Changing Corporate Behavior through Shareholder Activism

Each year, American foundations give away billions of dollars to address social and environmental issues. This number, though substantial, is dwarfed by the amount of assets that remain invested in foundations’ endowments. Few foundations, however, recognize the vast funds in their investment portfolios as anything other than a source of income to fund grants and operating expenses. This in unfortunate because, as the Nathan Cummings Foundation (NCF) and some of its forward-thinking peers have shown, the funds in a foundation’s investment portfolio can in fact be leveraged to address numerous social and environmental issues while preserving or even enhancing the long-term value of the portfolio.

Over the last eight years, NCF has successfully pursued active ownership strategies including proxy voting, resolution filing and other forms of corporate engagement. Because its approach is based on active ownership, the Foundation has been able to avoid one of the major obstacles facing more traditional approaches to socially responsible investing; the fear that returns may be sacrificed for the benefit of some abstract conception of the greater good. In fact, all of NCF’s shareholder activities, and indeed the majority of the most successful shareholder campaigns out there, are premised on the idea that addressing the issue in question will actually serve to protect or even enhance shareholder value over the longer-term.

A prime example of this is NCF’s work on climate change. In addition to being a major focus of the Foundation’s Ecological Innovation program, climate change is an investment issue with significant and well-recognized implications for long-term shareholder value. Consulting firms such as McKinsey & Company and Marsh have put out dozens of publications examining the risks that climate change poses to long-term shareholder value. For example, in a 2006 alert entitled, “Climate Change: Business Risks and Solutions” Marsh noted, “The way in which companies respond to the new operational and strategic risks and opportunities of climate change will have far reaching impacts on corporate profitability and shareholder value.”

With its clear implications for long-term shareholder value and explicit links to the Foundation’s Ecological Innovation program, climate change has been the subject of more than half of all shareholder proposals filed by the Nathan Cummings Foundation. Since 2004, NCF has filed 42 climate change proposals with 19 different companies across a range of industries, leveraging the assets in its endowment to achieve greater disclosure and, in a growing number of instances, commitments to reduce emissions.

Another example of an issue with both ties to NCF’s programmatic objectives—in this case its crosscutting focus on social and economic justice—and implications for long-term shareholder value is executive compensation. Over the last few decades there has been an enormous increase in income inequality, with significant implications for social and economic justice. According to the Economic Policy Institute’s publication, The State of Working America 2008/2009, between 1989 and 2007, average CEO pay rose by 163% while the wages of the average worker in the U.S. rose by a relatively paltry 10%, creating a situation in which the average CEO earns more in just one day than a typical American earns all year. Clearly executive compensation has implications for social and economic justice. With executive compensation eating up an increasing portion of corporate earnings, the issue also has clear implications for shareholder value.

NCF began to file shareholder proposals on executive compensation in 2008, with the majority of those proposals asking companies for a say-on-pay. Although The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires companies to provide investors with a say-on-pay, the Nathan Cummings Foundation continues to believe that executive compensation has important implications for both long-term shareholder value and social and economic justice. We will persist with our efforts to push companies to be more thoughtful about the structure of executive compensation packages going forward. An integral part of these efforts will include the use of NCF’s proxy votes on management proposed say-on-pay packages to send compensation committees a message about the appropriateness of the pay packages they design.

In these and other areas of importance to both our programmatic objectives and the long-term performance of our investment portfolio, NCF has successfully used the other 95% of its assets to achieve concrete changes in corporate behavior. Without spending a single extra dollar on grants, and with very little in the way of administrative costs, the Foundation has pushed corporations to strengthen shareholder rights, improve governance practices, increase transparency and think more strategically about environmental and social issues. We’ve even been successful in prodding companies to begin reducing their GHG emissions.

Our new white paper, Changing Corporate Behavior through Shareholder Activism, lays out in detail the theories underpinning our approach to responsible investment and active ownership and the challenges and successes we’ve had with the approach. It is available here.