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Shareowner Action

For most of the history of publicly held corporations, shareowners have existed as passive economic participants, with no acknowledged voice in how companies are run. But in the last 30 years a growing trend of shareowners activism in the U.S. has helped shareowners to become active company owners, claiming the rights and responsibilities of ownership. Shareowners are not only tolerated for their views on how corporations should conduct their business, but have become a growing force in the determination of appropriate policies and practices.

Shareowner activism is one of the three principal strategies of socially responsible investing, along with screening and community investing. It is the take-the-bull-by-the-horns approach, involving the shareowner in corporate decisions that could have long-term impacts on social change and environmental improvement. For those who can devote a little time to it, shareowner activism can be an interesting and rewarding aspect of investing.

Shareowner activism concerning social and environmental issues has really evolved in the last 30 years, growing out of the notion that corporations should be held responsible for the effects of their actions on all stakeholders, not just the profits of shareowners. Stakeholders include everyone effected by a company's actions, including employees, management, vendors, consumers, and the community, as well as shareowners. Accordingly, the concerns of shareowner activists cover a wide range of issues that all fall under the umbrella of corporate responsibility.

The subjects of shareowner advocacy can include both domestic and international issues, because many corporations have operations oversees, and may involve either social, environmental, or corporate governance concerns. Common issues include working conditions and safety, discrimination, pay equity, board diversity, corporate governance, and executive compensation. Overseas manufacturers have received particular attention in the area of labor and human rights, either in their own operations or that of their vendors, including the existence of "sweatshops" or the use of child labor.

Other concerns revolve around stakeholders more removed from the company, such as the protection of consumers from unsafe products, or members of the community from pollution or depletion of natural resources. Shareowners may want companies to adhere to established corporate codes of conduct, such as the Coalition of Environmentally Responsible Economies (CERES) Principles regarding environmental conduct, or the Social Accountability 8000 (SA8000) initiative defining global workers' rights.

The social and environmental issues in these shareowner initiatives share the common thread of corporate responsibility and accountability, and cover many of the same topics social investors look for in screening their portfolios. The difference here is that rather than avoiding investing in companies with checkered social performance, investors take the opportunity of their ownership to bring companies to the table and discuss issues important to them.

Many social investors shy away from shareowner activism, because it presupposes that they own stock in a corporation that is doing something socially or environmentally objectionable. But no corporation is without its warts, and shareowner activists take the position that it is worth owning stock in a company to engage it toward positive change to the benefit of all of its stakeholders, many of which have no voice and little choice in their relationship with the company.

There are basically four levels of shareowner activism, representing different degrees of engagement with the offending corporation. These are: voting your proxies on social and environmental issues at annual meetings, initiating dialogue with company management, sponsoring shareowner resolutions, and, finally, divestment.

No matter how many shares a shareowner has, they are entitled to vote on resolutions. They don't even have to attend the annual meeting to vote their proxy, but can vote by mail instead. Many companies now have options for voting by phone or by internet, so there is absolutely no reason not to vote. Every vote counts, as social and environmental resolutions typically garner seemingly marginal support, often less than 10 percent. Part of this is because shareowners are uninformed on the issues, or do not share the concerns of the resolution sponsors. But many that may identify with the resolution simply do not take the time to vote their proxy, and these unmarked ballots are automatically cast in accordance with management's recommendation, which is typically to vote against such resolutions.

The next stage of engagement between shareowners and company management is dialogue. Individual shareowners with small holdings may have little chance of reaching upper management with their social and environmental concerns, but they certainly have the right to raise issues important to them. Some institutional investors regularly communicate with and effect change in large corporations. Pension funds, churches, universities, or mutual funds, along with investor coalitions such as the Interfaith Center for Corporate Responsibility (ICCR), have the attention-getting voice of major shareowners, and often represent the concerns of their constituents in dialogue for positive changes in policy.

In some cases dialogue with a corporation's upper management is enough to implement change on social and environmental issues. But when that's not the case, the next step is to propose a shareowner resolution, to be voted on at the next annual meeting. This requires only that the shareowner owns $2,000 worth of stock for at least a year. Their resolution must be less than 500 words and adhere to the format set by the U.S. Securities Exchange Commission (SEC), the government agency entrusted with regulating these proceedings. If the shareowner files their proposal prior to the resolution filing date, and company management does not successfully challenge it at the SEC, it will appear on the next annual proxy ballot.

Shareowners who want to propose a resolution would do well to work with a group like ICCR or Responsible Wealth, a project harnessing the resources and connections of socially minded wealthy investors, or institutional investors which carry the clout of thousands of members. These umbrella groups help shareowners word their resolution, promote their concerns to a network of other shareowners to encourage them to vote their proxies.

Resolutions on corporate responsibility are worded very carefully, partly because of guidelines set by the SEC, but also so as to not alienate other shareowners from the issue. Rather than taking an adversarial stance and listing the things that social investors find negative, the resolution generally makes a positive suggestion that the company can do to show its good intentions on the issue. For instance the resolution may ask the company to set a ceiling on executive compensation relative to the pay of other workers, produce a report on efforts to promote diversity, describe measures taken to improve accountability, or endorse the CERES Principles.

Typically between 200 and 300 social and environmental resolutions are filed every proxy season, but some never make it to a vote because they are either withdrawn by the shareowner or challenged by the company at the SEC. Withdrawals are usually the result of progress in dialogue with the company, reaching a point of agreement where the resolution is no longer necessary. In many cases withdrawals represent a real success, being either a positive settlement of the issue, or at least a temporary understanding between the company management and shareowners.

Rules regarding the language used in resolutions, and the issues they rightfully address, exclude issues beyond the scope of shareowner control. If company management feels a resolution breaches those rules, they will submit it to the SEC, who has the final authority to omit the resolution. If the SEC decides that the resolution is appropriate, the company has to include it on the proxy ballot. Many social issues, especially issues of discrimination, have a history of being omitted by the SEC on the grounds that they were part of the corporation's "ordinary business," or other guidelines. Although many recent rulings on discrimination resolutions have been in favor of the shareowners, that does not keep corporations from challenging social and environmental resolutions that they feel are beyond shareowners' legal concerns defined by the SEC.

Although each company is different in its reaction to resolutions, in some cases even apparently marginal support by shareowners can apply enough pressure on a company to attend to social and environmental issues, and eventually come to the bargaining table. Having the issue potentially publicized in front of thousands of shareowners, as well as the public, is sometimes an incentive to negotiate a settlement prior to the annual meeting. If a resolution gains 3 percent of the vote in its first year, it can be resubmitted another year. Then it needs 6 percent the second year and 10 percent every year hence to remain on the proxy ballot. Resolutions that have enough support to come back year after year are a message to management that the issue will not easily go away.

The last resort for shareowner activists is divestment, or selling stock in an offending company, after attempts at dialogue or resolutions are deemed ineffective. Although divestment by an individual shareowner is unlikely to affect a corporation, many institutional investors, such as pension funds and mutual funds can carry a lot of weight through divestment. This strategy has been used to try to stop companies from doing business with countries led by repressive governments, such as South Africa in the 80s or Burma in recent years.

The range of activities open to shareowner activists, from voting at shareowner meetings to divestment, offers an active role in company ownership. shareowner activists have often been viewed as adversarial, compromising the profits of corporations and other shareowners with pesky social or environmental concerns. But ideally, the role of the activist is to engage corporations to make changes that are in the best interest of their long-term financial health.

Shareowner Action describes the efforts of investors to influence the behavior of a company. This strategy gained prominence during the boycotts of companies doing business in South Africa, prior to the dismantlying of apartheid. The four levels of shareowner activism are: voting your proxies on social and environmental issues at annual meetings, initiating dialogue with company management, sponsoring shareowner resolutions, and, finally, divestment.

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