SRI Trend #2: The growing popularity of Shareholder Activism
2. Shareholder Activism efforts attempt to positively influence corporate behavior. These efforts include initiating conversations with management on issues of concern to the investor, and submitting voting proxy resolutions. This strategy is also called “value enhancing” SRI in that the investor tries to bring like minds to enhance the value of an existing investment. Note this investment does not need be in a socially responsible company, as one of the motives might be to encourage the corporation to become more ethically responsible.
These investors are institutional such as public pensions (as opposed to individual), holding periods of the investments are shorter, and the investors tend to operate on a much smaller list of issues. They are not fans of the Efficient Market Theory; and instead believe that equity prices lack efficiency; and are thus not always correctly valued by the market. In attempting to garner support for their resolutions, resolutions sometimes become headline-making news, with an example being an attempt to get General Electric to clean-up New York’s Hudson River. Whether or not the resolution passes, a positive effect is that the public ends-up more educated.
Two key indicators supporting evidence for growth in Shareholder Activism are, 1) the rising number of shareholder resolutions filed at US companies on environmental and social issues (up from an annual average of 240 in 1999-2000 to more than 380 in 2007-2009. 2) Of these resolutions filed, shareholders are supporting more. According to RiskMetrics Group, 2007’s vintage of resolutions was supported by 15.3% of investors, an all-time record. The most popular resolution was “Say on Pay” with 46% of the vote during 2009, which makes sense considering the public’s anger over high executive pay, especially to Wall Street firms.
One example of this active form of investing is the Calvert Large Cap Value fund ($86MM AUM, as of 10/19/10), which uses what it calls a SAGE strategy, or Sustainability Achieved through Greater Engagement. According to its portfolio managers, they first identify sectors that are considered for investment (e.g., Energy). Then they undertake advocacy with all companies that do not meet Calvert’s core “ESG” (Environmental, Social, Governance) criteria. They have direct engagement with the target companies. If the companies don’t change their acts, Calvert divests its investment positions. Calvert’s largest investment position (as of 9/30/10) is Royal Dutch Shell. Key advocacy objectives include enhanced commitments to reduced Greenhouse Gas emissions, expansion into alternative energy, and improved safety training and reduced fatalities.
One disadvantage of this strategy is that it helps fuel a “short-term” trading mentality. The irony here is that Pensions, the largest investors using the Shareholder Activism strategy, are known for their very long-term holding periods. Another disadvantage to this strategy is its limits on portfolio diversification. The last disadvantage is more pertinent for smaller asset managers. Calvert’s Large Cap Value fund, for example, has high exposure to the Energy and Financial industry. Six out of its ten largest holdings operate in the Energy industry.
Portfolio managers and analysts are often stretched with earnings calls, meetings, etc., and often have a difficult time directly engaging in more than a few dozen corporations at one time. One key concern I have with this method is that such a strategy may not always fit under the SRI label. Remember, the primary goal of Shareholder Activism is increasing the price of the stock. The question is perhaps the inverse of Niccolo Machiavelli’s, “Will the end justify the means?”