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3/30/2010

Shareowners Find Support in Congress and the SEC for Resolutions Filed in 2010

Resolutions addressing climate change and corporate governance dominate the 2010 proxy season, as proposed legislation and regulatory mandates increase attention to the issues.

SocialFunds.com -- Given the prevailing winds currently at play in the political atmosphere, it's not surprising to learn from last week's webinar previewing the 2010 proxy season that the most important issues for activist shareowners this year are the environment and corporate governance. As Subodh Mishra, a member of the Governance Institute at RiskMetrics Group , said at the webinar hosted by Meg Voorhes, Deputy Director of the Social Investment Forum (SIF), "For once, much of the energy this proxy season is focused on Capitol Hill, rather than what's happening in the usual meeting halls."

Following the Obama administration's historic victory on health reform legislation, there is renewed hope among activist shareowners and social investors that bills pertaining to climate change and financial reform may eventually win passage as well. Furthermore, in addition to legislative activity on issues of critical importance to investors, the Securities and Exchange Commission (SEC) has made a number of regulatory decisions in recent months that improve the possibility of success of many of the shareowner resolutions proposed for this proxy season.

Heidi Welsh, the executive director of the Sustainable Investments Institute (Si2), outlined the important SEC decisions at the webinar, saying, "There are two important developments at the SEC concerning what is permissible in shareholder resolutions, and what companies have to disclose. A staff bulletin from last October stated that environmental issues are not automatically excludable as ordinary business, and in January the Commission released interpretive guidance on material risk disclosures relating to climate."

Encouraged by such developments, shareowners have introduced at least 97 proposals relating to the environment this year. In the webinar, Welsh classified the majority of the proposals into the categories of natural resource management and climate change. Included among the new proposals relating to natural resource management that are currently pending are nine that address the practice of hydraulic fracturing.

Hydraulic fracturing is used by natural gas companies to extract reserves from pockets underground. The process requires the injection of as much as 7.5 million gallons of water per well, as well as toxic chemicals, to crack open rock and allow the natural gas to flow to the surface. The shareowner proposals survived a challenge brought to the SEC by natural gas companies, and three of the 12 proposals originally filed have been withdrawn in favor of engagement.

New issues relating to natural resource management also include coal ash waste disposal. In the aftermath of a December 2008 dam breach at a Tennessee Valley Authority (TVA) coal ash pond, which released 1.1 billion gallons of coal ash sludge over more than 300 acres in eastern Tennessee, Green Century Capital Management submitted five resolutions relating to coal ash waste disposal, three of which are still pending.

As concerns of investors over the exposure of portfolio companies to climate-related risks have grown, the sheer number of resolution relating to the environment has grown as well, increasing 40% over the number filed last year. The significant increase in shareowner activity in the area of environment has made it necessary that submission of resolutions be organized in order to improve their effectiveness.

Rob Berridge, the Senior Manager of Investor Programs at Ceres , said at the webinar, "The Interfaith Center on Corporate Responsibility (ICCR) and Ceres team up on the coordination of climate resolutions. We operate a number of working groups, and there's work going on with small-cap companies that is led by Walden Asset Management and Calvert ."

Many of the environmental resolutions request improved disclosure of risks and opportunities relating to the mitigation and management of greenhouse gas (GHG) emissions, in the form of sustainability reporting. According to Welsh of Si2, "The SEC has issued favorable comments on the GRI's sustainability reporting." The SEC Investor Advisory Committee (IAC), which includes among its members several representatives from the social investment industry, is expected to emphasize improved, and perhaps mandatory, reporting by companies on environmental, social, and governance (ESG) issues in its recommendations to the Commission.

A total of 38 shareowner resolutions were filed this year that directly address sustainability reporting, of which an impressive 22 have been withdrawn. Referring to one such successful engagement, with Union Pacific, Berridge said, "Tom Donohue, the head of the Chamber of Commerce, is on the board of Union Pacific, and it was probably interesting to see his reaction to that resolution. But the company agreed to a request by California State Teachers' Retirement System (CalSTRS) that they issue a sustainability report."

The potential conflict of interest in Donohue's relationship with Union Pacific has received a considerable amount of attention in the media. According to a September 2009 post on Climate Progress , Donohue has collected annual retainers of at least $1,134,333 from Union Pacific since 1998, as well as over 43,000 shares of stock.

Climate Progress wrote, "The President of the US Chamber of Commerce, who is resisting calls from his own board members to stop fighting against federal climate policy, is being richly compensated by Union Pacific, a company which %151 along with some of its key businesses partners %151 is vigorously fighting against federal climate policy."

With the recent controversial decision by the US Supreme Court in the Citizens United case, issues of corporate governance are fresh on the minds of shareowner activists, although the full impact of that decision will probably not be felt until next year's proxy season. Nonetheless, the Center for Political Accountability (CPA) has led a shareowner effort to request that companies report on their political contributions. Of the 46 proposals submitted this year, 12 have thus far been withdrawn. More than 70 companies, including almost half of those listed on the S&P 100, have voluntarily adopted CPA's framework for political disclosure.

Despite the implications of the Citizens United decision on corporate involvement in the electoral process, Mishra of RiskMetrics saw a silver lining in matters pertaining to corporate governance in general, saying, "This year has certainly been different from years past. We've seen signs of changes within the SEC under Mary Schapiro, and in a Democrat-controlled Congress."

In his presentation at the webinar, Mishra noted that legislative initiatives have kept pace with increased majority votes on corporate governance resolutions in 2009. As 46% of shareowners voted in favor of resolutions relating to corporate governance last year, the US House of Representatives passed bills relating to financial reform and mandatory annual votes on executive compensation. The Senate is currently deliberating on its version of financial reform legislation.

In addition, proposed regulations by the SEC on proxy access, if adopted, could lead to the filing of alternative slates of director nominees by shareowners. And the adoption by the New York Stock Exchange (NYSE) of a rule banning discretionary voting by brokers could result in many more directors nominated by companies failing to achieve majority support.

Other shareowner resolutions that have been introduced for the first time this year address the human right to water, and an ICCR-led campaign asking companies to compare the pay of executives with that of the lowest-paid employees. In their shareowner resolution, 30 ICCR members asked 21 health industry companies to compare the total compensation packages of top executives to those of the lowest paid employees, analyze changes in the relative size of the disparity since 2000, evaluate whether executive compensation packages are excessive, and explain whether the findings invite moderation of executive compensation packages.