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A Proxy Battle: Shareholders vs. CEOs

by Kevin KelleherSpecial to CorpWatch
June 13th, 2006

cartoon by Khalil Bendib

The atmosphere outside the Hotel du Pont in Wilmington, Delaware, where Coca-Cola was holding its 2006 shareholder meeting, was a festive one. For a company that has worked hard to make its beverages appear ubiquitous in sports stadiums and amusement parks, it was appropriate enough.

The trouble was, it wasn’t the kind of festivity Coke ever asked for – or wanted.

A circus-like gathering of protesters vied to get the attention of, or steal the spotlight away from Coke CEO E. Neville Isdell: Harvard students beating on plastic barrels with drumsticks, union reps unloading into bullhorns and a blind taste-test daring passers-by to tell the difference between Delaware tap water and the much more expensive variety that Coca-Cola sells under the toney name Dasani.

Inside, Isdell, suckling at a plastic bottle of Coke, proclaimed the painfully obvious: “Not everyone in this room is going to agree with everyone's views,” he said. “In the end, we truly want The Coca-Cola Company to be regarded as a great business and recognized as a great corporate citizen."

Isdell isn’t alone – hundreds of corporate boards have spent the spring proxy season facing challenges of all kinds from shareholders. From human rights to the environment, to corporate governance, shareholders’ resolutions are garnering more and more votes each year, and corporations are being forced to deal with their gripes face on.

The protesters outside were simply pushing Coca-Cola toward becoming that great corporate citizen sooner rather than later. Toward that end, there were three resolutions submitted to shareholders:

• One, sponsored by the New York City Employees Retirement System, sought the establishment of an independent committee to examine whether Coca-Cola colluded with Colombian paramilitary forces in anti-union violence against bottlers in the South American country;

• Another, sponsored by the As You Sow Foundation, pushed for a report that would come up with a strategy to recover and recycle more used bottles and cans;

• A third, sponsored by Harrington Investments and the Sisters of Charity in Cincinnati, sought a report “on the potential environmental and public health damage of each of its plants, affiliates and proposed ventures extracting water from areas of water scarcity in India.”

While each proposal promised to take Coca-Cola a step toward the goal of corporate citizenship that Isdell teased at his speech, and while none were asking for the company to put forth onerous costs or to disclose proprietary information that could blunt its competitive edge, each of the three motions failed. One shareholder who labeled such complaints “an attack on capitalism” that diminishes Coca-Cola’s brand won enthusiastic applause from profit-minded shareholders, or what it calls its “share earners.”

Peri Payne, social research advocate at Harrington Investments, which helped file the India proxy, says it’s hard to measure the impact of the efforts of activist shareholders this year. “I’ve only been doing this for two years, and I’m already a skeptic,” she said.

There were enough votes to make the proxy eligible for reintroduction next year, but no real mandate for the company. “But in the sense it opened up communication between Coke and the communities in India, and that connections were made with different activist communities involved, I think it was a success.”

Coke, of course, says it takes every shareholder resolution “very seriously,” to quote communications rep Charlie Sutlive. “We like to address these concerns before they become resolutions,” he said. “We like to encourage a dialog so we can find common ground on the issues our share earners are concerned with.”

Payne is cautiously optimistic that Coke will make serious attempts to address the situation in India, where four different rural communities charge that the company is depleting the local water table for its bottling operations. In recent years, Coke has set up rainwater-harvesting programs in the region. “That’s just PR,” says Payne. She says there is no evidence that harvesting offsets the over-pumping of the aquifer, and says no studies were done to see if harvesting rain before it gets to the watershed is actually counterproductive. But it looks proactive. “Why they think they can reassure people with fluff, I don’t know. They are so used to stalling people for years … but one thing they do understand is that water will be one of the major battles of this century.” Payne says there’s room for cautious optimism, even if Coke’s motivation is purely selfish. “They’re running, we just don’t know if it’s in the right direction.”

Sutlive assured CorpWatch that progress is in the air, rattling off a list of sustainable water projects underway in India, and collaboration with local NGOs. Behind the scenes, activists call Coke’s efforts superficial and disingenuous (at least one group refused to meet with Coke officials unless total shutdown of the bottling plant was on the table), and at least one Coke honcho intimated that the activists didn’t really represent the communities in question. The truth, of course, lies between – somewhere no shareholder proxy can truly probe.

The rest of Coke’s annual meeting, featuring an array of human rights, environmental and other complaints that Isdell batted away, yielded few surprises. All four directors seeking election won it handily. A fifth, Warren Buffett, declined to seek re-election.

Coke’s marketshare is shrinking in the United States, its stock is down 4 percent in the past year while the S&P 500 index is up 15 percent. Coke’s stock has lost 28 percent in the last four years. For investors who believe that a company’s financial success is inextricably tied with its commitment to social justice, there is still hope that Coke will begin to see that it can do well by doing good. Or at least by doing less bad.

Shareholder Activism, Then & Now


Elsewhere during the 2006 proxy season, the scene at Coca-Cola was played out again and again. At Home Depot’s meeting, board members neglected to show up, because they knew shareholders were angry over CEO Bob Nardelli earning $245 million during five years when the stock has slumped, Nardelli showed, but he allowed no question and answer period. It was a company firmly on the defensive.

Corporate arrogance toward shareholder resolutions aren’t new. And if anything, it’s only spurring shareholders to be more determined. The Social Investment Forum estimated that the number of social and environmental resolutions in the first half of 2006 rose 7 percent to 180, while governance-related resolutions rose 4 percent to 400. And while the bulk of proposals are being rejected, they are serving an important purpose: jarring stonewalling companies into a dialog about social and governance issues.

“Once you submit a proxy, it does get the attention of senior management and sometimes the board of directors,” says Steven Schueth, president of First Affirmative Financial Network, an investment advisory firm focusing on social investment. “They often become more willing to engage in a dialog. Frankly, we’d often prefer behind-the-scenes discussions to having a shareholder vote.”

That was the case with Apple Computer this year. Knowing that a proxy was coming demanding that the company address the serious environmental mess created by old computers, the company acted first. “They preempted us,” says Larry Fahn, executive director of As You Sow, which sponsored the resolution. Apple announced two weeks before its annual meeting that it would offer free computer recycling to anyone who bought a new Mac. Fahn considers it the year’s biggest success.

Shareholder proxies are about as old as corporate shares themselves. But the voting process took a turn in 1971, when the Episcopal Church submitted a resolution to owners of General Motors’ shares addressing the automaker’s activities in South Africa. Divesting from South Africa eventually became a cause that turned shareholder activism from an occasional aberration from the bulk of governance-related resolutions into a cause in itself.

In 1992, the Securities and Exchange Commission eased rules that had limited the communication between shareholders and management. But the previous years had shown that institutional investors - notably the pension funds of unions as well as state, city and college employees – were managing more and more money, giving them a louder and louder voice with corporate managers.

Those two factors allowed the birth of shareholder activism to mature quickly into a sometimes effective counterbalance to managerial failures. Since then, the banner of shareholder activism has been carried by, on the one hand, religious and stakeholder groups, and on the other, corporate raiders and others bent on shifting a company’s strategy toward one that delivers a fatter profit.

The pension funds - led by the California Public Employees Retirement System and TIAA-CREF (or the Teachers Insurance and Annuity Association - College Retirement Equities Fund) – strove to balance these two aims, hoping to push U.S. companies toward changes that would yield long-term performance that would, in turn, provide for stronger nest eggs for the millions of retirees whose money they were managing.

In the 1990s, shareholder activists like CalPERS applied their proxy pressure to companies ranging from Apple Computer to Citicorp, not just seeking change through shareholder resolutions but in meetings with CEOs. In the process, they achieved victories is pursuing changes such as better drug access for AIDS patients in poor countries and improved working conditions for Asian suppliers to U.S. companies.

The pendulum began to swing in the opposite direction in the early 2000s. While CalPERS and other activist pension funds continued to outperform broader stock indexes, they couldn’t avoid the declines afflicting all investors. At the same time, CalPERS, under the leadership of Sean Harrigan, a onetime union rep, made even more aggressive moves such as the decision to withdraw its money from Southeast Asian countries with abominable labor practices.

In 2004, Harrigan was forced out of the top post at CalPERS, reportedly under pressure from California Governor Arnold Schwarzenegger. Harrigan apparently made a misstep in calling for the preternaturally revered Buffett to resign from Coca-Cola’s board. Less than two years later, Buffett has done that himself even as Coca-Cola's stock has continued to sink. But the blow had been struck against activist shareholders.

Still, the landscape has continued to shift in the arena of shareholder activism. Not only did the corporate scandals at Enron, Tyco International and World-Com lead to regulatory changes like the Sarbanes-Oxley Act, which has made it a bit more challenging for board directors to lazily rubber stamp every single move put forward by a company’s management, but shareholders themselves woke up the reality that their votes can save a company from its management’s excesses.

Signs of Progress

Few of the resolutions that shareholders have voted on in 2006 have passed. Among those that did was one calling for drug maker Amgen to disclose more information on its political contributions. More than two-thirds of shareholders voted for it, and the board even amended the proxy to indicate that they supported it in the interest of full transparency. But many others, such as one calling for Reynolds American to support anti-tobacco laws and another asking Hershey Foods to report on child labor among its cocoa suppliers, gathered fewer than 2 percent of the vote.

This year brought small but encouraging signs of progress. There was an emphasis on political contributions, such as the successful Amgen proposal. According to the Interfaith Center on Corporate Responsibility, 22 other U.S. companies faced resolutions that simply require companies to disclose the amount of money they contribute to politicians, political parties and political action committees. Many of them are drug makers, among the most powerful forces behind the lobbying industry flourishing in Washington, D.C., such as Bristol Myers Squibb, Eli Lilly and Wyeth, but also others such as Verizon, AT&T, Clear Channel and Monsanto.

Another example is the way many U.S. companies are changing how they elect corporate officers. Corporate laws at many companies elect officers in a sneaky way: Votes against candidates aren’t counted, so if there’s only one person voting for a board member, he’s in. Resolutions are calling for a majority of all votes to be required before a candidate is elected to the board.

Such a majority-vote proposal passed at Exxon-Mobil – the only one of 13 proposals at Exxon to pass this year. The AP said it was the first successful shareholder proposal there that anyone could remember. Successful reform in the way directors are elected may in turn trigger reform in how progressive resolutions are introduced, debated, and voted on.

Such progress may be incremental, but each gain makes boards not only more accountable, but more interested in resolving proposals before they can come to a vote. “We already have seen important negotiated agreements this year with 84 environmental and social resolutions withdrawn and 63 corporate governance resolutions withdrawn, often after significant concessions were made by companies,” says Social Investment Forum president Tim Smith.

Take Exxon, which was ranked 180th out of 189 companies in measuring CEO performance with CEO pay. Its outgoing CEO Lee Raymond made an average of $145,000 a day over the course of the past 15 years. One resolution made the reasonable request to let shareholders approve future executive pay increases. Others asked the company to research the environmental impact of its drilling, to take stronger actions against sexual discrimination against its workers and to disclose to shareholders the data backing its spurious climate-change data.

Or Chevron, which faced resolutions to report both on its operations’ costs to citizens of Ecuador and on its drilling activities in protected areas; and to adopt a human rights policy that would meet, along with 78 other companies, the guidelines of the Universal Declaration of Human Rights.

Or Wal-Mart, which shareholders are asking to stop the intimidation of employees exercising their right to freedom of association, minimize the exposure of its customers to toxic substances in the products it sells, and report on the disturbing gaps in pay between its executives and its lower-paid workers.

Of course, all of the above resolutions were rejected. And yet all of them land on the side of common sense, arguing that a company, just like a person, should do unto others as it would want done to itself. The notion that companies should seek profits in the moment, all future costs be damned, is seeming more and more antiquated year by year.

For the past 35 years, the history of resolutions brought by shareholder activists is the history of an effort attempting to bring a company’s conscience in compliance with its financial success. The rise of so-called socially responsible funds such as Trillium Asset Management and Domini Social Investments show that this fight is more than feasible, it’s good business.

For shareholder activists, bringing a proxy to other shareholders is less about winning the vote: Most institutional investors don’t vote or blindly go with the management’s recommendation. And even if a resolution passes, it’s not legally binding. What’s more encouraging is when a proxy wins the attention and the approval of a large number of investors.

“More and more, shareholders are voting in favor of resolutions,” says Schueth. “Five to seven years ago, we’d win 3 percent or 4 percent of the vote and we’d be thrilled. “But we’re seeing an uptick every year, so that now they win maybe 15 percent to 20 percent of the vote. That’s a lot of investors, and it’s often enough to lead the management to change.”

E. Neville Isdell may have won over bottom-line-conscious Coca-Cola shareholders with his arguments. And they’ll surely get their rich dividends for a few years. But if, as his critics have predicted, the company remains indifferent to the consequences of its own actions in deference to profits, he will be sabotaging the long-term returns his shareholders deserve.

More than any other reason, that is why the sometimes shrill voices of corporate critics deserve to be heard - and seriously considered. And that is why the 2007 proxy season will matter even more than this year’s did.