Monday, November 8th, 2004

News Updates

Nonprofits Are Flexing Stock Proxy Muscles

Pfizer, the giant drug-maker, has agreed to annually publish on its Web site a list of contributions it makes to political candidates.

Smithfield Foods, the world's biggest producer and processor of hogs, is fighting shareholder requests that it track the environmental impact of its hog operations.

And Starbucks, the coffee conglomerate, has started offering customers milk without the bovine growth hormone.

Each of these firms has been the target of shareholder groups led by, or including, nonprofit organizations that are part of a small but growing movement that believes philanthropy involves more than giving away money.

Shareholder activism, ranging from voting proxies to talking to corporations and filing shareholder resolutions, is in keeping with foundations' fiduciary role as investors, and with their charitable role as organizations with a social mission, foundation activists said.

"Proxies and proxy voting constitute an intrinsic aspect of the value of the investments," said Jim Pitts, an adviser to The Boston Foundation who retired Aug. 31 as its chief financial officer and chief investment officer.

"If you're going to hold yourself out to be a steward of charitable funds," he said, "you can't ignore the economic value of the proxies, and therefore you need to vote them, and you need to vote them along the same set of values that the institution is founded on."

The Boston Foundation, whose organizational values include "diversity" and "equity," believes "there would be a significant amount of dissonance between the foundation's values, the investments, and stewardship, if we didn't close the loop on informing ourselves of the proxy matters and voting according to the foundation's value system," Pitts said.

Yet, while they invest their assets to generate income to make grants, which typically represent 5 percent of assets, foundations generally do not treat all their assets as resources to advance their philanthropic goals, activists said.

Foundations and nonprofits can have "as much, if not more, impact with the 95 percent of endowments sitting in investments than with the 5 percent they give away," said Michael Passoff, associate director of the corporate responsibility program at the As You Sow Foundation. The foundation, based in San Francisco, conducts shareholder actions on its own behalf and for socially responsible investors and nonprofit clients such as Amnesty International in Washington, D.C., and the Education Foundation of America in Westport, Conn.

"Shareholder activism is very effective these days and it's a whole area where foundations are not active," he said. "And, 95 percent of their money can be activated by, at a minimum, voting their proxies and talking to corporations and filing shareholder resolutions. We call it the '95 percent solution.'"

And even in their role as investors, he said, foundations should be more active. The slumping stock market and rash of corporate scandals have hurt the portfolios of foundations. "That highlights the need for foundations to play an active role in monitoring corporate governance and corporate responsibility," he said.

Taking a stand

Foundations hold investments worth an estimated $400 billion in U.S. companies but are not paying much attention to the way those companies do business, said Doug Bauer, senior vice president at Rockefeller Philanthropy Advisors in New York City.

While 54 percent of foundations surveyed last year by the Council on Foundations do not automatically vote with management, for example, 90 percent of that group have no written policies for voting proxies on social or environmental issues, Bauer said.

"There's clearly a disconnect between their investment strategies and their programmatic interests as foundations," he said.

Asked by three of its individual clients to look into the issue, Rockefeller Philanthropy Advisors found shareholder activism underway at only a tiny group of foundations, including the Nathan Cummings Foundation and Jessie Smith Noyes Foundation, both in New York City.

"Foundations are perhaps the only significant institutional investors left that pay little attention to the proxy process, and in essence regularly support management positions that are opposed to their foundations' position," said Passoff. "They are similar to mainstream investors who pay little attention to proxies and have little understanding of the impact they can have."

The "socially responsible investment" movement for years has included endowed religious orders, such as the Sisters of Mercy, union pension funds and state treasurers who oversee state employee pension funds, such as Calpers in California, Bauer said.

What's more, labor pension funds, mutual funds, investment managers and bank trust departments all are required by federal law or regulation to disclose their proxy votes or proxy-voting guidelines, said Caroline Williams, chief financial and investment officer for the Nathan Cummings Foundation.

"Even if nobody mandates it for foundations," she said, "if it's important for other investment funds, why wouldn't it be for foundations?"

The Council on Foundations in Washington, D.C., does not directly encourage its members to use their proxy power, said Dorothy Ridings, president and CEO. "But, we do have strong statements on the necessity of having foundations get more involved in public policy that is in the subject matter of what they fund," she said. "You could clearly extrapolate from that, that the use of the proxy power is a legitimate means of achieving that goal."

Using proxy power to further grantmaking goals "is just as legitimate as attempting to increase the dollars you have to spend toward your grantmaking goals," she said. "It's a public policy technique or tool, just one of many tools that can be used by investors, including foundations, to further their goals."

Getting involved

Playing a more active shareholder role can begin simply with voting proxies in favor of issues that support a foundation's mission.

"You vote your proxies," Passoff said. "That's basic fiduciary responsibility, although most institutions don't even carry that out."

The next step, he said, would be to try to educate a company about particular issues, participate in shareholder "dialogues" with corporations, or file shareholder resolutions.

And if they conclude they cannot or do not want to invest the staff or time to become more active shareholders, he said, foundations can hire a professional proxy-voting service, join a coalition that works on shareholder issues or contact one of a small but growing number of foundations that are trying to provide guidance to other foundations on shareholder activism.

The Interfaith Center on Corporate Responsibility at iccr.org in New York City, for example, works on behalf of religious organizations that have big pension funds and, with the Coalition for Environmentally Responsible Economies at ceres.org, co-managed an effort this year asking 24 companies to disclose any of their own initiatives to reduce emissions of greenhouse gases, Williams said.

Investor Responsibility Research Center at irrc.org provides research and analysis on proxy issues, while the Shefa Fund in Philadelphia provides guidance on shareholder issues for Jewish foundations, and the Rose Foundation in Oakland, Calif., provides information for other foundations on issues such as environmental fiduciary responsibility and Securities and Exchange Commission rules, Passof said.

The As You Sow Foundation, which handles shareholder solicitation campaigns on environmental and social resolutions for foundations and nonprofits, offers a broad range of shareholder advocacy services for its clients, Passoff said.

Operating since its founding in 1915 as a trust, with its assets controlled by five bank trustees, The Boston Foundation could make grants only from interest income and dividends on its stock, said Pitts.

In 1997, unhappy with those limitations and with the trustees' investments that had made cigarette-maker Philip Morris their largest single holding, the foundation board voted to move to a "total return policy."

Two years later, the foundation secured approval from the bank trustees, and from the state's attorney general and highest court, to adopt a corporate structure.

But, lacking the staff to track and pursue shareholder issues, the foundation hired what is now Institutional Shareholder Services, a firm in Rockville, Md., that is the largest proxy service, to help it develop a proxy policy, Pitts said.

That policy, available on its Web site at tbf.org, spells out roughly 130 positions the foundation has taken on shareholder issues.

The firm also acts as the foundation's voting agency, voting according to policies the foundation sets. With funding from the three individual clients who were interested in shareholder activism, Rockefeller Philanthropy Advisors teamed up with the As You Sow Foundation to produce "Unlocking the Power of the Proxy," a comprehensive guide to proxy voting and resources available to foundations that want to become more active investors.

Nearly all its 3,000 copies, published in February and also available at rockpa.org and asyousow.org, have been distributed, while several thousand more have been downloaded, and a new printing is in the works. "We're literally at the beginning of this journey," said Bauer.

Connecting the silos

For many foundations, Williams said, "proxies are just considered paperwork that has to be filled out." What's more, she said, the idea of proxy voting typically is far removed from a foundation's mission and program priorities.

The gap that can exist between a foundation's investments and its program interests became clear to Williams two years ago, an insight she said led the foundation to become a more active shareholder, and to treat its stock as an asset to protect its philanthropic mission.

In April 2002, the foundation's board of directors approved guidelines that said its actions as a shareholder should reflect its values, including "transparency" and "accountability." The organization also mandated in the guidelines that, in voting its proxies, the foundation should consider its programmatic interests and "engage and help convene dialogues" involving corporations, nonprofits, foundations and other shareholders, Williams said.

At that same meeting, the board approved several grants to address pollution resulting from agribusiness. In reviewing its stock portfolio two weeks later, Williams said, she found the foundation owned 31,000 shares of stock in Smithfield Foods in Smithfield, Va., the largest hog producer and processor in the world. "And, hog waste is a big environmental pollution issue," she said.

As a first step in helping it become a more hands-on shareholder, she said, the foundation joined a group that was filing a shareholder resolution seeking more information from Merck about its ethical policy for seeking extension of its pharmaceutical patents.

Companies like Merck that make prescription drugs raised two important concerns for the foundation, Williams said, because it makes health grants, and because it invests for the long-term, and so pays attention to the long-term business models of companies in which it invests.

Patent extensions also involve intellectual-property issues of concern to the kinds of arts and cultural groups the foundation also funds, Williams said.

At Merck's shareholder meeting in the spring of 2003, the resolution received 7 percent of the votes, considered a strong showing, and exceeded the 3 percent needed for the resolution to be automatically allowed to be placed in the proxy next year.

Proxy activism

Getting involved in shareholder resolutions can involve social, environmental and corporate issues that are complex and may seem remote from the philanthropic issues foundations face, activists said. But foundations should pay attention to those issues, they said, both to generate healthy returns to support their grantmaking, and to keep their investments in sync with their philanthropic mission.

While it was dipping its toe in the proxy world by joining the Merck shareholder resolution, the Nathan Cummings Foun-dation also was doing homework on Smithfield Foods. In April 2003, the foundation filed a shareholder resolution asking Smithfield Foods to prepare a report on the environmental impact of its hog-raising operations.

Co-filers for the resolution were the Sierra Club in San Francisco and Amalgamated Bank in New York City, which manages the pension fund for what was then the Union of Needletrades, Textiles and Industrial Employees.

In response to the resolution, officials of Smithfield Foods began meeting with officials of the foundation, but the talks bogged down.

While the company agreed to provide data on the environmental impact of its hog-processing plants, it would provide only limited data on its hog-raising Williams said. While it once mainly focused on processing hogs, the company in the past five years has purchased a lot of hog-raising operations and signed long-term contracts with hog farms, she said.

With nearly two in three of its hogs raised on "contract" farms owned by independent farmers, she said, Smithfield has shifted its long-term business model, becoming a vertically integrated firm that reaches "deeper into the supply chain to raise the pigs."

That shift also has magnified the significance of the environmental impact of those hogs, as well as the risk that impact might have on the company and its shareholders, she said.

In declining to provide data on the environmental impact of its contract farms, she said, Smithfield Foods said it was not liable for its contract suppliers.

But federal courts and regulators are moving to make "integrators" liable for their contractors, Williams said. In a case involving Tyson in Springdale, Ark., for example, a federal district court in Kentucky ruled last November that the company was responsible for environmental pollution caused by some of its independent contract farms, she said.

The U.S. Environmental Protection Agency also proposed regulations, rejected by the Bush administration, that would have made vertically integrated firms liable for their contract suppliers.

"We think, long-term, Smithfield is going to be liable for pollution occurring from contract farms, and we think it's important for the company to monitor the circumstances, to know what's going on, to have the information, so it can start to put in place systems and procedures to manage its liability," Williams said.

In September, at Smithfield Foods' shareholder meeting in Richmond, Va., the resolution filed by the foundation received 20.1 percent of the vote, with abstentions receiving 3.7 percent, and votes against the resolution totaling 76.2 percent.

"So, excluding shares owned by management, one in three shareholders voted against management on this issue, and that's huge," Williams said, who added the foundation will continue to talk to the company and likely will re-file the resolution next year.

"We're an endowed institution, so we're a long-term investor," she said. "We think in some industries there are big questions about whether certain business models will work long-term."

Copyright © 2006 The NonProfit Times.