies to file public documents showing how they are complying with the Dey guidelines. The TSE does not require compliance with the guidelines – but every year companies must disclose and explain any differences between their corporate governance practices and the guidelines. The threat of criticism by peers and the media for not measuring up has promoted a widespread acceptance of the standards among those companies, as shown by a follow-up research study in 1999. The public nature of the reporting has also made it easier for investors to assess how companies are doing on governance issues.
The Pension Investment Association of Canada (PIAC), the representative association of large pension plan sponsor organizations in matters related to investment of pension fund assets, has produced a set of standards that cover most corporate governance issue areas, as summarized below.
PIAC's Corporate Governance Standards are divided into four main sections:
- Obligations of Boards of Directors
- Majority of directors independent of management
- Separation of roles of Chair and CEO
- Nominating, Audit, and Compensation Committees independent of management
- Smaller board size
- Annual report on meeting governance standards
- Executive Compensation
- Promotion of shares as compensation
- Compensation competitive and tied to long-term positive performance
- Avoid excessive stock purchase loans to executives
- Avoid unrestricted stock options, options priced below current market value, or low interest loans
- Annual disclosure of the company's executive compensation system
- Takeover Protection
- Major changes reviewed by independent committee of the board
- Major corporate changes subject to a vote of shareholders not controlled by management
- Ample time and enough information for shareholders to make informed judgements
- Management not allowed to "short track" a takeover bid
- Shareholder Rights
- Shareholders to be informed, active, and exercising proxies to protect rights
- Shareholders to concentrate on the long-term
- Balance influence between shareholders and management in proxy voting system
- Equal treatment of shareholders, and first offer of new stock issues
Sample Guideline: Independent Boards
| 2.1.1 Independence of Boards of Directors Discussion: A board of directors should have a majority of "unrelated" directors and ensure that the board is truly independent of management. An unrelated director is a director who is independent of management and is free from any interest or business relationship, which could materially interfere with the director's ability to act in the best interests of the Corporation, other than interests and relationships arising from shareholding. A related director would include retired executives of the company, relatives of management and directors receiving consulting fees such as legal counsel and investment bankers. Those who have interlocking directorships, whereby chief executive officers sit on each other's boards, would also be related directors. We believe that a board with a majority of unrelated directors, and whose key committees are staffed primarily or exclusively with unrelated directors is better positioned to critically evaluate management and corporate performance. In addition, the board should include a number of committees that should be staffed, at a minimum, with a majority of unrelated directors. These should include an audit committee, a nominating committee, and a compensation committee. Guideline: Ordinarily, we will not vote against a slate of directors simply because it fails to meet the independence standard. We will do so, however, if corporate performance, over a reasonable period of time, is unsatisfactory. Source: OTTPB corporate governance guidelines http://www.otppb.com/web/website.nsf/web/CGIndependenceofBoards |
For those looking at somewhat stronger guidelines, CalPERS, one of the largest pensions in the United States, has developed corporate governance principles based on those promoted by the International Corporate Governance Network (ICGN), which in turn follow upon those set by the Organization for Economic Cooperation and Development (OECD).
Corporate social responsibility
While corporate governance issues are a significant concern to shareholders, there is an increasing trend among investors to broadening the arena of discussion to also include the social and environmental responsibilities of corporations. Research continues to show that corporations that take these responsibilities into account do better over the long-term than those that do not. Investors, therefore, are feeling more comfortable exercising their social values, secure in the knowledge that they do not have to risk a lower rate of return as a result.Statements of principles
Concrete statements of shareholder preferences in areas of social responsibility, like corporate governance guidelines, are frequently based on more general statements of principles and standards of conduct. Two examples of such general statements are the CERES Principles and the Bench Marks document.The CERES Principles were formed in the wake of the 1989 Exxon Valdez oil disaster by the Coalition for Environmentally Responsible Economies, a collaboration between environmental groups and social investors, as a means of improving the environmental conduct of corporations. The ten principles cover the following areas:
- Protection of the Biosphere
- Sustainable Use of Natural Resources
- Reduction and Disposal of Wastes
- Energy Conservation
- Risk Reduction
- Safe Products and Services
- Environmental Restoration
- Informing the Public
- Management Commitment
- Audits and Reports
A second set of standards is contained in the publication, Principles for Global Corporate Responsibility: Bench Marks for Measuring Business Performance, which was created in 1993 through the combined efforts of three faith-based organizations, the Taskforce on the Churches and Corporate Responsibility (TCCR) in Canada, the Interfaith Center on Corporate Responsibility (ICCR) in the US, and the Ecumenical Committee for Corporate Responsibility (ECCR) in the UK.
In their words,
"Bench Marks is a comprehensive set of social and environmental criteria and business performance indicators drawn from a body of internationally recognized human rights, labour and environmental standards and principles. Many of these are reproduced among the 23 appendices found in the document.
As society increasingly demands that companies act responsibly across a full range of social and environmental considerations, Bench Marks sets out social and environmental expectations for responsible corporate conduct against which business performance can be measured and reported. Bench Marks is used to examine how companies behave in relation to:
In both cases, these two sets of principles of social responsibility enjoin companies to go beyond what is required by law in their operations, and to become more transparent in reporting on their activities. They are both good resources to draw upon when fashioning socially responsible proxy voting guidelines.As society increasingly demands that companies act responsibly across a full range of social and environmental considerations, Bench Marks sets out social and environmental expectations for responsible corporate conduct against which business performance can be measured and reported. Bench Marks is used to examine how companies behave in relation to:
- ecosystems;
- international, local and indigenous communities in which they operate;
- workplace conditions and employee issues related to women, minority groups, people with disabilities, child labour and forced labour;
- suppliers, shareholders, joint ventures/ partnerships/ subsidiaries, customers and consumers; and
- financial and ethical integrity"
Other excellent resources in this area are the OECD Guidelines for Multinational Enterprises and the International Labour Organization's Declaration on Fundamental Principles and Rights at Work.
Social issues
Many issues fall into the area of social responsibility. The following is a list of the main categories of these issues and some examples of more specific concerns contained within them. They represent the kinds of matters that socially responsible shareholders seek to address through corporate dialogue and shareholder proposals, and can be used in the development of proxy voting guidelines.
Environment
- CERES Principles / Corporate transparency
- e.g., endorse principles, and increase disclosure regarding pollution and other environmental impacts
- Climate change
- e.g., reduce greenhouse gas emissions
- Major resource projects
- e.g., stop Three Gorges dam in China, or mining in sensitive areas such as the Arctic
- Bio-diversity
- e.g., stop cutting old growth timber, or clearing tropical forests
- Energy alternatives
- e.g., promote renewable resources, and fuel efficiencies
- Predatory lending
- e.g., eliminate high-pressure, high-interest loans to poor people
- Equal access to credit
- e.g., no 'redlining' (practice of eliminating banking services in impoverished neighbourhoods)
- Pay equity
- e.g., institute equal pay for work of equal value
- Minorities/Affirmative action
- e.g., increase effort to hire and promote women, racial minorities, disabled people
- Board diversity
- e.g., place more women and minorities on company boards of directors
- Gender or sexual orientation
- e.g., no discrimination against women and gays/lesbians
- Sweatshop conditions / child labour
- e.g., maintain healthy work environments, hire only adult workers
- Tobacco
- e.g., eliminate activities that promote sales of tobacco products
- PVCs
- e.g., phase out usage of poly-vinyl chloride products
- GMOs
- e.g., reduce or eliminate food products using genetically modified organisms
- Standards of conduct
- e.g., eliminate human rights abuses, anti-labour practices, corruption, religious discrimination in countries such as: Sudan, Burma, China, Indonesia, Mexico, Nigeria, Chad, Cameroon, Northern Ireland, Tibet
Sample Guideline: Climate Change
| Global Climate Change Consensus among atmospheric scientists that anthropogenic global climate change poses serious threats to the environment and significant economic and social challenges to society continues to solidify. In 2001, the Intergovernmental Panel on Climate Change (IPCC) found "new and stronger evidence that most of the warming observed over the last 50 years is attributed to human activity." Growing evidence indicates environmental damage from fossil fuel burning will be major and worldwide. According to the IPCC, threats to human health and the environment include:
Socially responsible investors have filed climate change disclosure proposals with oil and gas companies, utilities and appliance manufacturers. The sponsors seek information regarding activities to report and reduce emissions, increase energy efficiency, and develop green and alternative sources of energy. Ethical Funds will support these proposals. Source: Ethical Funds Inc. Proxy Voting Guidelines – Environment http://www.ethicalfunds.com/content/sri/sri_at_ef/social_environ_issues.asp |
Sample Guideline: Social Responsibility
| E. Social Responsibility, Ethical and Environmental Considerations Introduction Fiduciaries, according to trust law, must put the financial interests of their beneficiaries first, ahead of any social or political agenda for environmental protection, nuclear energy, human rights, military production and/or employment practices. That means that OMERS fiduciary duty is to obtain the highest returns for the plan beneficiaries with acceptable risk. OMERS believes that the effective management of the risks associated with social, environmental and ethical matters can lead to long-term financial benefits for the companies concerned. Therefore, OMERS will monitor the performance of boards with respect to the disclosure of the impact of social, environmental or ethical issues on financial and non-financial investment risks, and engage with companies who in our view could improve the quality of their disclosures. Generally, OMERS believes that shareholders have a right to know about the activities of their companies. OMERS will examine social, environmental and ethical issues on a case-by-case basis, taking special regard for the effects proposed actions will have on the corporation's long-term value, costs and the financial well-being of beneficiaries. Risks to the company's short- and/or long-term value arising from social, environmental and/or ethical issues should be identified and assessed. Companies should disclose in their Annual Reports all information on social, environmental and ethical matters that significantly affect the company's short- and long-term value. In Ontario, the Employment Standards Act and Human Rights Code make it illegal to discriminate because of race, ancestry, place of origin, ethnic origin, citizenship, creed, sex, sexual orientation, marital status, family status, or physical handicap. Canadian employment and human rights standards are being extended by some advocates to the operations of Canadian companies in countries where these standards are considered to be inadequate. At the global level, human rights and labour issues are extremely complex and open to divergent cultural and political interpretations. OMERS deals with shareholder resolutions individually, and is guided in its proxy voting on these matters by the letter and the spirit of Canadian human rights and labour legislation. OMERS believes that adequate policies and procedures for managing these risks should be an integral part of the overall management of a company, including a process for verifying compliance. All proposals involving social, environmental and/or ethical issues should be evaluated on an individual basis. Voting Recommendation In general, vote in support of:
http://www.omers.com/investments/proxyvoting_guidelines/E-intro.htm |
Outside assistance
Any institutional investor that requires outside assistance in development of guidelines, research and analysis, or proxy management should consider using third-party firms that provide such services in whole or part, such as Fairvest, Innovest, Michael Jantzi and Associates (MJRA), and Shareholder Association for Research and Education (SHARE). These companies may have in-depth knowledge of corporate governance, proxy voting, social investment or social responsibility that may be useful to you. Some maintain extensive databases on corporate social performance as well. Use of their services can generally save quite a bit of time and effort on research, and in some cases provide useful tutelage on the subject of active shareholdership. See Appendix C for more details on these organizations.
