Naked in public…proxy voting disclosure

With big business under increasing scrutiny and pressure from forces acting to make them more accountable, it must seem to many executives as though they are being asked to take all of their clothes off in public. Some are doing so willingly, and it’s often not a very pretty sight. Nevertheless, the evolution towards greater corporate transparency continues to gain momentum.

This process has accelerated in the U.S., where the Securities and Exchange Commission recently ruled that mutual fund companies must now disclose how they vote the proxies they hold on behalf of tens of millions of shareholders. This comes as a result of some heavyweight U.S. pension funds flexing their financial muscles in order to counter corporate sleaze.

On the other hand, the Investment Funds Institute of Canada argues that this sort of disclosure would not be helpful to investors. “We do not believe that a portfolio manager’s record of proxy voting is widely desired by Canadian mutual fund investors or is meaningful in assisting them to make buy, hold or sell decisions or is otherwise conducive to greater investor protection.”

IFIC also expresses concern about the potential politicization of the voting process should proxy disclosure become mandatory. “We think that the disclosure of this information is being sought by special interest groups that wish to use the proxy voting practices of fund managers and the Canadian investment funds industry generally as a vehicle to further their respective social and political agendas,” says IFIC. Hooey says me. Is environmental protection a special interest? Do they see no effect on share performance if a company exhausts the environment upon which they likely depend, or undermine the social fabric of the communities in which they operate?

The truth is however, that the vast majority of investors choose not to exercise their rights as common shareholders to vote at AGMs, or have given over those rights to mutual fund companies who, in Canada at least, have neither the obligation nor will to disclose how they vote this proxy on behalf of their shareholders. Fortunately, exceptions to the status quo are becoming more common.

In Canada, the movement towards taking corporations to task at their AGMs has been advanced by the management at Ethical Funds in Vancouver. Ethical Funds is one of the rare money managers in this country that has embraced the concept of reporting on their proxy-voting intentions, and disclosing the results of this voting to it’s shareholders. In Canada, they have been followed by Acuity, Meritas the Ontario Teachers Pension Fund and the Ontario Municipal Employees Retirement System.

Financial Sector Lending Policies Ethical Funds has been leading a team of US investors and environmental groups in establishing a dialogue with a major financial backer of the controversial Three Gorges Dam project in China. This engagement has seen the backer respond by creating an environmental and human rights policy that addresses the terms for future development work on this project. Ethical Funds is also working with Canadian banks to have them incorporate environmental and human rights concerns into their lending policies.

Engaging pharmaceutical companies Affordable pharmaceutical prices, support of the Global Fund for HIV/AIDS, tuberculosis and malaria, and immunity from liability for generic manufacturers to produce and distribute US-patented pharmaceuticals needed in developing countries are resolutions sponsored by Ethical Funds.Major Canadian energy companies are facing resolutions asking them to detail the range of potential financial liability associated with their greenhouse gas emissions. This disclosure would include their strategies to reduce this liability, an estimate of the costs and benefits of substantially reducing emissions under a range of reasonable carbon pricing scenarios, and with special reference to the possible role of investments in renewable energy. Walmart is faced with an Ethical Funds resolution that would have the company commit itself, it’s international suppliers, and it’s own international production facilities, to the implementation of a code of corporate conduct based on the UN International Labor Organization’s human rights, and commit to a program of outside, independent monitoring of compliance with these standards.

IPSCO Inc., one of North America’s leading steelmakers, has announced it will adopt the shareholder proposal filed by Ethical Funds this past winter and voted on by its shareholders at the company’s Annual General Meeting (AGM) held April 30, 2003. The proposal received 49.2% of the shareholder vote, the highest level of support ever recorded for a shareholder resolution focusing on environmental concerns in Canada.

The Ethical Funds proposal calls for IPSCO to establish a policy of disclosing facility-specific toxic and greenhouse gas emissions. Previously, the company had refused to disclose its greenhouse gas emissions at any of its 14 facilities (seven in Canada and seven in the US) and its toxic emissions at its Canadian plants. The company will now offer these disclosures under Environment Canada’s National Pollutant Release Inventory.

This is by no means an exhaustive list of Ethical Funds? work in the arena of shareholder action, and one can argue that socially responsible investors have a long way to go to truly shape corporate behaviour in the interest of all stakeholders. Nevertheless, the age of corporate transparency is upon us. In their recently released book The Naked Corporation: How the Age of Transparency Will Revolutionize Business, authors Don Tapscott and David Ticoll postulate that, “Transparency is about much more than corporate disclosure about financial performance, and it is spreading everywhere. It is causing thoughtful companies and other institutions to revise their values and behaviour for the better. Law No. 1 for today’s corporation is that, increasingly, you are going to be naked whether you like it or not. Law No. 2: If you’re going to be naked, you better be fit”.

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