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Shareholder Advocacy Solutions

Holly A. Testa, CFP™ AIF™SRI in the Rockies, 2008 Preconference MeetingOctober 25, 4:50 p.m.

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Shareholder Advocacy Solutions

• What is shareholder advocacy, really?• What is First Affirmative already doing?• What do our valued partners do, and how can we

work together?• Planning for the future-what next?

• http://www.youtube.com/watch?v=QMBZDwf9dok

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Motivation

“I’m mad as hell, and I’m not going to take it anymore!” Howard Beale, Network, 1976

…so, what happens after you have shouted out the window at the top of your lungs?

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Shareholder Advocacy

Underlying Philosophy …individuals and institutions that own shares in companies have a right

and even a responsibility to provide guidance to management on pressing policy issues the company faces. *

Working Definition An array of activities undertaken by shareholders of a corporation

designed to change corporate policies or practices**

• Sources: Trillium Asset Management*; Shareholder Action Process, Walden Asset Management**

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Shareholder Advocacy Tools• Proxy voting• Dialogue with corporate management• Dialogue with regulatory agencies• Filing shareholder resolutions• Communication and cooperation with other

shareholders, investment advisors and clients• Media campaigns• Divestiture• Boycotts

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Proxy Voting • Probably the most basic advocacy tool• Evaluate all proxy questions on owned shares

based on the merits and vote appropriately-not just “with management”

• Common Issues Corporate governance/executive compensation Environment Energy Diversity Human rights/labor practices Health and safety

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Proxy Voting at First AffirmativeOptions available via the Client Questionnaire

Authorize First Affirmative to vote all proxies according to the published voting guidelines

Delegate proxy voting authority to activist managers, i.e. Trillium, Walden, Boston Common (Fairways accounts only)

Client retains voting rights

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Proxy Voting at First AffirmativeResources

First Affirmative proxy voting guidelines on the website Proxy voting guidelines for many mutual funds and

managers are available on their web sites Professional Members have access to Proxy

Governance database, providing extensive analysis on proxy issues

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Dialogue• Letters to companies on targeted issues• Meetings with company management • Attendance at shareholder meetings (usually in

conjunction with a shareholder resolution)• Participation in efforts to effect change on

regulatory and policy issues

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Shareholder Resolutions• A proposal put forward by eligible owners of

corporate stock requesting management to take certain actions

• The proposal must conform to the rules of the US Securities and Exchange Commission for inclusion in the proxy statement that the corporation distributes to shareholders

• Usually a result of coordinated action by coalitions of institutional and individual shareholders

• Non US companies are subject to few resolutions, due to very high hurdles for filing resolutions in many countries

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Case Study: Predatory Lending• Social investors have filed at least two dozen

shareholder resolutions directed at predatory lending practices since 1999

• Companies targeted include Wells Fargo Bank of America Household International Lehman Brothers Countrywide

Source: Interfaith Center on Corporate Responsibility

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Wells Fargo-2005Whereas…..• California regulators filed suit seeking 38 million in penalties for

failing to meet state disclosure standards• Class-action lawsuit in Illinois for charging fees on loans up to

11%, above 3% state limit• New York found violation of federal law prohibiting markups on

feesResolved….• Study ways to link executive compensation to successfully

address predatory practicesOutcome…• Successful-executive compensation was linked to address

predatory lending practices

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Lehman Brothers-2004Whereas…..• Judgment stated that Lehman “substantially assisted” First Alliance

in perpetuating fraud, 10% responsible in a $50.9 million judgment • Household International settled with Attorneys General of 20 states

to provide a $484 million restitution fund• Citigroup settlement for $215 million with the FTCResolved….• Require development of procedures to screen loans and their

originators so that Lehman is not party to securitizations involving sub prime loans

Outcome…• Withdrawn (usually means company agreed to address, but look

what happened!)

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Mortgage Meltdown:Actions-200830 “traditional” governance proposals filed to

address mortgage industry risks:• Amend audit committee policies—highlight conflict

of interest risks with credit rating agencies rating both companies and their lenders

• Executive compensation• Disclosure of Mortgage Practices• Independent board members• Separation of CEO and board chair positions

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First Affirmative ParticipationBroad Based-Through Partnerships• Long term member of the Social Investment Forum; SIF

membership included in Professional Member benefits package

• Participate in Forum sponsored campaigns - examples: Washington Redskins Bank of America sponsorship, Shareholder Rights campaign

• Research and discussion with partner organizations such as Interfaith Center On Corporate Responsibility and our activist managers on how to deepen our involvement in the future

• Transformative Investing Website-partnership with advisers, serves as forum for discussion surrounding advocacy issues

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First Affirmative ParticipationShareholder Advocacy Opportunities for Clients• Increased communication of shareholder issues through

our newsletter, Affirmative Thinking• Confidential Client Questionnaire and Social Policy

Questionnaire allows opportunities for clients to express preferences

• First Affirmative delegates advocacy work by choosing managers who are actively engaged

• Investment Managers used by First Affirmative sponsored or cosponsored 75 shareholder resolutions in 2008

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Sustainable Investment SolutionsEfficiencies-Advocacy models give preference to mutual fund managers with a strong record of shareholder advocacy; mutual funds limit customization, but there are models that can meet special needsDynamics-Many mutual funds used are engaged in shareholder advocacy, but no customizationGenerations-Shares cannot be counted as shares that individual managers represent (exception: mutual fund shares)Fairways-Clients can be placed directly with activist managers and be directly involved in letterwriting campaigns and advocacy efforts of those managers

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Shareholder Advocacy ResourcesFirst Affirmative Resources• Adviser Update, Shareholder Advocacy: Opportunities and

Challenges• Professional Member Benefits-Social Investment Forum

and Proxy Governance access• First Affirmative Proxy Voting Guidelines• Transformative Investing Advocacy Group• Guidelines for Fairways Accounts• 2008 Proposed Proxy Actions List• First Affirmative Advisers

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ResourcesPartner Resources• www.socialinvest.org, Advocacy and Public Policy Working Group• www.iccr.org Interfaith Center on Corporate Responsibility-the

prominent organization that coordinates activities and organizes social agenda shareholder resolutions

• www.asyousow.org As You Sow• Organizations focusing on specific issues:

Center for Political Accountability Coalition for Environmentally Responsible Companies (CERES) Association of Federal, State and Municipal Employees (AFSME) Global Reporting Initiative Equal Employment Coalition

• Activist manager and mutual fund websites

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Real World Effects?

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What Next?