Features June 2001

Never mind the ballots

UK activist groups are increasingly tabling shareholder resolutions to pressure companies to improve their social or environmental standards. But many socially responsible investors aren’t voting for them. Mark Nicholls asks why?

As an anonymous revolutionary once said, “if voting changed anything, they’d make it illegal”. The more radical environmental campaigner might be inclined to attribute this view to much of the UK socially responsible investment (SRI) community. None the major SRI fund managers backed recent environmental resolutions tabled at the annual general meetings (AGMs) of BP and Balfour Beatty.

The BP resolution, organised by Greenpeace, directed the oil major to set out how it planned to phase out the sale and production of fossil fuels. It was supported by just 7.4% of votes cast at the 17 April AGM. Another resolution, urging divestment from Petrochina, the Chinese oil company, over human rights concerns was supported by 5.2% of those voting.

At the Balfour Beatty AGM on 2 May, only 3% of votes cast supported a resolution tabled by Friends of the Earth (FoE) calling on the construction and engineering firm to adopt the recommendations of the World Commission on Dams (WCD).The firm has come under fire for its involvement in the controversial Ilisu dam project in Turkey. However, FoE says that 40% of shareholders who voted on other resolutions at the AGM abstained.

Environmental resolutions are likely to become an increasingly common feature of corporate life in the UK. Institutional investors are being encouraged to take a more active role in the management of companies in which they invest – highlighting concerns they may have on issues ranging from directors’ remuneration to environmental and social risk exposures.

And pressure groups see shareholder resolutions as an effective way to draw attention to their campaigns – both among the general public and, particularly, within the business and finance communities which they are increasingly targeting in their campaigns.

But in marked contrast to their US counterparts, the UK’s SRI investment managers have taken a ‘softly-softly’ approach to exercising their rights as shareholders. Rather than supporting high-profile resolutions at AGMs, they are instead favouring behind-the-scenes discussions to raise concerns and to encourage firms to improve their environmental or social performance. Such an approach, many argue, raises questions about the transparency of the process.

“A lot of SRI fund managers – and mainstream investors – had in-depth conversations with [Balfour Beatty] to ensure that it had a sound ethical policy and was acting in the long-term interests of its shareholders,” says Michelle Edkins, corporate governance director at Hermes Investment Management, which has £50 billion under management and has taken an active stance on shareholder rights issues.

“Even SRI funds that may support the principle behind the resolutions don’t want to upset the management [by voting against them at an AGM] if they've given a commitment that they’re addressing the issue,” she adds.

“The climate resolution clearly raised a crucial issue. But we judge that the best contribution we can make at this stage to moving forward with BP – and other companies – on the issue is dialogue. And this is what we are now doing,” says Rob Lake, head of SRI strategy at Henderson Global Investors.

But some within the UK SRI community concede that such an approach can expose them to criticism. As one fund manager pointed out, “if SRI funds are about improving environmental performance, why can’t we get behind these resolutions?”

“I think the SRI community should be backing these resolutions,” says Stephanie Tunmore, a climate campaigner at Greenpeace in London. “They are being overly cautious.” And their arguments in favour of engagement “would be easier to accept if we were seeing movement from these companies,” she adds.

Some US investors, with a longer history of supporting shareholder resolutions, certainly disapprove of this very British reticence. “Many UK-based SRI investors vote as if their votes will pass the resolution,” says Simon Billenness, a senior analyst at Boston-based Trillium Asset Management, which supported the BP resolution. “These [social or environmental] resolutions never pass, but they can be a nudge.”

At the root of the controversy lies a complex web of issues surrounding attitudes to corporate governance, the evolving debate around environmental and financial performance and the parallel – but often subtly divergent – agendas of non-governmental organisations (NGOs) and the socially responsible investment community.

In the first analysis, most SRI investment managers felt that the BP and Balfour Beatty resolutions simply did not represent the only, or even the best, way to improve the two companies’ environmental performance.

The BP resolution – which called on the company to set out how it planned to move beyond fossil fuels in line with its recently adopted slogan of ‘beyond petroleum’ – proved particularly difficult for fund managers to support (see Environmental Finance,April 2001, page 4).

Friends Ivory and Sime (FIS), a UK-based fund manager with £38 billion ($54 billion) in assets (including its £1.6 billion SRI Stewardship Fund, which doesn’t hold BP) abstained on the vote.

“We were extremely supportive of the resolution,” says Steve Waygood, a senior analyst at FIS,“but we felt we couldn't’t support it as worded.” The particular difficulty was the requirement that BP establish quantified targets and timetables for its exit from fossil fuels – a process that FIS believes will take 50–100 years.

In contrast with US social investors – who often have an ‘ethical mandate’ that can make them more tolerant of lower returns in exchange for peace of mind – UK SRI managers have to prove a clear business case before supporting resolutions.

And, in many cases, SRI managers in the UK cannot take the longer-term investment horizon that many argue is more relevant to their style of investing. Most major SRI fund managers belong to larger institutions which often vote shares on a firm-wide basis – so SRI fund managers also have to convince managers holding money in ‘mainstream’ portfolios that there is a clear business case for voting against management.

Indeed, many argue that the NGO community and socially responsible investors simply have different agendas.

“Their role and our role is very different,” says Hannah Griffin, a campaigner at FoE in London.“They are involved in an ongoing relationship with companies on these and other issues – our only objective is to make Balfour Beatty’s environmental and social practices better.”

As another analyst says:“Greenpeace’s primary interest is not the survival of BP.” However, it is possible to argue the point both ways. The Pensions and Investments Research Council (PIRC), which offers institutional investors a corporate governance voting service, recommended its clients supported both resolutions.

“The business case is core to our analysis,” says Stuart Bell, PIRC’s research director. “We look at these resolutions on their merits – but not everyone accepts the links between social and environmental issues and the business case.”

However, even if fund managers can be persuaded that the broad thrust of an environmental resolution will add shareholder value, they also have to be convinced that management is making insufficient effort to respond to investors’ concerns.

In both of the recent resolutions, the companies’ management persuaded the majority of investors that they are either sufficiently addressing the issues raised or that the resolutions were otherwise flawed – although it should be noted that many of Balfour Beatty’s institutional investors abstained over the WCD report.

This underscores another crucial difference between US and UK social investors: the latter typically have much better access to the companies in which they invest.

This is partly because most UK institutional investors have much larger holdings in companies (in percentage terms) than their US counterparts. For example, FIS as a whole holds almost 1% of BP’s shares.

“Even a relatively small investor such as Hermes can ring up a company’s management and arrange to talk face-to-face,” says Edkins.

The fact that UK investors enjoy a cosier relationship with the companies in which they invest changes the significance of the shareholder resolution, say observers. In the UK, many institutional investors consider voting for such resolutions – invariably against the board’s recommendation – to be a measure of last resort.

Indeed, even though no social or environmental resolution has ever garnered anything near a majority of votes cast, they are often perceived by management as threatening gestures – which further discourages large UK investors from supporting them.

It is a very different story in the US. There, it has proved difficult for concerned investors to draw attention to the issues that concern them, without first tabling resolutions.

“In the US, resolutions aren’t seen as a nuclear option,” says Billenness at Trillium. “It’s much easier to file resolutions and, in lots of cases, filing a resolution is a crucial component in bringing a company to the table.” The US also has a much longer tradition of shareholder activism, with around 200–300 resolutions tabled each year.

So, whereas in the UK, an AGM resolution comes at the end of the engagement process, in the US it’s often a first step. And while boards in the UK often react defensively to unwanted resolutions – BP scored a public relations own goal with its legal challenge to the social and environmental resolutions tabled at this year’s AGM – Billenness adds that there’s a tradition of continuing dialogue between US companies and concerned investors.

“We recognise that resolutions can polarise debate,” says Bell at PIRC.“Part of the problem is that resolutions are few and far between [in the UK].They are often seen as throwing down the gauntlet.

“But our experience is that resolutions can have a catalytic effect in moving the debate forward,” he adds.

It is here that some of the divergent views come together. FoE claims that tabling the resolution encouraged discussions between investors and Balfour Beatty which led to the latter shifting its position.

“On the day of the AGM, the company issued a press release committing itself to taking the WCD recommendations into account,” says Griffin.“They had previously said the guidelines weren’t relevant to them.”

Balfour Beatty is, unsurprisingly, more circumspect. Says a spokesman: “Like any company, issues that affect us are constantly under review. We don’t think our position has changed. However, the resolution did get us to articulate our position more clearly.”

And such resolutions can have a galvanising effect on the SRI community, says Tunmore at Greenpeace. “How many conversations were investors having with BP before Greenpeace began tabling resolutions at BP AGMs three years ago?” she asks.“This has forced investors to think about the issues.”

But while such resolutions certainly encourage a more vigorous debate, transparency – or the lack of it – is a more important issue, argues Billenness at Trillium: “It’s important that we see added social value from the engagement process.” It may be appropriate to carry out dialogue with a company behind closed doors, but it’s important that the company and its stakeholders can publicly communicate where progress has been made, he says.

This is a charge that the UK’s SRI community accepts: “There is a need for more transparency,” says Emma Howard-Boyd, head of the environmental research unit at Jupiter Asset Management in London.“We’re behind greater transparency on engagement, but there is a sensitivity [among companies] about what can be reported in terms of the engagement process.”

“This is a fair point,” agrees Toby Belsom, a company analyst at Morley Asset Management, which manages £100 billion for UK insurer CGNU.“Sometimes we can’t be fully transparent if we want to retain our seat at the table.

“And it should be remembered,” he continues, “that some NGOs have relationships with companies that take place behind closed doors. That’s always been part of the environmental movement.”

Neither Jupiter nor Morley comment publicly on their support for individual shareholder resolutions.

But Belsom defends the record of the UK’s SRI investors: “None of this is to say that we haven’t been radical. It should be remembered that we’re not an NGO attached to a fund management house – we’re part of the fund management community.”

EF Simon Billenness,Trillium Asset Management:“In the US, resolutions aren’t seen as a nuclear option”

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