SpruceRoots Magazine - July 2001

by John M Farrell

Facing down pepper spray and tear gas is not an easy way to throw off the yoke of globalization. A growing number of activists are finding shareholder action to be an equally dramatic tool for social change.

When Bruce Herbert stepped up to the microphone at an annual Starbucks' shareholder meeting he had the best of intentions.

America's leading specialty coffee retailer had a poor record of labour practices across a string of coffee plantations in Guatemala. Workers there saw roughly 65% of what is considered a normal living wage for the average Guatemalan family. Herbert wanted management to address the issue of fair wages. He wanted the company to do the right thing.

Confronting the company's top brass at a public meeting of its owners was a risk, but previous attempts to influence corporate policy had fallen flat. The company was claiming that because it doesn't own the plantations directly it has no influence over the labour situation. That's hard to swallow coming from a company whose sphere of influence extends to over 3,300 locations worldwide with net earnings topping $400 million.

But Herbert had not come to admonish but to praise. He started in by publicly acknowledging some of the progressive steps the company had made over the past couple of years. He highlighted a $100,000 donation to CARE, which made Starbucks the largest corporate donor to the international relief and development organization. Yet despite this largess, Herbert continued, it was important for the company not to confuse charity with justice because CLICK. The microphone went dead.

The sound system at the front of the room continued to operate quite well. Well enough to hear the company's chief executive launch into a scathing though well-scripted denouncement of the shareholder campaign.

"It really took us by surprise because we weren't attacking the company," said Herbert, thepresident of Newground Investment Services, an investment advisory firm in Seattle. "We weren't saying they were a heinous blight to the planet. We were just saying the company is in a position, given its successes and profitability, to share some of that with the people who grow things upon which all this success is based."

Starbucks may have silenced a critic's voice, but it was only temporary. The event had proven embarrassing for a company with a well crafted reputation as the 'good corporate citizen'. Dulling the shine was not good for business. Worrisome still was the fact that Herbert was no gadfly appearing as an annual annoyance. He's a shareholder activist backed by a strong and influential coalition of faith-based investors that included churches and pension funds. This time, the push for change was coming from within.

Four years later, Starbucks had dusted off its much lauded but never exercised "code of conduct"- a code that was quickly drafted by management when it first got wind of the shareholder campaign. As part of this commitment, Fair Trade coffee is now being served as a house selection. Coffee carrying the Fair Trade label ensures that farmers are guaranteed a premium over the prevailing price being paid for coffee on the international market. "We're keeping the pressure on," says Herbert. "The company is making some changes."

The world in which corporations could do as they pleased while shrugging off the concerns of the public without feeling the consequences has become a little less cozy. Demands for greater social responsibility are getting louder, better organized and more popular.

Take Canada's largest independent oil and gas company. Talisman Energy Inc. was stung by one of the largest campaigns ever mounted against an oil company since taking control of a remote oil project in the east African country of Sudan nearly three years ago. Leading the charge is a coalition of church-based institutional investors, represented by the Taskforce on the Churches and Corporate Responsibility. The coalition charges that oil is fuelling Sudan's civil war and the company continues to pay royalties to an unaccountable and brutal military dictatorship.

At last year's AGM, a Task Force-sponsored shareholder proposal asked the company to issue an independently verified report on its compliance with international standards of human rights, and to explain what steps it would take to ensure that money from oil development did not finance the civil war. The proposal received an unprecedented 27% support from shareholders (proposals must garner at least 3% in the first year it is introduced). But the report issued by the company last month failed to meet the expectations of either social investors or human rights groups.

Company executives will be forced to answer some hard questions at their annual meeting in Calgary come May. While it is too early to gauge the outcome, the impact of the campaign has been felt across the corporate landscape. By any standards the amount of negative publicity generated over this issue was impressive. Talisman's Sudan operations may represent only a fraction of its overall oil and gas production, but the company's stock value has taken a pounding. The campaign also forced institutional investors, who own most of the shares in large companies, to make a choice. Many multi-million dollar pension funds chose to divest.

For shareholder activists the goal is to change corporate behaviour by making company managers more accountable and socially responsible. The key to the campaign is in filing a shareholder resolution. This is usually carried out by institutional investors such as foundations, mutual and labour funds and trusts. But individuals can also be active shareholders by simply buying stock in a company which in turn gives the investor the right to vote on corporate policies each year at an annual general meeting. The work for activists comes in persuading other shareholders to vote for a resolution mandating that management take certain actions.

In the United States the rules and regulations that allow a shareholder to initiate a resolution are defined by the Securities and Exchange Commission (SEC). An investor is first required to hold $2,000 worth of shares in a company and hold it for one year before a resolution can be proposed. If the resolution is of general enough interest to the shareholders at large it is then submitted to the company and copied to the commission. The company than has the option to challenge the proposal. But if all goes well-and it usually does-the resolution is included in the proxy materials that go out to all shareholders for voting.

"A resolution can be brought forward by just one shareholder but a multitude can join in the same filing," explains Herbert. "Typically, more is better. In part, because the more shareholders you have the larger your voting block. It creates a sense of a broader buy in."

Canadian shareholders are not required to buy a minimum number of shares to prove ownership but they do face a thornier set of regulations that discriminate against action on social and environmental issues. One barrier is that shareholder resolutions can only be circulated by "registered" shareholders-mostly trust companies-making it difficult for social investors to circulate resolutions for a vote. The biggest barrier is the exclusionary language contained in the Canada Business Corporations Act which permits corporate management to reject resolutions filed "primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes." Armed with this clause, companies have refused to circulate shareholder proposals that they consider have a social or "green" agenda.

Bob Walker of Ethical Funds of Vancouver says that is all about to change. New legislation before the House of Commons removes the offending clause and allows individuals and institutional investors to file a resolution directly.

"The churches have been lobbying for a dismantling of these barriers for 15 years," Walker says. "We expect a backlash from business but we're keeping an eye on this. We're confident this will go forward."

Still, aside from legislative constraints, registered investors often shy away from voting on social proposals unless they are tied to a company's bottom line. That is why activists talk about building a good business case.

Investors are more likely to favour resolutions that are strategic in nature, that look beyond the next quarter's earnings. Large institutional investors, like pension funds, are long-term investors that want to see consistent long-term performance. But, truth be told, companies that abide by international standards on human rights and the environment tend to do well financially. That's why social responsibility and good corporate governance has become more and more attractive.

"There is no such thing as a perfect company," contends Herbert. "Companies have good and bad qualities. But the behaviour of most companies can be changed by simply engaging management on the issues. This is what we attempt to do. We always try to initiate a dialogue with the company well in advance of the filing deadline [for resolutions]."

Activists say something in the order of 60% of these conversations lead to changes in corporate policy. Dialogue is all it took to convince the largest outdoor sports retailer in the world, Recreational Equipment Incorporated (REI), to cancel its contracts with suppliers using products and materials from Burma. Once company executives were convinced it was not wise to be connected to Burma's military junta, it just made good business sense to reorganize the supply chain.

This type of corporate advocacy dates back to the 1920s when churches decided to exclude so-called "sin stocks"-alcohol, tobacco and gambling-from their investment portfolio. For many decades that constituted social investing. Then about 30 years ago the first shareholder resolution was initiated on a social issue. The Episcopal church threw its weight against apartheid rule by working with shareholders of General Motors to divest operations in South Africa.

It has taken another few decades for the idea of social investing to march into the mainstream. Now close to one in eight investment dollars in the US is invested with some sort of social or environmental screen applied. Although smaller by comparison, the social investment movement in Canada topped the$50 billion dollar mark last year.

While the idea has been slow to develop in Canada it's sure footed with positive downstream impacts. Companies associated with widely agreed upon social ills such as clearcut logging, sweatshops and genetically engineered food have become the target of consumer boycotts, market campaigns, lawsuits and divestiture by institutional investors.

Last year saw environmental groups becoming shareholder activists. Greenpeace entered the oil and gas game by acquiring 4,400 shares of Royal Dutch/Shell and a coalition of 11 US environmental groups, led by Friends of the Earth, endorsed a slate of 85 social and environmental shareholder resolutions.

There is little question that shareholder action works. Investors are aligning their interests with other major stakeholders such as church groups, environmental groups, labour and foundations to form powerful coalitions that attempt to reform corporations. Groups once yelling for the overthrow of capital markets are now working with corporations around issues of accountability, transparency and sustainability.


SpruceRoots Magazine - July 2001

graphics - InHouse/SRs