Yes, We Can, Too
Everyone, from the progressive Left to “Obamican” crossovers, has high hopes for the new administration. Social investors are no exception. We share the expectation that the Obama administration will take a hands-on approach to many of the problems we’ve addressed for years, including climate change and other environmental priorities, predatory lending, inadequate regulation of the financial markets and much more. There’s a subset of policy reforms, however, that are being championed more or less exclusively by the social investing community, and those are the subject of this article. What follows is a brief summary of some of the policy reforms we’re audaciously hoping (and lobbying) for to remove specific barriers to the advancement of social investing.
On December 11, more than 60 social investors (including Trillium Asset Management Corporation) wrote to President-elect Barack Obama seeking the restoration of the right of investors “to propose and vote upon resolutions asking a company to evaluate how specific risks may affect the company’s business…. These include the kind of credit risks associated with the mortgage crisis, as well as an array of environmental and social issues which we believe may have large financial implications, e.g., climate change and product toxicity.” The appeal stems from the Securities and Exchange Commission’s Bush-era stand against shareholder resolutions requesting that a company evaluate the risk related to a line of business or an emerging social or environmental trend. (The SEC arbitrates between companies and shareholder resolution filers when companies challenge the submission of resolutions based on any of 14 technical and substantive rules. Corporations have been arguing that proposals that address risk violate the “ordinary business” exclusion.)
For example, in 2006 the SEC disallowed, on “evaluation of risk” grounds, a resolution at Ryland Group that was virtually identical to a proposal that had passed muster at Ryland the year before. Another example of the use of the head scratch-inducing “evaluation of risk” exclusion was the dismissal of a proposal at Washington Mutual earlier this year asking the company to discuss its potential financial exposure as a result of the mortgage securities crisis. The number of such exclusions as violations of the “ordinary business” rule has increased significantly in the last several years, as have inconsistent applications of the rule.
Making the World Safe for Pension Fund Activism
In October, the Department of Labor (DoL) issued two interpretive bulletins at the prodding of the U.S. Chamber of Commerce. One modified its longstanding view that pension plans may engage in shareholder advocacy without violating their fiduciary duties as defined by the Employment Retirement Income Security Act. Because the letter is confusingly written, the extent to which the DoL is seeking to impose stricter constraints on shareholder advocacy by pension funds is unclear. One thing is clear, though: the bulletin is inconsistent with prior DoL regulations. The Social Investment Forum is calling upon the new administration to discard the bulletin and clarify that existing practice has not changed.
The second bulletin declared that DoL would not, from now on, consider environmental or “so-called ‘green’ companies” to be acceptable economically targeted investments (ETIs). But why? In a letter to the DoL sent in December, the Social Investment Forum asks, “Why did the Department include an example that seems so out of place, arguably irrelevant, in a discussion of ETIs? Is it, as contemplated by one commentator, a suggestion of a broader intent behind the ETI bulletin? Or is it so far afield that it should be regarded as an error?” The bulletins are a parting shot from an administration beholden to business interests whose ideology recognizes no value in the consideration of extra-financial factors.
Not Too Much Information
Last summer, the SEC announced the “21st Century Disclosure Initiative,” inviting investors’ comments on the creation of “a comprehensive high-level plan for overhauling the Commission’s current forms-based disclosure system.” A report is due by year-end. While the Initiative is mostly concerned with modernizing the technology of disclosure, Trillium took the opportunity to respond to the SEC’s invitation to comment on any other types of information it should be seeking from companies. We put in a plug for requiring corporate reporting on sustainability issues such as the environment (e.g., risks to business from water scarcity and climate change) and political contributions. Rather than reinvent the wheel, we suggested, the SEC should look at integrating Global Reporting Initiative reports into its filing requirements. (The French, Danish and British governments, as well as the South African stock exchange, already require sustainability reporting from major companies.)
This is consistent with positions we have supported as a member of the $7 trillion Investor Network on Climate Risk (INCR), which promotes better understanding of the financial risks and opportunities posed by climate change. In September 2007, the INCR petitioned the SEC to address the obligations of publicly-traded companies to assess and fully disclose the material economic opportunities and risks from climate change. Senate Banking Committee leaders, Senators Christopher Dodd (D-CT) and Jack Reed (D-RI) also supported the petition in a letter sent to the SEC in December 2007, and language urging the SEC to require companies to disclose their climate risks is included in the Senate Committee on Appropriations report accompanying the 2009 Financial Services and General Government Appropriations Bill.
Along these lines, as we wrote about in the Fall 2008 issue of Investing For A Better World, Trillium has also lobbied the Financial Accounting Standards Board (FASB)to enhance disclosures about loss contingencies by expanding the population of potential liabilities that must be disclosed, requiring more specific information about those potential liabilities, and mandating clear and transparent disclosure formats. (While FASB is not a governmental body, the SEC has designated it as the organization responsible for setting accounting standards for public companies.)
Why Vote? It Only Encourages Them
Why can’t shareholders nominate the board directors who nominally represent them in the governance structure of the corporation? If you answered, “because only the Red Queen could defend the logic of corporate board elections,” that is partially correct. But the root cause is that the SEC says we can’t.
At the end of 2007, in a vote described by former SEC Chairman Arthur Levitt as “probably the most important vote the commission has taken in nearly 15 years,” the SEC Commissioners voted 3 to 1 against allowing shareholders access to management’s proxy statement to nominate corporate directors, the most recent defeat for an idea with strong support from shareholders but fierce opposition from the corporate community. But with such strong backing and a friendlier administration in place, the issue is not dead yet. If the SEC doesn’t reconsider, Congress may do it for them. Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County, and Municipal Employees, told RiskMetrics recently that a proxy access provision may be included in compensation legislation or a broader bill to overhaul the SEC.
Yes, We Can Provide Mutual Fund Products
And finally, what does one have to do to get a good set of socially responsible mutual fund options around here? Some federal workers have been asking that question for years because the Thrift Savings Plan, the retirement plan for all federal civilian and armed services employees, currently contains no socially responsible investing options. Thankfully, Congressman Jim Langevin (D-RI) introduced the Federal Employees Responsible Investment Act at the urging of these workers. Now to pry it out of committee.
A Shareholder Bill of Rights?
With new leadership in Washington, the conditions may be right for shareholders to win, and in some cases win back, their rights. Prior to this fall’s stock market meltdown, some were even predicting the passage of a “shareholder bill of rights” – covering executive pay and the right to nominate directors – within the first 100 days of the new Administration. Given the ongoing financial and economic crisis, this is less likely but not out of the realm of possibility. After all, as an investor who personally divested his stock in a company doing business in the Sudan, our new president is certainly sympathetic to at least some of the fundamental ideals of social investing. It’s a new day.