How Is It Different from Responsible Investment?

Interview - In the U.S., shareholders are encouraging companies they invest into improve their social and environmental practices and this is referred to as “shareholder activism”.An approach that gradually gains ground on this side of the Atlantic.

What is shareholder activism?

Laurence Loubières- It is a process by which shareholders seek to influence corporatebehavior through public statements, regular meetings with the management, the filing of shareholder resolutions at the company’s AGM and the active exercise of voting rights.The investor’s influence is certainly proportional to the number of shares held, but that type of activism is available to any shareholder who wishes to be heard by the company of which he or she is legally a "co-owner".It can be used for more or less speculative purposes, but also to promote a more responsible management of the environmental, social and governance issues connected to the company’s activities.Another way of speaking about it is: "shareholder engagement."Protestant churches and religious orders, which havefor a long time practiced it as a component of their investment policy, see engagement as a privileged instrument to denounce abusive practices (non-respect of human rights, pollution ...), to encourage businesses to adopt more responsible behaviors and, more broadly, to reorder finance at the service of the common good.

How is it different from responsible investment?

Shareholder activism is a component of responsible investment.It involves a direct contact with the company, on top of portfolios selection techniques that exclude certain activities (defence, alcohol, tobacco, pornography, gambling ...) promoteothers (renewable energy ...) and aim to invest in the best in class companiesin terms of environmental or social performance.Shareholder activism can also be a component of impact investing, which involves investing social purpose enterprises, generally not listed, and thus happens outside of regulated financial market structures.

Beyond faith-based organizations, shareholder engagement with a CSR angle is now practiced by institutional investors (pension funds, insurance companies, asset managers...).Some report publicly on the issues they engage on, on the resolutions filed and on the votes obtained.To maximize the reach of their commitment, shareholders often gather in coalitions, permanent or temporary.Many "investors statements" have thus emerged in recent years to attract the attention of one or more companies on a topic.The tragedy of Rana Plaza in April 2013 in Bangladesh, triggered, for example, a statement signed within weeks by more than 200 institutions representing 3,000 billion in assets under management, to urge companies involved in textile manufacturing and distribution to strengthen their management systems in order to ensure respect for human rights in their supply chains and adopt the relevant best practices.This initiative has spurred a series of actions from some of these companies: for example, 26 North American companies (including Gap, Wal-Mart, Fruit of the Loom) sourcing 580 factories in Bangladesh have gathered into the "Bangladesh Alliance for Worker Safety" to improve transparency and worker safety conditions of their suppliers.

How did "socially responsible"shareholder activism start?

In 1971, the US attorney Paul Neuhauser asked his pastor what the church could do to fight againstapartheidin South Africa.The answer was: "You are the church!"He was then part of an anti-segregation committee tasked with making investment recommendations to his church’s government bodies.The committee decided to draft a shareholder resolution at General Motors’ AGM, of which the Episcopal Church held shares, asking them to cease operations in South Africa while the apartheid regime was still in place.Socially responsible shareholder activism was born.Sensitive to this move, the management of General Motors decided to apply an equal policy for all its employees, directly contradicting official guidelines.This helped to destabilize the grip of apartheid within the foreign business community.Other Protestant churches and Catholic religious communities joined the movement that became the coalition of shareholders ICCR (Interfaith Center on Corporate Responsibility)[1].In France, Sister Nicole Reille founded in 1983 the assocation Ethics and Investments.

How is shareholder activism practiced throughout the world?

In Europe, some asset management companies and some Dutch pension funds are involved.In Switzerland, the Ethos Foundation is the voice of several national pension funds. In England, ShareAction encourages pension funds to engage with companies on social and environmental issues.This agency catalyzes the research work of a network of NGOs (Christian Aid, CAFOD, Greenpeace, Oxfam, WWF ...) by bringing it to the attention of institutional and private investors.ShareAction offers training and recruits volunteers to participate in general meetings of companies and ask questions.

In France, the filing of a shareholder resolution on environmental, social or governance issues atthe AGM of large companies such as Total, Renault, Societe Generale is very rare.Founded in 1999, PhiTrust is the only financial services company to be explicitly dedicated to this [see box].Some large management companies (Amundi, Mirova ...) are involved in dialogues with companies.Sometimes NGOs buy some company shares in order to be able to ask questions during the AGM.

It is in the U.S. that shareholder activism with a social angle is the most developed.It is still mainly driven by religious or specialized organizations such as foundations or associations.

It is the U.S. that shareholder activism with a social angle is the most developed.It is still mainly driven by religious or specialized actors, foundations (As You Sow) or associations (Ceres)[2].In Canada, some specialized institutions (le Regroupement pour la Responsabilite Sociale des Entreprises, RRSE, based in Quebec or SHARE in British Columbia, which brings together religious congregations and Protestant churches) and some financial companies (NEI Investments) and pension funds (Bâtirente) are actively engaged in dialogue with companies and filing shareholder resolutions on behalf of their customers or members.However, the major Canadian pension funds limit themselves to dialogue and do not venture into filing resolutions.In the rest of the world, the main players are in South Africa and Australia.In Asia, responsible investment is very little practiced.

What are the key levers used by shareholder engagement?

Shareholder activism begins with getting in touch with the company and setting up meetings with the company on specific topics.This direct dialogue with management, sometimes difficult and time consuming is an effective way to change the entire company.It can sometimes lead to a true partnership, a joint search for solutions.

Asking a question or filing a resolution at the general meeting of a company sends a strong signal to management, the board and other shareholders.

The public communication dimension is another action lever.Asking a question or filing a resolution at the general meeting of a company sends a strong signal to the management, to the board and other shareholders.The resolution can be followed or preceded by public communications, press releases or investor statements.The companies concerned about their reputation seek to defuse these attempts.This provides leverage to shareholder to obtain changes during the preliminary dialogue phase.Also the withdrawal of a resolution before the vote because the company has agreed to move forward, can be just as significant a high percentage of votes on the day of the AGM.

The third weapon is that of the financial clout and visibility of the investor coalitions. The more shareholders are involved, the more likely will the company be influenced.In the U.S., the ICCR coalition of investors remains one of the main pillars of shareholder activism both in terms of size (more than 300 member organizations) and in terms of number of dialogues and resolutions filed annually for over forty years.Since the beginning of 2014, for example, ICCR members have filed more than 200 resolutions at the AGMs of more than a hundred American companies.

Non-faith based coalitions are also gathering strength.Shareholder activism is embedded into the "Principles for Responsible Investment" [Pri], launched in 2006 and whose influence continues to grow.In September 2014, 1270 PRI signatories represented 45 000 billion in assets under management and gather by now most of the big names in global finance.Being a signatory provides access to member initiated dialogue initiatives on various topics: climate change, working conditions in supply chains, executive compensation ... For example an Australian pension fund may thus be working alongside a French or Dutch financial company and asking a company to move forward on a particular common topic or submit a resolution with them.

Why is shareholder activism much more advanced in the United States?

The ability of shareholders to be heard through resolutions at general meetings depends on the regulatory environment.In the US, it is enough to be the holder of the equivalent of 2,000 dollars in shares of a company in order to file a resolution, which is within reach of an individual.In France, it must represent, alone or in a group, 0.5% of capital, which in the case of CAC 40 companies, amounts to several hundred million euros.Banking groups, which hold significant shares capital corporationsoften provide financial services tothe same companies and are thus therefore reluctant to confront them by filing resolutions.These regulatory differences complicate the work of international coalitions.Eurosif, which brings together European officials investors, is working with the E.U. to harmonize practices.But companies are pushing back to limit the harmonization of shareholders’ rights.

Is shareholder activism efficient?

Shareholder activism can be very efficient.Working tirelessly with professionalism, expertise, and patience for over forty years, ICCR members trigger change within huge companies (Wal-Mart, Ford, Exxon, McDonald's, Goldman Sachs ...) on a variety of topics related to the respect of human rights.This impact is due to the fact that ICCR members are rooted in concrete realities that allow them to denounce situations of injustice or abuse and bring them to the attention of business leaders.

Among many successes in 2013-2014, ICCR has obtained fromthe retailing company Target the setting up of an international team dedicated to responsible food sourcing.Great chocolate manufacturers like The Hershey Company (40% of the US market) have committed to use only certified cocoa to fight against cases of slavery and child labor in plantations.Major agribusiness companies[3]have agreed to use only fully traceable and certified palm oil to combat massive deforestation linked to this culture.Coca-Cola and PepsiCo have promised to publish the names of their three most important sugarcane suppliers and to respect human rights and responsible agricultural practices throughout their supply chain.Pharmaceutical companies (Roche, Viiv Healthcare, GlaxoSmithKline) have agreed to share some of their drug patents withdeveloping countries through legal mechanisms.Hotel chains, airlines and road transport companies have set up child protection policies against sex trafficking that have already rescued many victims of prostitution.Resolutions filed with banks like Goldman Sachs, Bank of America or Citigroup (on risk management, governance, investments, political contributions...) have attracted the attention of the press and investors alike[4].A coordinated campaign among 118 industry groups led many of them to adopt drastic policies to reduce emissions of greenhouse gases.

What are the limits to shareholder engagement?

Shareholder engagement requires time and a lot of determination.Some dialogue attempts are met with hostility.Years may be needed before the company agrees to change its practices.And patiently crafted trust can be compromised when interlocutors change.

Companies often try to challenge the validity of the resolutions through the Securities and Exchange Commission, the regulatory body of U.S. financial markets.In the U.S, the law requires that the resolutions do not represent a direct interference with the company's management.A more radical tactic to avoid embarrassing questions is to set up shareholder meetings in an isolated area.JP Morgan, which is headquartered in New Yorkholds for example its AGM 1,800 km south of Wall Street, on its internal training campus in Florida.

Not only does shareholder activism involves to resist tenaciously to many headwinds, but in addition, success is often difficult to measure accurately: when to stop a dialogue?After a success or aftertoo many failures?It requires theconstant prioritization of goals and the reassessment of whether to continue or not.Sometimes maintaining a constructive dialogue over time is in itself a success.ICCR has been involved in a dialogue for nearly twenty years with the Wal-Mart retail group, with four meetings per year.The results are mixed: if the group has advanced very consistently on environmental issues and its international purchasing policies, itstill struggles to make progress on its own controversial social policies.But to change Wal-Mart means having a significant impact on hundreds of thousands of suppliers, its 2.3 million employees and even more numerouscustomers.After years of fruitless dialogue on the provision of health benefit for its temporary employees, the company decided in 2013 to make available to all staff a service to choose the best insurance coverage and 120,000 employees have used it in the first months of its establishment.The CEO of Wal-Mart expressed to ICCR his desire to continue the dialogue, in order to better understand the expectations of its stakeholders.

The range of issues to be addressed also remains a challenge: how to select the right angle when approaching companies on environmental and social issues?The topics addressed relate to systemic issues such as water, climate change, energy, market pressure for short-term profitability....It is sometimes difficult to know exactly what to ask ofcompanies.And a win on a specific subject does not exhaust a global issue.Obtaining from a mining company to stop the operation of a site to preserve local communities does not trigger an overnight shift from the irrational exploitation of the subsoil of the planet!But this can lead the company to adopt more responsible practices across its operations and help raise industry standards.ICCR has chosen to focus on human rights as the gateway for all its dialogues with companies.

Shareholder activism is one of the most direct ways to bring justice issues at the heart of a financial system that too often ignores them.

Should shareholder activism with a social dimensioncontinue to be practiced then?

Absolutely!This is one of the most direct ways to bring justice issues at the heart of a financial system that too often ignores them.It is important not to give up!Do not forget that in every business, there are people of good will, often caught up in paradigms that simply ignore the social and environmental impacts of companies.Talking with business leaders represents a unique opportunity to change practices, to move the lines.In particular, faith-based organizations, whose communities are privileged witnesses of corporate impacts on the most vulnerable, can thus raise their concern for justice with business leaders often completely cut off from these realities.

Indirectly, shareholder activism can also contribute to regulatory developments.ICCR has influenced bodies such as the U.S. Commodity Futures Trading Commission to limit speculation on basic food commodities.Shareholder pressures have contributed to the drafting of legislation requiring companies to report on the means used to ensure that no slavery happens within supply chains.ICCR has contributed to the work of John Ruggie, appointed by the United Nations to develop the "Guiding Principles on Business and Human Rights."Many pension funds now exclude companies that are contravening these principles from their holdings.When the investment policies of the largest pension funds start to align (for example by excluding companies producing illegal cluster munitions), global standards are set.There is a positive synergy between shareholder activism, the creation of"soft laws"integrated by institutional investors when selecting eligible companies for their portfolios and the adoption of best practices by companies.in this respect, shareholder activism fully becomes a systemic agent of change.

Shareholder activism is also expected to grow: the issues are pressing and investors want to be heard from companies.But who will relay the concern for justice, as many Western religious institutes are on the decline? Building the awareness of new generations will be a key success factor.ShareAction’s education and training initiatives in England, which manage to mobilize a youngpopulation of members and volunteerswho are eager for change, are a beautiful sign of hope!

[1]Sisters organizations were subsequently created: ECCR (Ecumenical Council for Corporate Responsibility) in England, TCCR in Canada (Taskforce on the Churches and Corporate Responsibility), from which will spring a French branch: the RRSE (Regroupement pour la Responsabilite Sociale des Entreprises).

[2]Some large pension funds in California, such as CalPERS, CalSTRS and the East Coast (New York) and some management companies (AM Calvert, Trillium AM, Walden AM) stand out, but the big banks, and Wall Street in general are very lowly involved in responsible investments.

[3]Unilever, ConAgra, JM Smucker, Mars, Nestle, Kellogg, General Mills, Mondelez, Dunkin Brands, Panera, Kroger, Safeway, Starbucks.