| Socially Responsible Shareholdership in Canada |
PART A:
THE RATIONALE FOR SOCIALLY RESPONSIBLE SHAREHOLDERSHIP
- The ethical environment for institutional investors in Canada
- Effects on shareholder return
- Active Shareholdership in Canada
The ethical environment for institutional investors in Canada
Socially responsible investment can be defined as the integration of social, ethical, and environmental criteria into the investment decision-making process for both financial return and the encouragement of corporate social responsibility. Institutional investors now find themselves facing growing demands for socially responsible investment policies in their portfolios. One of the reasons for this is the increasing acknowledgement of the prudence of socially responsible investment (SRI).Many institutions have felt the need to consider two key aspects of SRI. They are increasingly adopting social screens on their investments and developing and implementing guidelines for shareholder advocacy.
Pension plan members, for instance, cannot understand why their pension plans cannot be screened when they have direct evidence from their own portfolios that it is not only possible to screen their investments according to social criteria, but such screening has also produced favourable returns.
Churches and other religious organizations, many of which have invested for years according to various social and environmental screens, are embracing active shareholdership as a means to discuss issues with companies.
Foundations and family trusts are looking to social investment and shareholder advocacy as a way of integrating the goals of their granting programs with their investment policies.
And some screened mutual funds (notably, those managed by Ethical Funds Inc.) are adopting active shareholdership. There are many companies in the portfolios of these funds that pass their screens, but are less than perfect on one or two issues. Active shareholdership represents a way for these funds to retain the investment in these companies while addressing unitholder concerns about them.
The SIO maintains that active shareholdership is an integral part of a well-managed SRI portfolio. Just as institutional investors are taking active shareholder positions on governance issues to directly minimize financial risk, it is becoming good investment practice to actively manage your institutional portfolio on ethical issues to social and environmental risks.
Effects on shareholder return
What about the effect of shareholder advocacy on shareholder return? The evidence points to the conclusion that being an active shareholder makes sound business sense.This is certainly the case where advocacy is conducted on issues of corporate governance. A good example is the giant US-based pension fund, California Public Employees' Retirement System (CalPERS). CalPERS has been the leading proponent of corporate engagement by shareholders for several decades. It annually creates a listing of underperforming companies in which it has investments, and targets them for active dialogue. Such tactics have paid off - one study showed that the share price of 42 targets over a five-year period rose 52.5% higher than the Standard & Poor 500 Index average.
In their recent paper “Corporate Governance and Equity Prices,” Harvard economists Paul A. Gompers and Joy L. Ishii and Wharton School professor Andrew Metrick suggest that companies that protect shareowner rights perform better in the stock market than companies where management controls the board.
Based on data collected by the Investor Responsibility Research Center (IRRC) on about 1,500 firms from September 1990 through December 1999, the study found that the portfolio of companies favouring shareholders outperformed the portfolio favouring management by a significant 8.5 percent per year.
On the other hand, the extent to which a company's long-term profitability and sustainability improves from the exercise of responsible shareholdership in addressing matters of social responsibility is less quantifiable. However, as the following case studies from successful shareholder campaigns show, shareholder action can make companies more responsive to changing external conditions, improve their public profile, and decrease their potential liabilities.
For example, UK-based Pension Investment Research Consultants (PIRC) argues strongly that the 1997 shareholder action against Shell at its 1997 annual general meeting was instrumental in persuading company management to adopt a more enlightened human rights policy in Nigeria and a sustainable development policy, which, among other things, has led to a substantial investment in renewable energy. PIRC maintains that these changes have “put the company in a stronger position over the long term to achieve its commercial objectives as an energy company.”
Recent successful shareholder campaigns in the US also demonstrate this point:
- Home Depot announced an environmental wood purchasing policy and stated that it would eliminate its practice of buying three species of old-growth timber from endangered forests by 2002. At an annual meeting three months earlier, 12 percent of shareholders sent a clear message by asking the company to develop a plan to stop selling old-growth wood. This action clearly positions Home Depot as a responsible supplier of wood, positioning it for future growth in this market.
- After one year of dialogue with shareholders about their resolution, Baxter International, the World's largest health-care products manufacturer, has agreed to look for alternatives and to phase out polyvinyl chloride (PVC) materials in its intravenous products. During manufacture and incineration, PVCs release dioxin. Two hospital corporations – Universal Health Services and Tenant Healthcare – have also agreed to research alternatives to PVCs. It is expected this action will reduce the risk of legal liability associated with these products as well as protect the company against declining market demand.
- RJ Reynolds has agreed to separate its tobacco business from its food business, which shareholders have been encouraging the company to do for years. This will reduce the “tobacco discount” being applied by investors in shares of RJ Reynolds' non-tobacco businesses, allowing them to realize their full value.
- McDonald's has agreed to implement a sexual orientation non-discrimination policy. Trillium Asset Management and the Pride Foundation co-filed this resolution, which was withdrawn after the company agreed to enter into dialog over the proposal. This will make McDonald's more gay and lesbian positive, improving employee morale as well as reducing the risk of litigation.
- Since 1996, shareholders have been asking General Electric to clean up toxic PCBs in the Housatonic River in western Massachusetts. A number of forces, including government agencies, were brought to bear on GE, and shareholder resolutions were instrumental in calling attention to these polluted areas. In October 1999, GE agreed to spend $150 million to $250 million cleaning up a stretch of the Housatonic River that was polluted by PCBs decades ago. While the action will result in a direct bottom-line hit to the company, it reduces the risk that a potential court order could have in requiring the company to make an even bigger cleanup.
If it is true that, ultimately, sustainable corporations are those that pay heed to all their stakeholders, shareholder advocacy is an effective strategy to put real stakeholder influence in place. It also appears to add long-term shareholder value to the corporation. When investors act for others, they ultimately are acting for themselves.
Active Shareholdership in Canada
To what extent have Canadians engaged in active shareholdership? As the following chart shows, there has been a definite trend exhibited over the past eight years in the number of shareholder proposals submitted for voting at corporate AGMs. From fewer than 3 per year at the outset of this period, the last two years for which data is available reveal 63 and 39 submissions respectively.
Part of the reason for this may lie in the recent changes made to the Canadian Business Corporations Act, changes which empower shareholders to a much greater extent than previously.
And what is the focus of much of Canadian shareholder advocacy? It has almost exclusively focused on issues of corporate governance. As the chart below shows, in 2001 the most successful proposals had to do with director affiliations and cumulative voting. Labour standards (i.e., anti-sweatshop issues) were the social concerns that garnered a significant percentage of the votes cast.
It is anticipated that as the movement for socially responsible shareholdership increases in the US, Britain, and other parts of the world, Canada will also continue to be a leader in this important trend. The next section will assist Canadian investors in this by describing the various associated processes.
