Daly and Dunlop pave way for new era of shareholder activism

The reach of global multinationals like BHP is driving a new wave of shareholder activism. Fiona Dorrell/AAP

Sister Patricia Daly is in for the long haul. Last May, the New Jersey-based Dominican nun and shareholder activist, attended her 15th ExxonMobil annual shareholder meeting, again armed with the same resolution – for the US oil giant to adopt greenhouse gas reduction goals. Once again Daly, and her like-minded activists, failed.

But like a punch-drunk fighter, Sister Daly will return to the ExxonMobil ring in 2014. As she said after this year’s meeting: “If you are going to be shareholder in any of these companies (she was referring to US multinationals), the state of the planet demands that you are engaged”.

Engaged she is. For the past 35 years the issue of socially responsible investing has been the cross she has willingly carried. She now serves as executive director of the Tri-State Coalition for Responsible Investment, as well as being its representative to the national Interfaith Centre for Corporate Responsibility (ICCR), a body that represents more than 275 religious organisations and has assets totaling about US$110 billion. In 2007, it succeeded in getting Ford to make a company-wide emissions reduction target.

Australia’s equivalent of Sister Daly is former coal executive and now environmental activist Ian Dunlop. Dunlop has failed in his bid for a seat on the board of mining giant BHP, but is also unlikely to disappear from shareholder meetings.

The new robber barons

What Sister Daly and other activists represent is an adverse reaction to the era of global capitalism. They want these companies, which operate seamlessly across borders, cultures and legislations, to be far more aware of their social and environmental responsibilities – and act accordingly. Some act like America’s 19th century robber barons – but with a global reach.

Today, these companies often have turnovers larger than the GDPs of the countries where they operate. Australia’s two mining giants, BHP Billiton and Rio Tinto, have projects spanning six continents and nearly 50 countries. As a consequence, the potential for these global conglomerates to exploit the economies where they operate has never been greater.

At the same time there has been a growing separation between the owners and managers of companies. The ability of any individual shareholder to influence the direction of a company has become more limited as scope and scale increases.

And, it must be said, many shareholders are happy to reap their dividend income and take no responsibility for the company’s corporate behavior. While an individual owner who doesn’t agree with a company’s direction can sell, in the long run this may not achieve a better outcome in terms of the impact of the company on the wider community.

It is the coalescing of these two trends – the reach of these global multinationals and shareholder disengagement – that have underpinned the emergence of groups such as the ICCR. For more than 40 years this organisation has campaigned on issues as diverse as water, food, human trafficking and health, establishing a track record for influencing company boards and being a widely respected voice for social justice.

In large part, its success has been based on co-opting the support of other shareholders. Although ICCR is motivated by ethical and religious concerns, it always proposes resolutions in the interests of all shareholders; they want to reform capitalism, not abolish it. As Sister Daly argues, social, environmental and governance factors are central to good long-term returns.

Australia follows the US

Australia, too, is witnessing the emergence of shareholder activism. An obvious example has been the decision of some industry superannuation funds to divest their holdings in cigarette companies. More specifically, the Victorian Funds Management Corporation (VFMC) has been integrating environmental, social and corporate governance (ESG) criteria into its investment decision-making process for several years.

How ESG has a financial impact on the VFMC, which had FUM of A$41 billion at 30 June 2013, is subject to ongoing research. But irrespective of that research, the VFMC considers ESG risks in all its investment decision-making processes across all asset classes.

As global long-term investors and signatory to the United Nations-supported Principles for Responsible Investment (PRI), it acknowledges that climate change may affect the performance of investment portfolios to varying degrees across companies, sectors, regions, asset classes and through time as a consequence of regulatory change and the physical and social impacts of climate change.

In Australia we’re seeing an increasing level of awareness of ESG principles, socially responsible investing and better corporate governance at an institutional level.

Some examples include:

  • An increasing number of signatories to the PRI principles;
  • The new ASX Corporate Governance Guidelines, currently out for discussion, propose an enhanced approach to reporting on environmental and social issues; and
  • This is the third reporting season for the “two strikes board spill law” instituted in 2011, under which a 25% votes against the remuneration report of a listed company for two consecutive years can instigate the spill of the entire board of directors.

But when it comes to broader activism in the community Australia doesn’t fare so well, despite the fact we have one of the highest proportions of the population engaged in the share market through both direct investment and indirect investment through superannuation accounts. Hence the recent establishment of the Australian Centre for Corporate Responsibility, modeled on the ICCR in the US, to encourage and support wider investor interest and activism.

I suspect this activism will slowly spread to the retail end of the market. It will always be the preserve of the committed minority, but as organisations such as ICCR have demonstrated, they can make a difference.

By doing so they are highlighting the fact that activism is not anathema to capitalism (as distinct to the boards and senior managers). Indeed, what it is doing is returning capitalism to its roots where shareholders actually had a far greater voice in the running of their companies.