GOVERNANCE MAP

Large Mutual Fund Votes on Social and Environmental Shareholder Resolutions

The US Mutual Fund industry is the largest in the world, with $11.8 trillion in assets under management. Around 35% of this is invested in domestic stocks (see: "Investment Company Institute 2011 Factbook, 51st Edition"). U.S. Mutual fund voting data shows that, on average, the largest of the mutual fund complexes held stocks in around 70% of S&P 500 companies and around 40% of the Russell 3000 across their respective portfolios in 2011.

Since mutual funds, invested as they are across so much of the U.S. securities market, can’t do the ‘Wall Street Walk’, there seems no alternative but to invest in improved market-wide ESG risk management.

Over the eight years that mutual funds have been reporting their proxy votes there’s a discernible trend towards increasing support for social and environmental shareholder resolutions by a number of well-known mutual fund brands. In 2011 hydraulic fracturing, coal combustion waste and political spending were the most supported categories.

Calculated as the percent of votes cast for compared with all votes for, against and abstained, average support for social and environmental resolutions by 30 large fund complexes inched up from around 5% to almost 19% over the eight year period from 2004 to 2011. The average support for environmental resolutions was over 21% in 2011. The graph below shows the 8-year average support trend for 30 large US fund families.



While this certainly represents progress, some of the largest mutual fund groups vote against most or all social and environmental resolutions. Some, including the largest two, Fidelity and Vanguard, simply abstain. The graph below shows breaks the 2011 mutual fund vote down by fund complex during.



BlackRock, an Investor Network on Climate Risk (INCR) member and one of the largest asset managers in the world, recently announced that it will be investing in a campaign of engagement to promote good governance at its portfolio companies (see: "Fink Leverages BlackRock’s $3.5 Trillion in Shareholder Push"). Will this commitment also include voting on social and environmental shareholder resolutions? With increasing international emphasis on institutional investor stewardship following the financial crisis as well as accumulating empirical evidence supporting the business case for sustainability what else will it take to light a spark under other large mutual fund complexes?

2012 Proxy Preview Published. What Can we Expect this Proxy Season?

This year's Proxy Preview was published by As You Sow Foundation, the Sustainable Investment Institute (Si2) and Proxy Impact today.   Authors Heidi Walsh and Michael Passoff provide a detailed picture of the upcoming proxy season, tracing trends in shareholder resolution filing, proxy voting and engagement activities.  

Some of the biggest issues that they identify for this coming season are political spending, hydraulic fracturing and coal-related risks.

The report notes that this year nearly a third of socially responsible shareholder resolutions address concerns about corporate political spending, lobbying, and the influence of corporate money on government policy.  Key contributing factors to the growing interest in corporate political influence are the 2010 Supreme Court Citizens United case and the Occupy Wall Street protest movement.

Hydraulic fracturing engagement activities led by the Investor Environmental Health Network (IEHN) focused initially on disclosure of fracking fluid chemicals and on impacts on waste generation, water contamination and air quality.  This year engagement will draw attention to community impacts. Environmental pollutants from fracking operations are underreported by fracking companies and have a dramatic impact on the quality of life of proximate communities. Eleven fracking resolutions have been filed for the 2012 proxy season of which three have been withdrawn so far.

The report notes a possible reclassification by the EPA of coal combustion waste as hazardous as one of the key contributing factors to the increased shareholder support for coal-risk resolutions in the 2011 proxy season.  A 2011 resolution on coal risk at Ameren earned 52.7% support from shareholders.  Nine coal-related resolutions have been filed for the 2012 proxy season of which one has been withdrawn so far.

Another issue attracting strong support in 2011 following high-profile disasters in recent years is oil refinery accident risk.  Following the Fukushima nuclear disaster nuclear plant safety risk has been taken up by New York State Common Retirement Fund for the 2012 proxy season, with seven resolutions at nuclear energy companies.

The report notes a trend towards increased shareholder resolution activity on environmental issues relative to human rights-related issues over the last few years, continuing into 2012.  One possible explanation is that more companies are amenable to dialogue over human rights related issues. In addition, calls for transparency, accountability and risk management resonate with institutional investors and regulators.  Large institutional investors, including mutual funds, are increasingly recognizing climate risk and related issues as investment risks and well-crafted resolutions are articulating the business case for sustainability.

 

Mutual Fund Voting Survey - 2004-2008

1.6 million mutual fund votes analyzed from disclosures made by 31 August 2008

40 mutual fund families profiled on 2008 votes

600,000 votes on shareholder-sponsored resolutions over 5 years broken down into categories

10.5 million US mutual fund proxy voting records analyzed over five years

Average support for management resolutions at 90%, stable over 5 years

Average support for shareholder resolutions at 36.6% in 2008, up from 31.3% in 2004

SRI mutual fund groups such as Domini, Calvert and Citizens continue to support both governance and social and environmental resolutions filed by shareholders to a far greater extent (at around 81 and 88 percent, respectively) than do mainstream mutual fund groups such as Vanguard, Fidelity, Putnam and others (at around 45 and 11.5 percent for governance and social resolutions, respectively).

Interestingly, opposition to CSR resolutions by mainstream fund groups (votes cast ‘against’ CSR shareholder resolutions) has fallen by a full 13 percent over the five year period, from 85 percent in 2004 to 72 percent in 2008. This corresponds with a large and sustained increase in abstentions by mainstream funds on CSR resolutions over the five year period from 10 percent in 2004 to 16 percent in 2008.

Survey available for download at Fund Votes.

2007 Mutual Fund Votes TalliedHow Activist Are Funds This Year?

In the first summary of how mutual funds voted in 2007, FundVotes.com compares 54 large funds. Funds’ votes on management- and shareholder-sponsored resolutions are tallied and funds are ranked on their ‘activism’ in these two areas.

Drawing on a database of over 7.5 million voting decisions, funds’ 2007 voting records were compared with previous years (2004, 2005 and 2006). On average, funds were slightly less likely to support management resolutions this year than last (although not compared to 2005 and 2004). However, consider this result in context:

Abstentions on management resolutions are slightly up on last year and previous years – so in actual fact, funds are not rejecting shareholder resolutions much more than last year.

Average support for shareholder resolutions is down, and abstentions on shareholder resolutions are up. Both of these results may be explained by the smaller proportion of shareholder resolutions calling for majority voting in director elections – which last year received over 50% support from mutual funds.

As in previous years, SRI funds (Domini, Calvert, Parnassus, Citizens, Coventry and MMA Praxis) were least likely to support management resolutions and most likely to support shareholder resolutions.

Shareholder Support for Climate Change Resolutions Unremarkable

Shareholder support for Global Warming shareholder resolutions has been creeping up over the past three years. In 2006 a climate change resolution achieved a record 39% support by shareholders. This was put forward by the Nathan Cummings Foundation at Standards Pacific Corporation.

A recent article by Bill Baue of SocialFunds entitiled Mutual Funds Inch Toward More Conscientious Proxy Voting on Social and Environmental Resolutions makes this case. It is based a collaborative analysis of the data that I have gathered.

However, support in this area has yet to really gather momentum amongst mainstream funds.

Average shareholder support on climate change and energy efficiency-related resolutions has increased less than four percent since 2004. No more mainstream funds supported at least one global warming issue in 2006 than did in 2004. Counting only progressive resolutions in this category, no more resolutions were presented for shareholder vote in 2006 than in previous years.

So credit is due where credit is earned. The following mainstream funds supported at least one of the progressive resolutions on Global Warming and Energy Efficiency in 2006:

• ABN AMRO
• AIM
• AMERITAS
• BRIDGEWAY
• COLUMBIA
• GARTMORE
• GOLDMAN SACHS
• JANUS
• JOHN HANCOCK/MIT
• JP MORGAN
• LEGG MASON
• LORD ABBETT
• MASSMUTUAL
• MORGAN STANLEY
• NEUBERGER BERMAN
• SALOMON
• SCHWAB
• SMITH BARNEY
• T ROWE
• TIAA-CREF
• WELLS FARGO

It almost goes without saying that this issue would be supported by SRI funds, including (for those that voted on the issue):

• CALVERT
• CITIZENS
• DOMINI
• GREEN CENTURY
• MMA PRAXIS
• PARNASSUS
• PAX

Note that I distinguish progressive resolutions in this category from those that appear to have a conservative agenda aimed at stalling progressive change in this area. In all, there were five such resolutions in 2006. These were filed on or behalf of groups such as the Free Enterprise Action Fund and called for companies to revisit the scientific evidence on climate change in order to assess whether expenditures in increasing energy efficiency were justified. These have been omitted from the analysis.

Fund families' votes on each of the 2006 Global Warming/Energy Efficiency resolutions have been detailed at the fundvotes.com website.

New Staff Report by The Corporate Library:Analysis of Fund Voting (2004-2005)

On Tuesday this week The Corporate Library released a new report authored by this blogger.

The report presents the results of an analysis of the voting behaviour of funds as reported in their 2004 and 2005 proxy filings. It compares voting records on a number of dimensions:

• across the two years (2004 and 2005),


• across 45 fund families and two groupings of fund families: ‘mainstream’ and socially responsible investment (‘SRI’) funds, and


• across 2 main types of shareholder-sponsored resolutions: corporate governance (‘CG’) resolutions and corporate social responsibility (‘CSR’) resolutions, with a closer look at the subcategories of CG resolutions.

The key findings are that:

• SRI funds are more aggressive towards management with respect to both management and shareholder-sponsored resolutions than are mainstream funds, i.e. they are less likely to support management resolutions and more likely to support shareholder resolutions. No surprises here.
• Of the shareholder-sponsored resolutions, CG resolutions are supported to a far greater extent by both SRI and mainstream funds than are CSR resolutions.
• SRI funds show higher levels of support for both CSR and CG resolutions than do mainstream funds.
• Mainstream funds are 4-5 times more likely to support CG resolutions than CSR resolutions, whereas SRI funds were 11-18% more likely to support CG resolutions. On average, SRI funds supported CG resolutions around 75 percent of the time, whereas mainstream funds supported CG resolutions around 50 percent of the time. On average, SRI funds supported CSR resolutions 60 percent of the time, whereas mainstream funds supported CSR resolutions only 16 percent of the time.
• The most popularly supported sub-categories within the broad category of CG resolutions are poison pill rescission or voting, stock option expensing and implementation of a majority voting standard in director elections.
• Resolutions on stock option expensing and poison pill rescission or voting achieved, on average, more than 80 percent support from both mainstream and SRI funds in both reporting years. However, the number of resolutions in both categories decreased by 50 percent between 2004 and 2005 due to regulatory changes and more general changes in board practices, respectively.
• The number of resolutions requesting implementation of a majority vote standard for director elections increased by around 4 times between 2004 and 2005. Whereas no funds included in the survey had supported this resolution in 2004 where it had been voted on, SRI funds supported this resolution 100 percent of the time in 2005 and mainstream funds supported this resolution 60 percent of the time.
• Average support for CSR resolutions by both mainstream and SRI funds declined between 2004 and 2005, with SRI funds as a group showing more of a decline in support than mainstream funds (3 percent as compared to 1.5%). This surprising result has been attributed to the greater use of abstentions (as opposed to a vote for or against a particular resolution) by SRI funds, in particular, Catholic Funds and Parnassus.

The report goes on to explore the voting profiles of individual fund families in relation to some of their published proxy voting guidelines and also explores the implications of, and outlook for, shareholder activism around the majority vote standard in director elections.

Download the report.

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Notice: International Boreal Day of Action

“Kimberly-Clark, stop turning ancient forests into tissue paper.”

November the 3rd is International Boreal Day of Action. On Thursday this week concerned citizens around the world are asking Kimberly-Clark, their governments and other corporations to stop destroying our great northern forest - the North American Boreal forest, which "stretches from Alaska in the west to the eastern provinces of Canada and is the largest tract of ancient forest left in North America. Representing 25 per cent of the world’s remaining ancient forests, the Boreal forest is a globally significant forest."

See dedicated Greenpeace website http://www.kleercut.net for more information. Check out the video. Read the report "Kimberly-Clark: Investing in Forest Destruction".

Sign up for an event in your area.

Send an email to the CEO, Thomas J. Falk, and senior executives of Kimberly Clark.

More information at:
forestethics.org
greenpeace.org
savetheboreal.org
nrdc.org

Heard the Word of Blog?

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Social Screens for Director Nominees: Domini 400 Board Elections

Socially Responsible Investment (SRI) firms often support individual directors on the boards of portfolio companies, even when those same individuals are deeply implicated in the dirty and dangerous industries from which SRI recoils.

In the latest director voting disclosures it was revealed that Domini Social Investments, one of the nation's leading socially responsible investment companies, voted in support of 57 individual directors that also happen to hold board level positions in various arms manufacturing, defense contracting and nuclear energy companies.

While it is unfair to single out Domini Social Investments, since they are widely recognised as one of the leading lights in the SRI industry, the case study is intended to raise general questions concerning the application of socially responsible voting principles to director nominations.

As a socially responsible investment (SRI) company, Domini Social Investments is very careful about where it invests. Domini applies a set of inclusionary and exclusionary screening criteria to its index of 400 stocks (Domini 400 Social Index^SM).

Domini also engages in shareholder activism by sponsoring or co-sponsoring shareholder resolutions and by voting in accordance with its publicly disclosed voting guidelines for principled decision making on human rights, environment and corporate governance issues.

In board elections Domini applies a number of governance-related considerations to candidates: board attendance, board diversity, board independence, independent chairperson, independent committees, and number of other directorships.

However, board candidates are not evaluated on the same social criteria as are applied to shareholder and other management-sponsored resolutions. Domini is not alone in this regard, but this does highlight a massive gap in the SRI industry: individual accountability of board nominees.

I applied Domini’s weapons and nuclear power screens to board elections reported in Domini’s first N-PX filing (24 August 2004)¹ to identify nominees that were supported in their elections to Domini 400 socially screened company boards, but who hold leadership positions at companies in the weapons and nuclear power industries.

Sixty-nine weapons, defense and nuclear power companies were identified that would have been excluded from the Domini index based on the criteria provided at the Domini website. Some of these companies, for instance, Lockheed Martin, Northrop Grumman, Raytheon, FPL, Unicom and Stone & Webster are explicitly mentioned at the Domini website where the screens are explained.

Directors of these companies accounted for 103 nominations in the board elections of Domini Social Investment Fund’s portfolio companies. In 72 cases (70%), Domini Social Investment Fund voted in support of the nominee. The 72 nominations supported are accounted for by 57 individuals.

Some of these individuals are CEO-Chairpersons of the boards of the excluded companies: Marshall Larsen is CEO-Chair of Goodrich Corp, an aerospace and defense company (nominated to the board of Lowe and supported by Domini), Nicholas Chabraja is CEO-Chair of General Dynamics Corp, an aerospace and defense company (nominated to the board of Ceridian Corp. and supported by Domini), John Rowe is CEO-Chair of Exelon, a nuclear power plant owner and operator (nominated to the boards of Unemprovident, where support was withheld, Sunoco and Northern Trust Corp., where Domini supported his nomination) and Lewis Campbell is CEO-Chair of Textron, a defense supplier (nominated to the board of Dow Jones & Co, where his nomination was supported by Domini).

Chairperson of Alliant Techsystems, an aerospace and defense company, Admiral Paul Miller is also amongst those supported by Domini in his nomination to a Domini portfolio company board (Donaldson Co.). Admiral Joseph W. Prueher is on the board of Fluor Corp, a defense contractor, and was on the board of Integrated Defense Technologies, and aerospace and defense firm, until it was acquired by DRS Technologies in 2003. He was supported in his nomination to the board of Merrill Lynch & Co.

Mayo Shattuck, CEO, Chairman and President of Constellation Energy, a nuclear power plant owner and operator, is also a director of the Nuclear Energy Institute, the US membership organization and lobby group for the Nuclear Energy industry. His nomination to the board of Gap, Inc., was supported. Support for his nomination to Capital One was withheld. John Deutch, director of Raytheon since 1998, was director of the United States Central Intelligence Agency from 1995 to 1996, Deputy Secretary of Defense from 1994 to 1995 and Undersecretary of Defense, Acquisition and Technology from 1993 to 1994. His nomination to the board of Cummins Inc. was supported by Domini.

This analysis is intended to raise the following questions:

If the motive for SRI is social conscience, should the champions of nuclear energy and the arms industry receive the stamp of approval from SRI shareholders concerned about these very issues and not prepared to allow their investments to flow into these operations?

If the motive for SRI is to change the way that businesses operate, would the market for corporate leadership respond if candidates for corporate leadership positions were evaluated on social principles?

If the motive for SRI is long-run returns based on strong stakeholder relations, are the captains of corporations that violate stakeholder relations the best representatives of the screened portfolio corporation in relations with stakeholders?

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^{1This covers voting, from July 2003 to June 2004, at Domini's portfolio of 400 socially screened stocks comprising the Domini Social Equity Fund.}

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