SOCIAL TOPICS (Archive): CORPORATE GOVERNANCE 

Published, Fall 2002

Can corporate governance reforms rebuild public confidence in corporate America?  Shareholders in corporate America have been forced to realize what social investors have known for years: Inattentive investors provide latitude for irresponsible management. Integrity, ethics, honesty, and corporate responsibility - words intimately linked to today’s corporate scandals¾are concepts that have been embraced by social investors since the first shareholder resolution in 1971 brought pressure against apartheid. How a company is governed, its board structured, and committees organized are vital mechanisms in holding management accountable to higher standards.

Once representing a fragment of the investor community, shareholder advocates now frequently gain over 50 percent of the proxy vote on governance issues. Considering how heavily the proxy voting process tilts toward management, we view such support as an amazing triumph for shareholder advocacy.

In fact the difficult current environment provides a historic opportunity for investors to demonstrate the clear links between good corporate governance and accountability and positive corporate social responsibility. The owners of companies must take a leading role in ensuring that their agents (i.e. management) work responsibly to achieve the goals of the owners. To rebuild public confidence, businesses will need to look beyond corporate governance reforms and look at ways to be responsive to the social and environmental bottom line as well.

Walden’s approach illustrates the integrated analysis needed by investors. We must and do perform work to protect the integrity of the marketplace. Misleading earnings reports, biased analysts’ reports, the near-sighted drive for quarterly returns, and skyrocketing executive pay packages betray trust and compromise investors’ goals. How, for example, can we invest with integrity when we have to be skeptical of the very financial reports management provides?

Walden’s voice along with those of other social investors is key to blending the worlds of corporate governance and social responsibility. We must vigorously pursue reforms both directly with companies and through public policy.

Walden’s Program

Proxy Voting. For well over a decade Walden has been examining closely all corporate governance and social issues that appear on company proxies, making sure that we vote our clients’ shares according to standards of best practice. Not only have we supported specific proxy initiatives on enhancing board composition and procedures, for example, but we have also been withholding support for any director slate without a majority of independent members or without women and minorities represented.

Company Dialogue. Walden recently wrote to 60 portfolio companies that elect directors in small classes (staggered Boards) to urge them to have all board members elected annually, thus making them more accountable to shareholders. We sent letters to targeted companies with below-optimal thresholds for independence and diversity as well. We expect this work to lead to more comprehensive discussions with several companies.

Shareholder Resolutions. Linking corporate governance and social concerns in the proxy proposal process began with Walden’s 1994 resolution asking Ametek to create a diverse and independent board. In 2002 our two resolutions to EMC on the same topic resulted in a 56 percent vote in favor of board independence and 33 percent for board diversity¾a compelling signal that helped move EMC to name an independent woman to its board. We have led several resolutions that addressed policies pertaining to executive compensation. Walden works in coalitions with other institutional investors, such as the State of Connecticut pension funds, in approaching companies on governance issues, thus magnifying our effectiveness.

Public Policy Initiatives. The New York Stock Exchange (NYSE) responded to the growing scandals by proposing new standards of corporate governance in an attempt to create new checks and balances on business. Coupled with the passage of the Sarbanes-Oxley bill last July, the NYSE proposals were aimed at recreating a measure of confidence in the market. Walden wrote an extensive letter to the NYSE supporting proposed reforms in corporate governance for NYSE-listed companies and pressing the Exchange to go further. (See accompanying sidebar for highlights of our letter.) The crisis of confidence in corporate America is not simply a distrust of auditors and financial reports; it is also doubt whether companies are telling the truth about environmental matters and social matters, and showing respect for employees, customers, communities, and human rights. Consequently we also asked the Securities and Exchange Commission (SEC) to include disclosure requirements on social and environmental issues. Locally, Walden is involved in a coalition of concerned investors encouraging the pension board of the Commonwealth of Massachusetts to update its proxy voting guidelines to include votes on social responsibility issues. Walden believes strongly in the need to protect the integrity of the financial markets. In concert with others, we will be active in corporate boardrooms and stockholder meetings as well as with reforms proposed by the SEC and NYSE. We can do no other! –T. Smith