Archive for April, 2010

Key Issue: Sustainability Reporting

ProxyDemocracy concludes our series on social and environmental issues appearing on proxy ballots with this article on sustainability reporting. The coverage was provided by the Sustainable Investments Institute, the Washington-based research center. Heidi Welsh, SI2’s co-founder and executive director, wrote the final report.

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The 38 sustainability reporting proposals filed in 2010 account for one of the biggest slices of the activist pie this year, but two-thirds of the resolutions have been withdrawn after agreements, leaving just 16 pending.

Companies have grown more comfortable with the concept of sustainability reporting given investor pressures for more disclosure. Accords with proponents have been driven by the high votes these proposals receive, as well as recent regulatory developments.

Stakeholders: Calls for comprehensive sustainability reporting on environmental and social issues come from a wide range of corporate stakeholders. Pension funds, religious groups, foundations and social investment funds favor detailed disclosure to ensure companies are effectively managing their social and environmental risks and opportunities.

Their demands are supported by a growing body of academic literature that also has helped convince mainstream investment analysts, who are seeking data they can incorporate into both qualitative and quantitative investment risk and opportunity models. The proponents also believe that robust disclosure is closely tied to effective corporate management of critical public policy issues that affect constituencies beyond the investment world. These, too, hold implications for the terms under which firms operate.

Efforts to enlist companies in the search for a more sustainable global economy got their start with environmental initiatives begun 40 years ago by multilateral organizations. As the United Nations has gradually drawn private sector actors into its efforts, it has helped to expand the definition of corporate sustainability to encompass social factors such as respect for human rights, although the latter present a complex challenge for sustainability assessment.

Key voluntary schemes: Keen interest by so many players has produced a dizzying array of voluntary standards and codes of conduct, which have yet to coalesce into a single international protocol. Several voluntary initiatives stand out, including the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP).

Nearly all the 2010 shareholder resolutions ask companies to use GRI and to participate in CDP’s annual survey; both organizations boast an impressive array of supporters and each provides companies with a well-developed reporting framework. Members of the U.N. Principles for Responsible Investment, which boasts adherents with some $20 trillion in assets under management, support cooperation with both GRI and CDP. PRI members work to promote more disclosure and are continuing to press companies to sign on to yet another set of principles, the U.N. Global Compact.

Policy questions: The sustainability resolutions present investors with two key questions: 1) whether sufficient evidence exists to support a clear link between good performance on environmental, social and governance (ESG) factors and positive financial return, and 2) whether investors have a fiduciary obligation to take ESG factors into consideration in their investment management approaches.

Meta-studies from Mercer Investment Consulting suggest there is scant evidence of a negative ESG-performance correlation, while a study just released by MIT Sloan Management Review underscores the potential for significant profitability and competitive advantages that can be realized by aggressive sustainability management. Further, the landmark 2005 legal opinion from international law firm Freshfields Bruckhaus Deringer that said ESG “is arguably required in all jurisdictions” was updated in 2009, with a new analysis that concluded investment managers may be sued by their clients if they do not take ESG issues into account, further upping the legal risk ante.

Regulatory developments: The regulatory landscape, still roiled by the financial crisis and its aftermath, saw important developments related to sustainability in the last year. In the United States, the Securities and Exchange Commission issued new interpretive guidance for companies on Jan. 27, saying that firms now must report the material effects of climate change in their regular securities filings.

The SEC also signaled its clear interest in examining additional ESG disclosure mandates, and gave favorable mention to the GRI guidelines. The new SEC Investor Advisory Committee is considering a wide range of options that give investors a much greater voice in securities regulation and leaving the door open for more scrutiny of corporate activity.

The U.S. developments are occurring as ferment continues in Europe, where several months of discussion focused on how corporate ESG disclosure might be made “better and more widespread” have just concluded.


International Initiatives and Codes

 Recent Papers of Note

 Key Regulatory References


April 19, 2010 at 11:06 am Leave a comment

Key Issue: Labor Rights

ProxyDemocracy continues its coverage of social and environmental issues appearing on proxy ballots in 2010 with this installment on labor rights. More than 30 resolutions have been introduced this year on matters such as sweatshop labor and the disparity in pay between executives and lower-wage workers. The series was produced by the Sustainable Investments Institute, a Washington-based research center. SI2 co-founder Peter DeSimone wrote this report.

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This year’s lineup of labor rights proposals cover a range of issues, including:

  •  Pay disparity and concerns about differences between executive pay and wages for line workers. There have been 22 proposals filed.
  • Supplier labor standards and the debate over eradicating sweatshops in global supply chains. At least four proposals have been made.

Pay disparity:  The fractious public debate over disparity in pay between CEOs and entry-level employees has centered on the potential resentment it creates in the workplace, the risks associated with exorbitant short-term incentives, the negative effects of growing income and wealth disparities in the United States, and the possible disservice to shareholders in detracting from long-term shareholder value. 

The recent financial crisis has heightened the standoff and focused scrutiny of pay practices at financial services firms, especially those receiving bailout money under the U.S. government’s Troubled Asset Relief Program.

Besides seeking remedies through financial reform legislation, investor activists are asking companies for reports summarizing a review of executive compensation policies and pay practices. The reports would compare the total pay packages, including benefits, of each company’s top executives and lowest paid employees; an analysis of any changes in gaps in these pay bands; a determination if executive pay at each company is excessive; and a recommendation on whether changes or further monitoring is warranted, especially in light of any large disparities in pay or layoffs at each company.

Opponents say the activists’ contentions that CEO pay is out of line with share performance are flat wrong and contrary to the findings of a study commissioned by The Business Roundtable.  They also note that pay-for-performance is now routine at the vast majority of publicly traded U.S. companies.  Moreover, they warn, companies hamstrung by restrictions preventing them from paying market rates for executives risk losing key leaders and ground to competitors.

Supplier labor standards: Sparked by reports of abusive labor conditions from factory floors producing apparel and footwear in the 1990s, the anti-sweatshop movement in the United States has been in full swing ever since, although far fewer shareholder proposals have been filed on the subject in the last few years.  Activists’ attention has expanded beyond the retail sector to many other industries, including toys and agricultural products, the target industries of this year’s shareholder proposals.

Squaring off in this debate are labor-rights advocates and free-trade supporters.  The former argue that globalization is creating an unhealthy “race to the bottom,” as developing countries fiercely compete for scarce capital, contracts, investments and jobs.  They also raise concerns that suppliers violating basic labor covenants are also likely to be cutting corners in other places, namely quality, which could further damage a company’s reputation.

Free traders say globalization has created jobs where none existed before, and sweatshops are a natural byproduct of the progression from developing country to industrialized nation.  They argue that conditions will improve as economies grow and that until then market forces should prevail, as they provide the quickest path to prosperity.   

The shareholder proponents are asking companies to adopt supplier codes of conduct containing internationally recognized labor standards, to monitor suppliers for compliance with these codes and to report on findings from these activities.  They say that doing so will help companies mitigate risks to reputation related to engaging sweatshops and improve supply chain management.

Some critics question the effectiveness of voluntary corporate code compliance programs.  Detractors argue that shareholders should not have to shoulder the costs of enforcing labor laws in the face of government neglect.

Other labor issues:  At least eight resolutions have been filed on issues such as fair employment in Northern Ireland, the hiring of illegal aliens and the documentation of workers, and employee health care plans. 


Pay Disparity

 Supplier Labor Standards

April 16, 2010 at 10:24 am Leave a comment

Pay Disparity at Goldman Sachs

Lance E. Lindblom and Laura Shaffer of the Nathan Cummings Foundation argue in the New York Times that huge paychecks for top corporate executives are out of whack with reality — especially at Goldman Sachs Group Inc.

Shareholders should send Goldman Sachs a message by using their shares at the firm’s annual meeting on May 7 to press for more information on the pay disparity between top corporate executives and rank-and-file employees, Lindblom and Shaffer write. The foundation has been a supporter of ProxyDemocracy.

April 15, 2010 at 10:04 am Leave a comment

Key Issue: Industrialized Food Production

As part of ProxyDemocracy’s series on social and environmental issues in the 2010 voting season, we examine industrialized food production. The Sustainable Investments Institute (SI2), a research center based in Washington, produced the series. This report was written by Julia Beth Proffitt, an analyst with SI2 and founder of LanX, a project designed to support local communities and economies by providing sustainable investment opportunities for small to mid-size enterprises.

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 A total of 17 shareholder resolutions filed in 2010 address industrialized food production.  Campaigns to change corporate behavior in the area of industrial agriculture and food processing have focused on animal rights and animal welfare, emphasizing the abuses entailed by factory farming.

The primary players have been animal advocacy organizations such as People for the Ethical Treatment of Animals and the Humane Society of the United States. Recently, however, the questions on this set of issues have expanded beyond animal welfare to include broader concerns about how the current food system affects public health, worker welfare, ecological systems and local and regional economies and communities.

 Nearly all the 2010 food industry proposals do address the treatment of animals, though the framing of these proposals brings in broader concerns.  Specifically, most target poultry industry practices, with two areas of concentration: cage-free eggs and controlled atmosphere killing.  A few new resolutions from religious investors address the impact of industrial farming on the environment and the practice of non-therapeutic antibiotic use in farm animals. The Interfaith Center on Corporate Responsibility has a campaign to reform practices in the meat industry. 

 Cage-free eggs:  At least four proposals filed this year encourage restaurants and retailers to gradually switch to cage-free eggs.  Discussions prompted by the resolutions have led to company action that satisfied the proponents and has resulted in two withdrawals so far.  Although there are those who dispute the merits of cage-free eggs, the eggs apparently have significant appeal for a large niche market, which may explain companies’ willingness to move on this issue.

 Slaughter:  The largest number of proposals encourages the phasing-in of poultry slaughtered using controlled atmosphere killing, which is presented as a more humane alternative to the dominant industry practice of using electric immobilization before slaughter. Both techniques are designed to render birds unconscious to eliminate pain perception before slaughter begins.

 Company positions on this issue have been more rigid than with cage-free eggs, with few firms willing to make the switch.  Industry experts argue that the current stunning practice is humane and effective, whereas proposal advocates argue that it is not foolproof and that electric immobilization failures result in inhumane treatment of the birds, creating hazards for workers and compromising the quality and safety of the food product.

 Both types of proposals described above address practices that are outside the bounds of current federal law.  For example, the 1978 Humane Methods of Livestock Slaughter Act does not cover the slaughter of poultry, although the USDA does support humane considerations in its description of “good commercial practices.” Although several states have recently passed legislation bearing on poultry husbandry, the living conditions, treatment and slaughter of poultry are guided largely by voluntary standards.

 Laboratory animals and animal cruelty:  Separately, just one or two proposals seem likely to come to votes on animal testing.  Most of the 17 resolutions on testing and cruelty focused on indirect support of animal research, by requesting that companies consider limits on charitable giving to entities that conduct animal research; this fell afoul of the Security and Exchange Commission’s prohibition on contributions proposals that mention specific causes.  Other company challenges of additional proposals on labeling and animal cruelty look likely to succeed at the SEC.


General Background

 Animal Welfare

 Industrial Agriculture

 Poultry-Specific Issues

April 14, 2010 at 4:04 pm Leave a comment

Proxy Preview 2010 Published

Proxy Preview 2010 has been published by the San Francisco-based As You Sow Foundation. The report describes social and environmental shareholder proposals under consideration in the current proxy season and provides useful resources for investors and voters.

April 12, 2010 at 8:45 am Leave a comment

Keeping Tabs on Mutual Funds

ProxyDemocracy earned a citation as a fund-industry watchdog from the Wall Street Journal, while money managers themselves got a demerit for failing to keep an eye on corporate excesses.

“To the millions of Americans wondering how Wall Street’s compensation culture got so brazen, one part of the answer may come as a surprise: It’s your mutual fund,” Ian Salisbury writes in the Journal.

“Many Main Street investors have fumed at the huge bonuses paid to Wall Street executives and traders following a government bailout of the financial industry,” the article says. “Yet directors at companies such as Goldman Sachs Group Inc. and Morgan Stanley are mostly expected to sail to reelection in proxy voting this month and next –and among the parties casting the most votes will be fund-management companies.”

Complex trading rules and fund companies’ oversight of corporate 401(k) plans are cited as possible reasons for the industry’s weak record in challenging management on pay and other issues.

ProxyDemocracy helps “investors keep tabs on the behavior of individual fund families” by assessing their votes on executive pay, corporate governance and issues such as the environment. Visit here to see how your fund company rates.

April 5, 2010 at 2:44 pm Leave a comment


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