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December 05, 2008

Shareowner Advocates Find Hope Despite Troubled Economic Times
    by Robert Kropp

SRI community looks beyond traditional methods of corporate engagement to realize opportunities presented by the financial crisis and a new administration. -- Shareowner advocacy by socially responsible investors often originates with the formulation of proposals on matters of importance to the investors. Current high-profile issues include climate change and executive compensation. In many cases, these proposals are withdrawn before coming to a vote at annual shareowner meetings, usually when the companies targeted indicate a willingness to engage with activist shareowners in order to come to an acceptable plan of action.

"Challenging companies via shareowner proposals is an important tool in the toolkit, but only a small part," said Laura Berry, Executive Director of the Interfaith Center on Corporate Responsibility (ICCR), an association of 275 faith-based institutional investors.

"A proposal can gain 4% of the shareowner vote the year it is introduced, 7% the next year, and 11% the year after that, and be considered successful," said Berry. "Even if more than half the shareowners vote in favor of a proposal, the company is under no obligation to honor the vote."

Because proposals often advance in such incremental steps, activist shareowners often consider engagement a more effective alternative. spoke with prominent members of the SRI community about their plans for engagement with companies on a number of critical issues.

Julie Gorte, Senior Vice President for Sustainable Investing at Pax World, a mutual funds company recognized as a leader in sustainable investing, highlighted several areas in which Pax World will concentrate its efforts.

"Pax World identified 16 companies held in the Women's Equity Fund that have operations in countries identified by the US Department of State as "Tier 2 Watch List" countries," Gorte said. "These countries have a significant number of victims of severe forms of trafficking, and fail to provide evidence of efforts to combat severe forms of human trafficking. Pax World sent letters to the companies expressing our concern regarding the added risk exposure these companies face and to ask them to address the issue, and received responses from several companies. All of the respondents shared Pax World's concerns regarding human trafficking."

As an advocate for workplace diversity, Pax World plans to address problems with compliance found at some companies. Gorte said, "Pax World plans to engage with companies on the issues of workforce diversity data disclosure, representation of women on boards and in management, and about programs to attract, hire, retain, and promote women in the workforce. We also plan to continue to withhold votes from slates of directors that do not include women."

Stu Dalheim, Director of Shareholder Advocacy at the Calvert Group, a fund company that includes a number of prominent SRI funds, envisioned an expanded role for shareowner engagement.

"Calvert is a member of the multi-stakeholder Global Network Initiative, which is committed to the principles of privacy and freedom of expression in the information and communications technologies," said Dalheim.

According to the Center for Democracy and Technology (CDT), the Global Network Initiative, launched in October, provides guidance for companies, NGOs, investors, academics and others working together to resist efforts by governments that seek to enlist companies in acts of censorship and surveillance that violate international standards.

"The members of the Initiative met several times to develop the set of principles that were published this fall," said Dalheim. "It made for an interesting model," he said, referring to working toward a common goal in collaboration with companies.

Dalheim also noted with approval the maturation of the issue of Corporate Social Responsibility (CSR). "More and more often, companies recognize the need for good governance, and choose to get a dialogue going with us so shareowner proposals don't have to be filed."

Dalheim sees a silver lining in shareowner action on the issue of subprime mortgage lending. "Calvert has written to nine companies asking for information on consumer lending policies," he said. "We have received responses from some, and will file shareowner proposals to force accountability from the others." An enthusiastic supporter of the Community Reinvestment Act (CRA), Dalheim maintains that "The CRA had nothing to do with" the subprime lending crisis that led to the current global financial meltdown.

Berry of ICCR also referred to the subprime lending crisis as a benchmark for the empowerment of socially responsible investors.

"In 1993, ICCR members combed through publically available data from HUD on the housing sector, and raised warnings about the economic implications of predatory mortgage lending practices," she said. But ICCR was but a small voice in the wilderness then—even though the hard data with which it supported its conclusions were available to all—and its warnings went largely unheeded.

But today, Berry asserts, "Represents a great opportunity for the institutionalization of hope. The stakes are higher now, with the natural world melting and the financial markets melting. It's as if we received a sweet slap upside the head, and everything is starting to converge."

For shareowner advocacy, the convergence to which Berry refers is of special interest in her insistence that there can no longer be an entity known as a private company, whose activities are shielded from the public domain.

"We have to start demanding a more consistent framework for corporate reporting," she said. "A commitment to rigorous analysis of externally required data could lead to the monetization of social capital," resources that are linked to relationships of mutual recognition.

As an example of monetizing social capital, Berry referred to a study of early childhood education by the Federal Reserve Bank of Minneapolis, which found that "the return on early-childhood-development programs that focus on at-risk families far exceeds the return on other projects that are funded as economic development. Cost-benefit analyses showed returns ranging from $3 to $17 for every dollar invested. This implies an annual rate of return, adjusted for inflation, of between 7 percent and 18 percent."

Both Berry of ICCR and Dalheim of Calvert find cause for optimism in the arrival of a new administration in Washington DC. Berry said, "Ronald Reagan changed the question from 'Are we better off?' to 'Are you better off?' At this point in time, I think we can safely say, 'I'm not better off. You're not better off. And we're not better off.'"

It may seem counter-intuitive to proclaim the current economic crisis as a cause for optimism. Yet prominent voices in the SRI community find in the crisis an opportunity to evolve from isolated voices in the wilderness to collaborators in a new paradigm, in which the crises we face lead to a shared responsibility among government, corporations and shareowner advocates. The mutual acknowledgement among all parties that nothing less will prevent social and environmental disaster should magnify the prescience of the SRI community in an environment no longer in thrall to an untrammeled ethic of deregulation.

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