Once, they could be dismissed as troublemakers who bought a few shares to make a point. It would be dangerous to do so now. By one calculation, socially and environmentally responsible portfolios have over $1.2 trillion in assets, and at any moment a company can find itself in the sights of do-good shareholder activists.
A company could find itself praised for environmental policy, but attacked for anti-union policies – or vice versa. Monsanto has been singled out by some for being on the cutting edge of nefarious genetic engineering for crops, but is praised for its disclosure policy. Companies once reviled for South African connections now find themselves benefiting from the blessings of Saint Nelson Mandela.
The baby boomers’ yen for a comfortable lifestyle along with a clear conscience has put billions in screened portfolios, and their pension funds, as well as those of their churches, unions and other organizations, scrutinize more than just the bottom line when looking at their investments. Studies showing that goody-goody investments are actually good for the bottom line help those who want to gild their haloes for their retirement.
The good performance of the ethical portfolios is not necessarily a sign of divine favor. According to Dr Arthur Lowrie, president of Good Money, a Boston-based resource center for socially responsible investment, ‘On the whole, most studies have shown that you need luck to match the market, and a little more luck to do better than the market. The industries that we avoid are the ones most likely to be sued, most likely to be regulated, or are going to have bad community relations. One of my favorite examples is WR Grace. It can’t do business in Massachusetts because it polluted half a dozen community water supplies. Nobody wants them, and so when they try and open up a new shop all hell breaks loose.’
Bodies like Lowrie’s, the Council on Economic Priorities and the Interfaith Center on Corporate Responsibility, share information and concerns with institutional shareholders and often wield their proxies to get the attention of management on a whole series of issues. Add in growing links with major pension funds like Calpers and New York City funds, and that’s a lot of clout. ICCR alone represents almost 300 religious organizations with a combined portfolio of over $50 bn.
It’s not necessarily activists who buy a share or two to act as a ticket to glory at annual meetings. Charles Miller, executive director of the Evangelical Lutheran Church’s division for church and society, is typical of the many who are investors first and activists second. Their main aim is a good return to safeguard their ministers’ pensions, but ‘after the investment we have a lot of contact with corporations, on the basis of our social policy. We present shareholder resolutions to companies and hold shareholder dialogue on those issues,’ he says.
In addition to the church’s own investments, the ELC’s fund has $4 bn in pension assets for which it applies several screens. These filter out ‘direct production of war products,’ and the ELC is considering others, ‘on harmful products like tobacco, and another on environmental issues.’ It is also considering making recommendations to investors in congregations, which would given considerably more leverage. ‘We’re working on the web site to let them know our screens and shareholder resolutions, or, preferably, the dialogue we are having with companies.’
Locked door
Activists may well like pushing at an open door, with nice companies like 3M being the target for proxy campaigns. You might think private prison company Correction Corporation of America would also be a target for shareholder activists, but it seems not. None of them has ever beaten a path to this securely locked door. CCA’s IR person Peggy Lawrence says the company has had no dealings with such stockholders, but hastens to point out that it is not involved in any death row activities either.
On the other hand, following a shareholder resolution to drop tobacco advertising from its billboards, 3M Media first agreed to reduce them by half, then in 1996 agreed with ICCR to phase them out completely by the end of 1998. 3M’s IR officer Jon Greer comments, ‘Really these are not major investors – they are certainly not major drivers of our stock price. We do have people who specialize in the issues management area and we in IR work with them. We receive written questionnaires that we respond to and we’ve had some contact with New York’s treasurer to check whether our Northern Ireland businesses abide by the McBride Principles.’ Greer also points out that since the agreement with ICCR, 3M has sold the company concerned, although for different reasons.
RJR Nabisco’s IR man Huntley Whitacre is refreshingly candid about the socially responsible activist investors. ‘We just don’t have that type of investors, because naturally they tend to screen out tobacco companies. I very rarely get what you could call anti-tobacco questions; people want to know about litigation, restructuring. Serious investors understand what tobacco is all about. They know it’s a health risk; they go in with their eyes wide open.’
The company still attracts proxies from groups like the ICCR but, Hunt says, ‘They come, put their proposals and leave. They have their few moments of life at the annual meeting. We’ll certainly answer any questionnaires that they send but refer them to the legal department if they come with proxies. They want us out of the tobacco business, which no serious investor wants. Those that want us to divest on a social basis, well where does the tobacco business go then? It always perplexes me.’
Stalks & bonds
Another company that has been under attack is Monsanto, ‘Although less so since we sold our chemicals business,’ says vice president Nick Filippello. Currently some groups are questioning the use of genetically modified crops, but more so in Europe than in the US. When investors raised it on a recent roadshow in the UK, they were concerned more about product liability than any environmental questions. In fact, he very rarely has to field such questions, although he responds to the various groups. Indeed the CEP praises Monsanto’s ‘good disclosure policy’.
Filippello questions the figure of 10 percent socially responsible investment, which the SRI community estimates is the average for US companies. ‘We certainly have much less than 10 percent of our investors raising such questions, and again, much less than 10 percent of the questions we field are about them. They are very rare.’
General Electric spokesman David Warshaw comments: ‘It’s a fact of life that some shareholders will use an annual meeting to create publicity, and under the rules and guidelines of the SEC, they can do so.’ Indeed, the 1998 proxy season featured hits on everything from nuclear reactors to military production and public education on PCBs in the Hudson River. Warshaw concludes resignedly: ‘We’re a broadly-based company and so it’s not surprising we tend to attract a broad variety of such agenda-driven shareholders who seek to get publicity. We treat those proponents with the respect they deserve. They have a view and a right to that view. Our response is to deal openly with such groups, and to answer the questions in whatever form they may come.’
Warshaw continues: ‘We recognize that some shareholders are going to swing their portfolios depending on their views on a variety of issues. One would hope that they are looking at returns, then they’ll buy GE to get excellent returns, but they may also have other screens to make those investment decisions.’
Good marks for bad companies
Romy Gottfrid from the Council on Economic Priorities does not really care whether it is the lawyers or the IR department who answer her questionnaires, but she is impressed by how many of the ‘bad guys’ are completely transparent. They are graded on A to F, and some that get an F for environmental concern, get an A for transparency. ‘We’ve just finished an environmental survey of 15 oil companies and 13 of them participated. In fact, one of the companies at the very bottom responded very actively to get me all the information.’
Maintaining radio silence will not necessarily allow ‘bad’ companies to slip through the social screen. There is no presumption of innocence on their part, Gottfrid points out. ‘Of course, there are companies that don’t respond to our questionnaires and our automatic assumption is that if they do not respond to these issues, then they are probably not caring enough about them.’ She thinks that the trend is toward ‘plea bargaining’ on proxies. Managements want the resolutions withdrawn from the proxy card and the groups concerned agree, in return, say, for meeting and communicating with management on the issues.
WR Grace is the unwilling inspiration for the current Travolta film A Civil Action and the target of the actions in Massachusetts mentioned by Lowrie. In measured terms, corporate affairs officer Jane McGuinness admits that in terms of community relations in that state, ‘We have certainly learnt a lot, and made significant progress. The community environmental leaders in Woburn have since praised us for our public involvement in the town.’ Even so she regrets that there are groups with a ‘long institutional memory,’ that still have WR Grace on their hit list. ‘They tend to think we’re guilty even before we’ve done anything.’
The seemingly beleaguered company has had no investor calls about its corporate behavior that she or the IR department can recall. The pattern seems to suggest that IR officers have little to fear, although several of the activist groups point out that ‘admired’ companies can command a stock price premium – and that their behavior as corporate citizens is one of the determinants. It may be intangible, but it is there – and the ‘socially responsible’ investors are growing in number. Beware.
