Ethical Performance
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social issues to the fore as annual meeting votes draw near

April 2007

This year’s proxy voting season  in the US looks like being one of the liveliest yet. Activist investors, buoyed by recent successes, sense that on key issues such as executive pay, climate change, political contributions and majority voting, this might just be their year.

According to Institutional Shareholder Services, the world’s largest provider of proxy voting and corporate governance services to institutional investors, the number of social issues proposals voted on at the annual meetings of US companies has fallen over the last three years, from 186 in 2004 to 177 last year. However, support for such resolutions has grown among the broad base of investors, who were nearly twice as likely to vote in favour of a social proposal in 2005 than in 2004.

There are also signs that companies may now be more sensitive to investor concerns. The number of such proposals put forward by investors and subsequently withdrawn has risen in the last two years, ‘often after fruitful discussions with management’, ISS says – and last year proponents of corporate social responsibility ‘won significant support for proposals seeking reports on political contributions, fair employment practices, and sustainability’.

The prospect of an extension of investor rights is a further stimulus to US shareholder advocacy. Investors there are looking at the wider rights enjoyed by European shareholders, particularly on advisory votes on executive pay. Their interest in having a greater say in the governance of companies poses a policy conundrum for the Securities and Exchange Commission, whose board is currently split on whether to allow access to the proxy for the purpose of nominating directors to the board. This uncertainty has helped boost activism too.

KLD, the Boston-based SRI asset manager, says that executive pay is in the spotlight this season. It has already been the subject of 143 proposals, according to ISS, 48 of which favour closer links between pay and performance. Last year only 17 such proposals came to a vote. The SEC’s recent decision to water down its ruling, issued last summer, that companies detail their CEO’s compensation has drawn greater attention to the debate, says KLD. Following the change, companies now have to report the amount of stock options exercised each year, not the total stock options package.

Political contributions are another hot topic, on which a record number of companies are expected to vote this season, according to the Center for Political Accountability. The watchdog says that shareholder groups are pressing 44 companies to disclose and require board oversight of their political spending. By last month, seven – American Electric Power, General Dynamics, General Electric, Hewlett-Packard, Home Depot, Monsanto and Verizon Communications – had agreed to ‘adopt political transparency and accountability policies’, and a further 12 were in discussions with their investors, according to the Center. Many of the resolutions cover both direct and indirect spending, including payments to trade bodies for political purposes.

Climate change is also breaking records this year. So far 42 global warming resolutions have been filed, nearly double the number of climate-related resolutions three years ago, according to the Coalition for Environmentally Responsible Economies (Ceres). Resolutions filed by institutional shareholders controlling more than $200 billion (£103bn) in assets seek ‘greater disclosure from companies on their responses and strategies to climate change’. New York City comptroller William Thompson Jr, whose office has filed resolutions with electric power and coal companies, says: ‘Companies must provide full and transparent disclosure of the action they are taking to address the risks and opportunities of climate change.’

Ten of the companies targeted have been put on a ‘Climate Watch’ list by the investors, on the grounds that they are lagging behind industry peers. They are ACE Limited, Allegheny Energy, Bed, Bath & Beyond, ConocoPhillips, Consol Energy, Dominion Resources, ExxonMobil, Massey Energy, TXU Corp and Wells Fargo. For as long as activist investors feel they have the wind behind them, the pressure on companies is unlikely to abate.

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