Agitating for a Change: Investor Activism Gains Momentum in Enron’s Wake

Agitating for a Change: Investor Activism Gains Momentum in Enron’s Wake

Corporations and regulators respond to the growing army of shareholders concerned with sloppy governance and hazardous conduct. By Avery Yale Kamila

Patricia Wolf is a veteran activist. But you won’t find her waving signs or chanting slogans in the streets. Instead she demands action in the board rooms and at the annual meetings of the world’s largest corporations. As the executive director of the Interfaith Center for Corporate Responsibility, she unites a coalition of 275 religious investors -- churches, hospitals, foundations -- with combined portfolios valued at an estimated $100 billion. Her group is one of the oldest, and most respected, in the ever widening world of shareholder activism.

She recalls the early days of investor advocacy and says much has changed. "Corporations were very adversarial back then," she says. "They’d never been challenged. Both sides were unsophisticated."

Socially responsible investing -- buying shares in ethical companies -- has roots in religious traditions dating back centuries, most notably the Quakers. However the modern movement of activist stockholders (a close cousin to socially responsible investing) sprang from the civil unrest of the 1960s. Back in 1971, six Protestant churches banded together as the first shareholder agitators. They approached companies in which they were shareowners and asked about profits from the Vietnam War and South African Apartheid. Others were thinking along similar lines. The first socially responsible mutual fund -- Pax World Fund -- was born that same year.

A few years later, Catholic churches joined the fledgling Interfaith Center for Corporate Responsibility, and, more recently, Jewish groups have come into the fold. Wolf reports there is now interest from the Muslim community.

These days, her group is part of an allied front with mutual funds, labor unions, charitable foundations, state pension plans, and high net worth individuals. And the ranks continue to swell. Recent corporate scandals, the bear market, and growing evidence of a link between environmental management and financial performance have provided investors with plenty of reasons to seek corporate leadership that is hip to today’s challenges.

Wall Street Wakes Up

This year has given socially conscious investors much to brag about. Lipper, a mutual fund research company, tallied the cash put into and taken out of mutual funds during the first quarter of 2003. Their findings: socially responsible funds netted $185.3 million, while U.S. diversified funds suffered net outflows of $13.2 billion.

Innovest Strategic Value Advisors is the financial world’s top bean counter when it comes to environmental impact and corporate governance. In every industry sector Innovest has analyzed, companies that place in the top half of their ranking system consistently outperform the bottom half. For instance, when they analyzed the forest products industry, they found environmental leaders ahead of foot-draggers by 43 percent over 4 years.

"Investors in Europe, the UK, and Japan are extremely concerned about these issues. More so than U.S. investors," says Peter Wilkes, managing director of business development at Innovest. "But that is changing rapidly. Enron has brought these issues to the forefront, and we’re seeing a not so subtle sea change in perception. Our business has started to pick up substantially in the U.S."

"Only a small portion of our entire client base is interested in shareholder activism," says Suzanne Fallender, vice president and managing director of the social investment research service at Institutional Shareholder Services. The firm provides proxy voting advice to large investors. "But interest has grown in the last year. Particularly around corporate governance."

"What happened with Enron and Tyco has really made clear the relationship between good management and good corporate governance," says Mark Thomsen, research and news director at SRI World Group, a socially responsible investing news and consulting service. "A lot of people in the social investment industry are putting their efforts to regulatory change."

Taking center stage in the push to beef up regulations governing publicly-trade companies is the Sarbanes-Oxley Act passed by Congress last July. The act aims to improve corporate accountability, transparency, and responsibility. It’s now in the hands of the Securities and Exchange Commission, which must interpret the act and issue rules and regulations.

Which means the agency is suddenly very popular. Companies and investors are heavily lobbying the SEC to bend the rules to their particular persuasion. Most expect compromise regulations that do not fully satisfy either side. A good example -- the recently released rules allowing shareowners to nominate board of director candidates. Most activist investors view the rules as a productive first step, but say they fall short of significant reform. While corporations worry the rules will allow special interests to infiltrate their board rooms.

How a Gripe Becomes a Resolution

Shareholder resolutions are what most of us associated with investor activists. However, they’re the option of last resort. Wolf says her organization starts in issue groups, talking about such topics as Third World debt, HIV/AIDs, or violence in society. Companies with a particular stake in the issue are identified, and letters are sent to executive management asking questions about potential risks. What happens next is up to the corporation.

"Companies are very different," says Donald Kirshbaum, investment officer for policy at the state of Connecticut’s retirement plans and trust funds, valued at $18 billion. Connecticut, under treasurer Denise Nappier, has become a leader in shareowner activism. "Some companies you’ll hear from right away. Others you’ll never hear from. Our goal is to get companies to do things we think will make them perform better. We’d rather talk to the people who will take the action than file a resolution. But sometimes you need a shareholder resolution to get the company’s attention."

When companies respond, the two sides meet and issues are often addressed away from the glare of publicity. However, if a corporation won’t talk, they often get slapped with a resolution. These resolutions are vetted by the SEC and, if approved, appear on the proxy voting card at the company’s annual meeting.

"We file a resolution in the absence of feedback or the willingness to enter dialogue on the part of the company," explains Joanne Dowdell, director of corporate responsibility at Citizen Funds. The mutual fund company, with an estimated $1 billion in assets under management, co-filed four resolutions this past season.

The state of Connecticut filed over 20 resolutions, and the Interfaith Center on Corporate Responsibility sponsored 144 resolutions at 99 companies.

According to the Investor Responsibility Research Center, 1,040 shareholder resolutions were filed in 2003 -- a 20 percent increase over 2002’s 802 resolutions. The bulk of these resolutions, 760, were related to corporate governance issues.

Not only are more resolutions being filed, but nontraditional backing is growing. "The only way to get over 50 percent is with broad institutional support," says Kirshbaum.

This year, a vote at Avon requesting an annual board election yielded the support of 80 percent of shareowners. At Cooper Industries, 43 percent of shareholders supported the issuance of a sustainability report (up from 21 percent in 2002). A resolution at American Electric Power, requesting a report on the company’s climate change risk, garnered 27 percent of the vote -- the highest level of support yet for this issue.

The American Electric Power resolution had the endorsement of Institutional Shareholder Services. The firm caught many by surprise last year when it issued similar guidance for a renewable energy resolution at ExxonMobil. Twenty percent of ExxonMobil shareowners took their advice. (An increase from nine percent in 2001, when Institutional Shareholder Services gave the proxy a thumbs down.)

"Climate change is going to remain a top environmental issue," says Fallender. "The uncertainty surrounding the issue requires more disclosure and more understanding by investors."

Her organization doesn’t always recommend in favor of global warming resolutions. This year they opposed initiatives similar to the American Electric Power vote at Weyerhaeuser and PG&E, yet backed one at General Electric. Fallender says they evaluate each resolution on a case-by-case basis, with particular emphasis on the company’s disclosure policies and how it compares to others in its segment.

Global Warming Is Not All That’s Hot

Climate change hogs much of the attention, but it’s not the only issue on the minds of investors. In addition to global warming, Wolf says her organization is pursuing eight other concerns ahead of the 2004 proxy season -- accessibility and affordability of drugs; privatization of water; genetically-modified organisms; human rights; global labor standards; equality; pay disparity; and predatory lending.

She also says they always look at who sits in the corporate board room. "Boards that are diverse in terms of gender, racial background, and professional mix are better boards."

The state of Connecticut will place particular emphasis on corporate governance this year, according to Kirschbaum. Executive compensation, board member communication with shareholders, board diversity, climate change, and global labor standards are on the state’s 2004 list.

Dowdell says Citizen Funds is still working on their 2004 plan, but mentions a number of areas likely to receive attention. They include: human rights; global warming; board and management diversity; staggered boards; CEO compensation; stock option plans; and the Global Reporting Initiative.

It’s clear shareholder activists aren’t going away. Should current trends continue, more institutional investors -- who haven’t aggressively questioned corporate policy in the past -- will join the fray. But there’s also the possibility that many of the newer activist investors are really bear market reactionaries. "My concern is when a market starts going up, people forget what went on," says Innovest’s Wilkes.

Yet signs of real change lurk in the increased willingness of corporations to talk to shareowners. "At many corporations, stakeholder engagement has become part of the culture," says Wolf. She points out ExxonMobil as a glaring exception to this rule. "They’re isolated in terms of their thinking. In the long run, we think this is going to injure them."

But even ExxonMobil is making noises about its intentions to play nice with others. A recent Toronto Globe and Mail article predicts the company could change its head-in-the-sand approach to climate change risk when the current chairman and CEO, Lee Raymond, steps down (an event likely to happen next year).

In the meantime, forward-thinking investors will continue to press corporate leaders for financial accountability, global responsibility, strict governance, and long-term sustainability. A strategy likely to be judged by our grandchildren as a no-brainer.

Avery Yale Kamila is the founding editor of, an online magazine that publishes book reviews and feature stories for sustainable business leaders.