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Filed under: April 2003

Shareholder activism and proxy voting

There has been criticism leveled at proponents of ethical investing. Here’s why. The most common way to start putting together a portfolio of socially responsible investments is to screen for companies involved in nefarious businesses, or corporate practices…nuclear, tobacco, alcohol, gambling or pornography won’t get you included in most ethical funds, neither will dealing with human rights abusers, or having a poor labour relations or environmental record. The critics argue that this ‘negative screen’ approach has more to do with everybody feeling better about their investments than being a catalyst towards actually improving corporate behaviour. They say that ethical investors are simply engaging in self-gratification.

However, socially responsible investing does not end with the decision to buy or sell a stock. In some ways, it’s just the beginning. That’s because shareholders – the owners of common stock in publicly-traded companies – have the right to vote on a wide variety of company policies and practices. If you own stock indirectly through your mutual fund holdings, then the fund managers or their agents will vote your shares on your behalf. This is called proxy voting.

For anyone with the urge to take corporations to task for their social or environmental behaviour, the front lines may be found at the annual general meeting of company shareholders. Yet the battle to improve corporate conduct can be a difficult one, as the following example might suggest.
According to a press release issued by the Shareholder Association for Research and Education in May of last year, a resolution calling on Hudson’s Bay Company (HBC.TO) to put in place a process to end alleged sweatshop abuses in its supply chain was supported by 36 percent of the shares voting at their annual shareholders’ meeting. This represented the largest vote ever in support of a social resolution before a Canadian corporation and a significant gain over the 2001 vote on a similar proposal that received approximately 15 percent of the vote.

The resolution put forward at the meeting urged the board of directors to adhere to the International Labor Organization’s (ILO) Declaration on Fundamental Principles and Rights at Work, and report to shareholders annually on compliance. Four institutional investors sponsored the proposal. On the morning of the meeting, La Presse reported that the Bay’s largest shareholder, the Caisse de dépôt et placement du Quebec, with 10.14% of outstanding shares, supported the call for the Company to conform to the ILO standards and would abstain from voting on the resolution.

And there’s the rub. Without the support of institutional money managers, resolutions such as this go absolutely nowhere. The Caisse, to their credit, at least had the decency to declare their position on this vote, well, as far as you can call abstaining a position. I am curious to know how some of the other major shareholders of Hudson’s Bay voted. How did the BC Investment Management Corporation vote? How about Fidelity, Investors Group and Mackenzie Financial? Or the equity management arm of the Canada Pension Plan? The problem is that this kind of information is virtually impossible to come by because there is no securities law in Canada that requires these institutions to disclose how they have voted their proxies.

So let’s give a one-handed clap for the Caisse, and enthusiastic applause for the rare money managers in Canada who actually publish or declare their proxy voting intentions. The Ethical Fund family for instance, sets an excellent example by posting a comprehensive disclosure on their website outlining their voting guidelines on a multitude of corporate governance and social responsibility issues.In many cases, companies are responsive to entering a dialogue before shareholders are asked to vote on a matter. If not, then shareholder resolutions can focus their attention. In some cases, simply filing a shareholder resolution can bring companies to the negotiating table. They often prefer to avoid having social and environmental concerns placed in front of all shareholders. A resolution can then be withdrawn from the ballot if the company commits to an acceptable course of action.

Shareholder action seeks to help companies improve, says Bob Walker, vice-president of SRI policy and research at Ethical Funds in Vancouver. As a shareholder, Ethical Funds meets with the companies it holds on a regular basis. “We often meet with companies well in advance of their annual general meetings,” he says. “Many of these dialogues can go on for several years.”

With ethically invested funds making up a paltry 5% of the market in Canada and the major money managers under no duress to disclose their proxy votes, you might wonder how resolutions such as the one presented to Hudson’s Bay shareholders will ever pass. Well I believe there is some encouraging news on that front.

South of the border, the U.S. Securities and Exchange Commission recently voted to adopt rule amendments that would require mutual funds and other registered management investment companies to disclose their proxy voting policies and procedures, and their actual proxy votes cast. These amendments are designed to enable fund shareholders to monitor their funds’ involvement in the governance activities of portfolio companies and to encourage funds to vote their proxies in the best interest of fund shareholders.Similar measures have yet to be passed in Canada, and indeed, any such discussion in this country is muted at best. However, the view from here is that the sooner that Canada’s investment managers are required to disclose their proxy voting policies, the sooner shareholders will have the transparency they require to influence corporations to align economic, social and environmental interests.

The bright side is that there is little doubt companies are coming to realize that social responsibility is good for their business. “Strong social values will really help them in terms of profitability,” says Deb Abbey, who manages the Real Assets family of funds in Vancouver . “What do their employees think of them? What do their communities think of them? What do consumers who buy their products think of them? All of those things together are pretty powerful contributors to the bottom line.”

I know that many ethical investors question the inclusion of certain companies in their portfolios, particularly in the mining, oil, and banking industries. Yet rather than disengage from these corporations completely, is it not advantageous to meet them on their own turf and work to affect their behaviour through your rights as a shareholder? Or have your fund company do so for you?

And by the way, if you consider shareholder activism to be fruitless, or at odds with what might be the primary goal of making a decent profit, consider this. The Economist recently reported that a team at Harvard Business School examined 1,500 companies and found that those most responsive to shareholders gave 8.5 per cent higher annual returns in the 1990s versus management dictatorships.

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