The Multinational Monitor

December 1988 - VOLUME 9 - NUMBER 12

C O R P O R A T E   E T H I C S


By Heidi J. Welsh

WHITE SUPREMACISTS, animal rights activists, and some large pension funds have at least one thing in common. They all have used shareholder resolutions at major U.S. corporations to promote their political interests. Nearly every burning social cause has found its way into the minutes of corporate board meetings since 1970. In that year, overtly political issues were deemed admissible for shareholder consideration for the first time by the Securities and Exchange Commission (SEC), which regulates shareholder-company interaction.

Today, although the "greening" of corporate America has not occurred, directors have been forced by determined activists to reconsider many of their actions from a social justice perspective. In 1988 alone, 111 companies considered 157 resolutions on about a dozen social issues. Shareholder proponents often do not fit the traditional mold of political activists. They have, moreover, moved from the left to the more mainstream political center, and a number of conservative resolutions have surfaced. Companies have been asked about their dealings with Communist countries by Young Americans for Freedom and about "media fairness" by Accuracy in Media. Also, in 1988, AT&T was required to consider a particularly poisonous proposal from a neo-Nazi group that asked the company not to hire blacks and other minorities. Such proposals, however, are the exception.

The vast majority of shareholder resolutions raise questions about investment in South Africa and Northern Ireland, military production and the environment. Some have targeted infant formula and tobacco marketing in the Third World, while others have dealt with labor issues such as equal employment. Animal rights groups took on the corporate arena with shareholder proposals for the first time in 1987 and plan to propose 10 resolutions in 1989.

The History
The activists who challenge companies on their own ground today had far different forerunners two decades ago. If someone had told community organizer Saul Alinsky in 1966 that in 22 years the New York State Common Retirement Fund would sponsor proxy resolutions asking corporations to withdraw from South Africa, he might have believed it. But Alinsky liked to think that nothing was impossible. It was while he was helping to organize the black community of Rochester, New York, against Eastman Kodak, that Alinsky hit upon the idea of proxy politics.

The community group he assisted convinced the owners of 39,000 Kodak shares to sign over their proxies to it, in opposition to Kodak management. In the end, the company agreed to implement a minority hiring program agreeable to the dissidents.

Then, in 1968 and 1969, a group of young physicians--the Medical Committee for Human Rights--challenged Dow Chemical's production of napalm for use in Vietnam. The SEC ruled in 1969 that the group's proxy request "that the company shall not make napalm" was not admissible under its rules governing proxy statements. The Medical Committee went to court and persuaded the U.S. Circuit Court of Appeals for the District of Columbia to rule in its favor, breaking the ground for hundreds of shareholder proposals to come.

The Medical Committee ruling was issued in the summer of 1970, shortly after the first round of Campaign GM, another definitive event for shareholder activism. Extensive press coverage and the support of consumer advocate Ralph Nader accompanied the submission of the Campaign's proxy resolutions that questioned corporate responsibility at GM. Although the resolutions received less than 3 percent of GM shareholders' votes, the considerable publicity made it a success in the eyes of its initiators. Project director Philip Moore stated, "The measure of victory is not the votes, but the kind of debate we can have between shareholders and the public, so we can explore new ways corporations can be made responsive to the public."

Institutional Dissent
The shareholder activism movement has grown from a smattering of individuals questioning corporate power to a well-established, if fractious, coalition of disparate institutional investors who regularly pressure major companies. The individual shareholders who developed the tactic had few hopes of changing company policy by forcing change. Instead, publicity was their primary goal, with hopes that the general public and other shareholders would become outraged enough to pressure management or legislators, and ultimately create corporate policy changes. Other goals were to create a more self-conscious business community, to educate the stock-owning middle class politically, and simply to harass "bad" companies. These intermediate goals remain important for some shareholder dissidents today, even though most resolutions now come from institutional investors who may not share these objectives.

Churches became the mainstay of the shareholder activism movement during the 1970s. They grounded their shareholder philosophy in a religious commitment to social justice. Their approach has been both tenacious and conciliatory. Before stepping into proxy pressures, churches used selective investment screens to avoid "sin" companies; many still do not invest in companies producing tobacco or alcohol products, for instance.

Although public pension funds recently have been in the limelight of dissident shareholder activism, churches remain crucially important to the movement's progress and show no signs of slacking their efforts. South Africa is an issue as a matter of course for them, but many no longer address apartheid through proxy resolutions because they have divested of companies directly involved in South Africa.

A clear win for religious groups in the early 1980s was the adoption of World Health Organization (WHO) guidelines on the sale of infant formula in developing countries by major U.S. pharmaceutical companies. They continue to be concerned about formula use; military issues and a relatively recent effort targeting worker rights at U.S. assembly plants operating in Haiti also keep church activists busy.

Colleges and universities have been more unwillingly drawn into the socially responsible investment debate. Despite their function as a cauldron of protest over South Africa-related investment, educational institutions generally have not been proponents of shareholder resolutions.

Although more than 140 schools have adopted some kind of South Africa divestment policy (often under considerable student pressure), divisions within the educational community and concern for "academic objectivity" have precluded stronger activist positions. Nevertheless, the academic debate over socially responsible investment defined a rationale for action now used by public pension funds, which entered the fray in a serious manner for the first time in 1985.

Pension Funds
With billions of dollars in assets, the financial clout of the public pension funds guarantees them a hearing when they raise concerns with corporate management. Some of the richest funds in the country--notably the New York City and New York State public employees' funds--have taken a prominent role in the push to make companies leave South Africa. Teachers' Insurance and Annuity Association/College Retirement Equities Fund, the pension fund/insurance company for college and university professors with some $30 billion in equities, has also sponsored resolutions calling for withdrawal from South Africa.

Further, the New York City funds have promoted adoption of the MacBride principles, similar in spirit to the Sullivan principles, that gauge U.S. companies' fair employment practices in Northern Ireland. The MacBride campaign has increasing support around the country, with laws enacted in 10 states and proposed in eight more and the District of Columbia. Pension fund activism has been mandated by state and city law in most cases. The idea that socially responsible companies provide better returns is also percolating up into the circles of established financial wisdom, a development that makes pension fund managers looking for good returns more likely to consider support for social issues proxy proposals.

Does it work?
The big question for those considering proxy resolutions as a means to change corporate policy is whether such activism is worthwhile. A critical view contends that it is an exercise with too many prerequisites (ownership of at least $1,000 of stock for a minimum of one year) and too few substantive results.

Supporters of the tactic, however, maintain that they have found a unique form of access to the makers of corporate policies that have direct impact on the lives of people around the world. They also point to several instances of affirmative corporate response to shareholder pressure. Numerical victories are rare, since management generally owns a controlling interest and nearly always recommends voting against shareholder proposals.

Success is measured in doses of low percentages of the overall shareholder vote. Just 3 percent is required for a first-time resolution to qualify for resubmission the following year, 6 percent if it is a second-year proposal and 10 percent if it is under consideration beyond a third year.

Initially, activists had trouble meeting these modest requirements, but now nearly all resolutions manage to survive at least one airing; in 1988 nearly 95 percent of all resolutions that came to votes were eligible for resubmission. South Africa proposals have earned the highest consistent support, but respectable scores on other issues have shown up as well, with the average for all resolutions hovering around 10 percent for the past two years.

The corporate exodus from South Africa since 1985 is the most frequently cited example of shareholder victory. Shareholder activists, however, can claim only partial responsibility for gains in this area; many complex factors came into play. Restrictive contracting requirements by major U.S. cities and states have been at least as important as shareholder resolutions and adverse publicity. An overall picture of increased corporate responsibility in other areas is harder to draw and less encouraging for those wanting change across the board.

Activists measure their success in more ways than voting results, however. Although the ultimate goal for activists may be stopping nuclear weapons production or ending apartheid, intermediate aims--publicity, education and reminding corporations that people are watching--figure prominently in shareholder strategy, and vary depending on the type of activist. A close look at the South Africa issue and its treatment in the corporate world provides a framework for assessing shareholder activism in general. Because South Africa illustrates the most fully developed instance of corporate reaction to pressure, it remains an example of how far an issue may go, given the right conditions.

Substantive impact on corporate policy regarding South Africa is clear: first, companies adopted the Sullivan principles (called the Statement of Principles since Rev. Leon Sullivan disavowed them in May of 1987) to placate activists. Then, many U.S. companies began to leave South Africa. Since 1985, 172 U.S. companies have ended their direct investment, a move widely attributed to activist pressure of one sort or another. The cutting of non-equity ties such as licensing and franchising agreements is next on shareholder activist agendas; to date, 68 of the 149 US. and Canadian companies that disinvested since January 1, 1986 are known to maintain such ties. Despite these developments, the economic isolation that would bring South Africa to its knees, has not occurred--and the Pretoria regime has granted few concessions to its opponents. The recent treason trial and conviction of South African anti- apartheid activists is a frightening example of the government's position, whatever positive image it tries to paint through apparently conciliatory regional moves.

In sum, U.S. companies substantially reacted to anti-apartheid pressure, providing intermediate success for shareholder activists, but the dissidents' ultimate goal of changing the face of apartheid is still far from being realized. It may, however, be too early to assess the effect of withdrawals over the long haul.

The South Africa fallout in other areas of shareholder concern seems to create at least two apparently fallacious assumptions. From management's side, there appears to be a tendency to assume dissidents want companies to pull out if they direct concern at employment practices in a specific country.

Northern Ireland is a good example. Activists on that issue do not advocate corporate withdrawal, recognizing the country's serious economic problems; instead, they want to end potential discrimination against the Catholic minority. But when companies hear mention of the MacBride principles, Sullivan and South Africa may spring to mind, with the mental jump to disinvestment not far behind. In this vein, the British government maintains that the MacBride campaigners are making an already problematic investment climate more unattractive. Since South Africa has attained such prominence, the tendency is to assume a transferral of activist intent to other issues when that is not necessarily the case.

A more accurate parallel would be an image of progressive corporate involvement as a positive force in the affected community--be it in Northern Ireland or elsewhere. Activists are not immune from projecting improbable scenarios based on their South Africa experience, either. Some tend to believe that additional codes of corporate conduct can be promoted more easily now. But the level of outrage generated by South Africa's institutionalized racism is quantitatively different than that regarding other issues, however important those subjects are. Although the Northern Ireland effort is making clear headway, its route has not been smooth.

A less prominent example of limited issue coattails concerns the Soviet Union. Shareholder resolutions on Soviet trade have always fared poorly and companies so far have given a cool reception to the recently devised Slepak principles for labor and religious rights there.

Still, dissident shareholder actions are granted more credibility today than ever before, even if this increased respect is tied to the type of sponsor and to the particular issue raised. If a broad political protest movement with solid popular backing does not stand behind a shareholder resolution campaign, the proposals probably will continue to face an uphill battle in changing corporate behavior. But as familiarity with corporate territory and sophistication increases, shareholder activists will have ever greater impact. Ken Sylvester, who votes proxies for the New York City pension funds, recently concluded that, "In the years that we have been proposing resolutions, we have been able to convince many corporate managements to adhere to our requests. That, I think, is a measure of success."

Heidi J. Welsh is a research analyst for the Investor Responsibility Research Center.