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November 14, 2005
Forging Ahead from the Crossroads: Reviewing the 2005 Proxy Season
    by William Baue

Part one of this two-part article looks back at this year's proxy season, which was highlighted by majority vote director election proposals while part two previews the upcoming proxy season.

This point in the year marks the juncture between reviewing the currently winding down proxy season and preparing for the upcoming proxy season. Performing a postmortem on this year's proxy season is facilitated by the release this week of the 2005 Postseason Report: Corporate Governance at a Crossroads by proxy advisory firm Institutional Shareholder Services (ISS). The titular "intersection" alludes primarily to institutional investors' paving their own path with majority vote director election resolutions in the absence of action from the Securities and Exchange Commission (SEC) on its October 2003 rule proposal to allow shareholders to nominate directors.

While the overall number of shareholder resolutions filed so far this year (576) represents a decrease from the 703 resolutions filed in 2004 and 693 in 2003, the number of resolutions advocating majority vote director elections experienced the biggest jump in filings, from 12 last year to 67 this year.

"In perhaps the year's most significant development," writes ISS Publications Director Ted Allen, institutional investors "have voted in surprising numbers for majority election proposals filed by the United Brotherhood of Carpenters and Joiners and other unions."

The resolution, which seeks to replace the current system whereby directors need only a single vote to be elected, has garnered majority support at 16 companies so far this year. High votes were 70.8 percent at Mack-Cali Realty (ticker: CLI) and 67.3 percent at Marsh & McLennan (MMC). Support for the resolution has averaged 44 percent at the 60 meetings held thus far, an almost fourfold increase from last year's 12 percent average.

"We had high expectations for the director election majority vote proposal and the results to date are stronger than those expectations," states Ed Durkin, director of corporate affairs at the United Brotherhood of Carpenters and Joiners. "The surprisingly high votes are a clear signal from shareholders that it's time to move to majority voting for directors."

The strong support no doubt benefitted from endorsements by the Council of Institutional Investors (CII), the California Public Employees Retirement System (CalPERS--the largest public pension fund in the US with $196 billion in assets), and the Florida Retirement System, the fourth largest public pension fund at $133 in assets. Such support often inspires companies to resolve the issue outside the proxy ballot; toward this end, the Carpenters and three other union have joined forces with more than a dozen companies--including Chevron (CVX), Citigroup (C), and Intel (INTC)--to prepare a report on how to implement majority elections.

"Our hope is that a report coming from a group of both institutional investors as well as issuers will help inform the debate, and I think will make the point that a majority vote standard obviously can be implemented," states Mr. Durkin.

ISS, which absorbed the Investor Responsibility Research Center (IRRC) this summer, devotes a separate section of the postseason review report to social and environmental resolutions, most of which were filed by socially responsible investing (SRI) firms.

"The 2005 proxy season saw a continuation of the blurring of lines between corporate responsibility and corporate governance," writes ISS Senior Analyst James Letsky in the report. "Collaboration among proponent groups and more active corporate outreach defined an active proxy season in the realm of social and environmental shareholder resolutions."

"While another record number of resolutions was filed on issues such as human rights, consumer safety, and the environment, successful dialogue and increased corporate awareness of social issues led to the withdrawal of many proposals," Mr. Letsky continues. "As the 2005 proxy season wound down, it was readily apparent that the increased frequency and scope of dialogue between shareholders and companies led to more targeted resolutions and an increased level of consensus between the investment community and social and environmental advocates."

The ISS report identifies 188 social and environmental resolutions that went to vote.

"Of the proposals that went to shareholder vote, the focus tended toward requests for increased disclosure, and often asked for companies to assess the financial impact that its policies and operations might have on the company," Mr. Letsky states.

The high levels of shareholder support for resolutions using this approach suggests that focusing on financial and legal risks resonates with mainstream investors, according to Mr. Letsky. For example, the highest SRI vote--56 percent--went to a resolution asking Plum Creek Timber (PCL) to report on its political contributions. Of the 18 SRI resolutions that received more than 20 percent support, 12 request a report or a review of practice, such as a resolution asking Yum! Brands (YUM) to prepare a sustainability report that garnered 39 percent support.

"Also of note for 2005 was the impact that international regulations and legislation can have on US companies," adds Mr. Letsky in the report. "The adoption of the Kyoto Protocol, creation of more robust EU guidelines on toxic chemicals, ongoing scrutiny of human rights abuses in developing nations, continued concern of corporate operations in nations deemed to sponsor terrorism, and prescription drug re-importation through Canada impacted several issuers."

The ISS report also reviewed academic, journal, and book publications addressing corporate environmental, social, and/or governance issues. Amongst the publications listed is an article by Social Investment Forum (SIF) President Tim Smith in the Fall 2005 Journal of Investing special issue devoted to SRI.

Part two of this two-part article previews the 2006 proxy season.


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