Owners, Not Traders

by Meredith Benton and Heidi Soumerai

From the Summer 2008 issue of Values

Discontent with Big Oil is ubiquitous, from consumers’ anguish at the pump and anger at booming profits, to the industry’s perceived inadequate response to climate change and human rights abuses. This year, an eclectic group of activist investors focused their dissatisfaction on ExxonMobil, the recipient of 17 shareholder proposals.

The proxy resolutions on ExxonMobil’s ballot covered a range of topics. The Sisters of St. Dominic of Caldwell, New Jersey, requested that the company reduce its greenhouse gas emissions from products and operations. The New York City Employees’ Retirement System pressed for more inclusive equal employment opportunity policies. Descendents of John D. Rockefeller, whose Standard Oil evolved into theExxonMobil we know today, led a call to separate the role of CEO and Chairman and increase the company’s commitment to renewable energy. Meanwhile, the right leaning Free Enterprise Action Fund, apparently without ironic intent, sponsored a shareholder resolution asking ExxonMobil to prohibit all future shareholder resolutions.

The Common Bond

Disparate as they may be, these ExxonMobil investors seem to share a long term horizon that values ownership over short term speculation. They push for better performance on issues they care deeply about, while also making the business case that their advocacy is in the best interests of the company and its shareholders. In the words of the Rockefeller heirs, “Rockefellers are owners, not traders…committed to ExxonMobil’s continued prosperity” (Financial Times, May 21, 2008). Walden shares this sentiment, believing that a long term outlook and a commitment to strategic shareholder engagement are central components of a successful sustainable investment strategy.

Climate change may have helped put shareholder action at ExxonMobil front and center, but the company debate is just another milestone in the evolution of investor activism. Shareholder advocacy traces its beginnings to the 1960s with the growth of the environmental, anti-war and anti-apartheid movements. More recently, shareholder advocacy has been fueled by increasing evidence of links between good environmental, social and governance (ESG) performance and long term company success, giving credence to the business arguments cited by social investors. Also, all too many corporate scandals of Enron-esque proportion have provoked major institutional investors to demand greater director and management accountability. Certainly, as ExxonMobil clearly demonstrates, concerns about global warming have prompted more and more investors to actively encourage companies to respond vigorously to climate risks and opportunities.

The Need for Advocacy

Social or ‘sustainable’ investing is a discipline that integrates ESG analysis with financial criteria to identify and invest in companies that can stand the test of time. Yet, like the hard work of traditional securities analysis, determining which companies have sufficiently assessed and responded to ESG risks and opportunities is a difficult job that is compounded by a lack of corporate disclosure, standardization and reliability of data.

While the amount of ESG information self-reported by companies has dramatically increased over the last 15 years, much of it is provided on a voluntary basis, allowing companies to represent selectively their strengths and challenges. As such, much of the data provided is not comparable company-to-company; nor is it often comparable within one company over time. In addition, company data is rarely reviewed by auditors or externally verified. Moreover, the difficulty of assessing companies is magnified when considering those operating in particularly challenging industries, such as energy production, chemicals or heavy manufacturing.

Walden seeks to offset information shortfalls by casting the broadest possible net for data collection, including government databases, independent research firms, media tracking, consulting with non-governmental organizations, and speaking directly with companies. Nonetheless, given poor data quality, shareholder advocacy is an essential tool for sustainable investors to improve disclosure. Beyond the data dilemma, few companies have in place ESG programs of the caliber social investors view as sufficient. Through shareholder advocacy, investors can encourage the development of programs and policies to address their sustainability concerns.

Shareholders United

The tools of the shareholder advocate - dialogue with companies, shareholder resolutions, proxy voting, and public policy initiatives - are important components of the corporate change process. These tools are strengthened by working in collaboration with other investors, informed professionals, affected constituencies, and non-governmental organizations.

Coordinated investor campaigns around common priorities are increasingly utilized in addition to the oft-used shareholder resolution process. Organizations such as the Investor Network on Climate Risk (more than 60 members including asset managers, state and city treasurers and comptrollers, labor pension funds and foundations) and the Carbon Disclosure Project (over 385 signatory institutional investors) have brought together a broad swath of investors, many of which would likely not consider themselves to be rabblerousers. These collaborations have done much to advance corporate planning, disclosure and mitigation in relation to climate change. Nor have these investors shied away from calling for changes in public policy; over 50 investors, including Walden, recently sent a letter to U.S. Senate leadership calling for legislative action on this issue.

ExxonMobil’s 17 resolutions this year are indicative of a company that has been insufficiently responsive to its shareholders. But, has all this investor attention made a difference at the notoriously reticent ExxonMobil? It is too early to tell, but some initial signs are hopeful. On climate change and equal employment opportunity, the company’s positions are moving, albeit slowly, toward the stance advocated by shareholders. ExxonMobil also pursued unprecedented investor outreach in response to the campaign to separate the roles of CEO and Chairman. This led Rockefeller family members to conclude that their initiative “appears to herald the long-overdue beginning of two-way communications between our company and its owners.” For long term investors – social, sustainable or otherwise – this is a positive outcome.

The information provided in the above article is for historical purposes only. Such information may no longer be current and therefore should not be relied upon.

The information contained herein has been prepared from sources and data we believe to be reliable, but we make no guarantee as to its adequacy, accuracy, timeliness or completeness. We cannot and do not guarantee the suitability or profitability of any particular investment. No information herein is intended as an offer or solicitation of an offer to sell or buy, or as a sponsorship of any company, security, or fund. Neither Walden nor any of its contributors make any representations about the suitability of the information contained herein. Opinions expressed herein are subject to change without notice. The writings of authors do not necessarily represent the views of Walden Asset Management, its parent, or affiliated entities.