Of the 334 complaints received between the rules’ implementation on August 12 and September 30, 16.2 percent were allegations of market manipulation, 15.3 percent reported on corporate disclosures and financial statements, while offering fraud made up 15.6 percent of complaints. The state with the highest number of tips was California, at 34, followed by New York at 24. Complaints were also filed from international tipsters, ten from China and nine from the U.K.

The statistics were reported in the SEC’s Office of the Whistleblower’s first annually mandated report to Congress on the program’s accomplishments, awards granted and fund balances, including interest and payouts. The SEC Investor Protection Fund, which funds the award program and finances the operations of the SEC Office of the Inspector General’s suggestion program, had an ending balance of $452,788,043.74 on September 30. The Commission also posted its audited financial statements for the fund at www.sec.gov/about/secpar2011.shtml.

“As a result of the relatively recent launch of the program and the small sample size, it is too early to identify any specific trends or conclusions from the data collected to date,” the report noted. “We expect that the Annual Report for 2012 – with the benefit of a full year’s worth of data – will yield such trends and conclusions.”

When the Office of the Whistleblower receives a tip, it is triaged against other recently received reports by Office of Market Intelligence staff and assigned to an appropriate member of the Division of Enforcement, lead by Sean X. McKessy. Complaints regarding existing investigations or that would be better handled by another division or agency are forwarded to the appropriate recipient. While the investigation is ongoing, the Office of the Whistleblower is available to serve as a liaison between the whistleblower and the investigatory staff.

Whistleblowers submitting a claim that results in an action exceeding $1 million are able to apply for an award of ten to 30 percent of the sanctions. When an action may result in a whistleblower award, the SEC posts a Notice of Covered Action on its website and the whistleblower has 90 calendar days to apply for the award. In August, the SEC posted 170 Notices of Covered Action for complaints lodged over the past year. Because the 90 days allotted for the filing of award applications had not passed before the report was written, no data is available on the number of successful applications or the amount any whistleblowers may receive.

Derek Linsell

Corporate Social Responsibility (CSR) is the integration of social and environmental factors into corporate decision-making. CSR is commonly viewed in terms of ‘stakeholder relations’, especially in industries like extraction or water use that have long had to consider their impact on surrounding communities. Stakeholders are persons or groups who are directly or indirectly affected by a project, as well as those who may have interests in a project and/or the ability to influence its outcome, either positively or negatively. Today, CSR has expanded beyond directly-impacted communities to include a more global view of the environment and community.

The importance of CSR as part of a holistic risk assessment strategy is gain acceptance but what is often overlooked is the value-creating potential of a CSR strategy. By designing comprehensive local and global stakeholder engagement and sustainability strategies, companies have the opportunity to create a broader, more inclusive, and continuous feedback process between a range of constituents. This approach not only affects the life of a specific project, but can also offer valuable insight for future operations and business development.

A new type of risk
Risk is understood by most boards and management in the context of a company’s threats, vulnerabilities, controls and counter measures. As Harvard professor and United Nations Secretary General’s Special Representative in Business and Human Rights, John Ruggie, explains in his report CSR as Risk Management “risk arises when a vulnerability exists within an organization’s operating system in the absence of effective controls and countermeasures.”

Nicole Skibola

Traditional risks are generally classified in terms of political, economic, and technological risk.While operations abroad and even in the United States still pose traditional business risks – political regulations or regional economic instability for example – Professor Ruggie raises discussion of a new type of risk called “social risks.”

Ruggie defines social risks as the levers and pressure points imposed by civil society and stakeholders on business and explains that because globalization creates a web of complexity, interdependence, and constant interactions among various stakeholders, businesses are increasingly vulnerable to key players in the dynamic global business system. Ironically, Professor Ruggie points out, “a social risk may arise from what appears to be a sound business decision,” citing examples like labor violations stemming from the business imperative to drive down prices and boost profit margins. Once a risk comes to fruition, the company may then be forced to expend significant resources changing its policies or approaches in the marketplace.

In consultations with international extractive companies, Professor Ruggie explained that “costly project delays often were the result of ‘stakeholder-related risks’” noting that one company experienced a $6.5 billion “value erosion” as the result of mismanaged stakeholder relations. The risks are often even greater for companies that claim to have embraced a CSR strategy, and then experience a major crisis. One only need to look at BP’s stock prices, which have plummeted from a high of $80 in October 2008 to $27 shortly after the Gulf of Mexico oil spill, to their current price of $46 over a year later.

Another interesting, recent response to social risks is the growth of shareholder resolutions in the annual proxy statement. During the 2010 proxy season, for example, shareholders of companies such as Caterpillar, Hewlett-Packard, Motorola and KBR asked for the adoption of human rights policies and assessment mechanisms. Specifically, the resolutions filed with Motorola and Hewlett-Packard urged that the companies develop policies to provide assurance that their, ‘products and services are not used in human rights violations.’ It is notable that these resolutions came in the wake of publicity over the use of conflict minerals in consumer electronics. While these shareholder resolutions are themselves not specifically social risks, they certainly disturb many of the ‘business as usual’ assumptions that traditionally dominate corporate decision-making.

From risk to value creation
Professor Ruggie describes CSR as ‘strategic intelligence,’ emphasizing the importance of social risk management as a value creation opportunity for business. Integrating stakeholders at all levels into decision-making (rather than informing them after substantive decisions have been made) expands the company frame of reference to the issues, problems and opportunities that involve the whole global system or network. “By integrating the business sensing, learning, and innovations gained from CSR programs, companies can better manage their risks and subsequently their economic, social and environmental impacts in a manner that is roughly analogous to what they learn from their customers, a well established form of business intelligence gathering.”

Additionally, as noted by the International Finance Corporation, choosing not to be proactive in establishing relationships with third parties, such as local government officials or NGOs, can quickly become problematic. Once a problem arises, and the multinational realizes the need to elicit support, or to find an intermediary, and perceived reputational risks can hinder a third party alliance. Rather, engaging with stakeholders from the start, as part of a business’ core business strategy “enables a proactive cultivation of relationships that can serve as ‘capital’ during challenging times.”

A Case Study in Stakeholder Value Creation
One company, Philippines-based Manila Water Company (MWC), provides an excellent example of the importance of proactive and strategic relationships with shareholders. As a water company with a mission to provide clean, safe water and sewage services to approximately half of Manila’s population, MWC aimed to have a proactive and open relationship with a number of its stakeholders, including customers, and local NGOs.

Manila is a city that has been historically plagued by unequal access to clean water. Until 1997, 76 percent of households in the eastern zone of Manila, home to 5 million people, did not have access to 24-hour water. Additionally, the rate of water loss was the highest among major cities in Asia, with two-thirds of the water produced lost to leaks and illegal tapping, and only 26 percent of 325,000 households in the metropolitan area had access to clean and affordable piped-in water. Working with the IFC, the Philippines government privatized the state owned utility by granting a concession contract to MWC.

The context of the story behind MWC’s acquisition and mission to revamp the Manila water system is particularly important in understanding its engagement policy. After the IFC directed concession from the government operator to Manila Water, the company launched a “Walk the Line” program.  Once a month, all company staff – from managers to district level representatives – visited their customers, including residents of informal settlements, to consult with them on water access in their community. By adopting a grassroots approach to serving low-income consumers, the company was able to integrate key stakeholders into its operations as a source of intelligence and strategic business planning.

As a result of this engagement and other initiatives, Manila Water significantly improved its service delivery. Between 2004 and 2006, the percentage of households having a 24-hour water supply jumped from 26% to 95%. At the same time, water losses from the system were reduced from 63% to 35.5%. From 325,000 households served at the start of 2004, there were more than 1,000,000 in 2006, including over 848,000 urban poor. By purposefully integrating a permanent stakeholder consultation function into its business development, MWC has not only transformed their service delivery but been established as a global leader in sustainable development and community projects.

The story of the Manila Water Company illustrates the idea that CSR evolving toward broader business imperatives and strategic management rather than philanthropic giving or cause related branding. Consumer and shareholder activism, paired with technology’s unique ability to coalesce remote stakeholders together and communicate instantaneously, has forever changed the world of business. Whether companies choose to perceive various actors along their supply chains as risks or opportunities is indicative of the fact that businesses can no longer ignore them – it is how they decide to integrate these disparate voices and communities that will determine their competitive advantage in the future.

In an increasingly connected and complex world, social and environmental risk management will only grow in importance. Companies that are able to sense and understand these risks will not only be able to better preemptively avoid the costs of misdeeds, but also create better network-based models of information sharing for business innovation.

Derek Linsell is President and CEO of Apricot Consulting. Nicole Skibola is Social Innovation Strategist at Apricot Consulting.

Steve Starbuck

In the 2011 proxy season, resolutions on corporate responsibility issues made up about 40 percent of all of shareholder proposals up for a vote during meetings that took place through June, according to the Ernst & Young corporate governance database. As in 2010, these proposals represented the largest category of shareholder proposals. The 40 percent figure also represents a significant increase over the 2010 full year figure of about 30 percent.

Initial projections by Ernst & Young analysts predicted the proportion of social/environmental proposals would reach 50 percent of all shareholder proposals. However, the actual proportion that came to a vote was 40 percent, partly due to a higher-than-expected number of submitted proposals that were later withdrawn by proponents.

A significant number of corporate responsibility resolutions were withdrawn by proponents, as a result of substantive dialogue with and/or action taken by companies, which is an indication of how company shareholder engagement can lead to mutual agreement on complicated issues. This is a level of success that is not captured in vote outcomes.

The increase in voting support for CSR-related proposals may be a significant factor influencing why companies are increasingly open to reaching an agreement with shareholders on these matters, rather than putting them up for vote on the proxy. For example, of the nine proposals on hydraulic fracturing (a controversial natural gas extraction technique) submitted this proxy season, half were withdrawn due to company action. The remaining proposals, which were included in proxy ballots, received very high levels of support, averaging more than 40 percent of votes cast; one won support from 49.5 percent of votes cast.

Ann Brockett

Investor and Regulator Focus
While the number of CSR resolutions is increasing, so to is the level of support, especially among mutual funds and other important institutional investors. Partly, this is because investors and regulators such as the Securities and Exchange Commission (SEC) are becoming more aware of the reputational and financial risks associated with social and environmental issues. Shareholder proposals have become increasingly prescriptive in asking boards to mitigate potential risks tied to evolving regulations, shifting global weather patterns and heightened public awareness of climate change issues—any of which can affect a company’s business.

These developments have placed more pressure on companies to show they appreciate such risks and are taking appropriate steps to manage them. Board members and senior management need to understand requests for information related to environmental subjects. Just as important, they must work actively to mitigate shareholders’ concerns about environmental issues whether the board considers them legitimate or not. Increasing support on shareholder proposals will put pressure on boards to respond. Although non-binding, failure to respond to a shareholder proposal that receives 50 percent or more of votes cast may result in votes against directors in the following year. First steps toward addressing shareholder concerns related to environmental risks include understanding their investment philosophies and voting policies; knowing who is responsible for key voting decisions; and becoming familiar with shareholders’ history of activism with other target companies.

Greater Support for CSR-Related Proposals
Shareholder proposals are important because they shape the corporate landscape and often frame conversations that take place in corporate boardrooms. Resolutions linked to corporate social responsibility (CSR) historically have been skewed toward social issues. But now, environmental sustainability has become the fastest-growing and most prominent issue, as more institutional investors begin questioning the potential financial impact of CSR issues on their investee companies.

A 2010 survey conducted by ISS, a proxy advisory firm, shows that 83 percent of investors now believe environmental and social factors can have a significant impact on shareholder value over the long term. This belief is clearly visible in the rising level of support for shareholder proposals requesting action related to social and environmental issues.

Additionally, according to our research, the average voting support for CSR-related shareholder proposals rose from 7.5 percent in 2000 to 18.4 percent in 2010, and data for 2011 shows that to date, average voting support on these issues has further increased to 21.4 percent.

Broader support means that proponents gain more traction with investee companies and put greater pressure on their boards. This is especially true if the proposals reach critical thresholds. For example, many boards take note once support levels reach the 30 percent mark. In 2005, only 2.6 percent of all shareholder resolutions related to social/environmental issues received average support of more than 30 percent of votes cast, according to our research. Last year, more than one-quarter of proposals reached the critical 30 percent support threshold, and so far in 2011, the figure has grown to nearly a third.

Regulatory changes are also driving broader support for resolutions linked to environmental risks. In late 2009, the SEC began to allow shareholder proposals to include the phrase “financial risk” in discussing environmental and other issues. In February 2010, the agency issued guidance reminding companies of their responsibility to disclose their material risks related to climate change.

Support From Mutual Funds Grows
A clear example of the growing support for environmentally related proposals comes from the mutual fund industry. According to an analysis by Ceres, a coalition of environmentally oriented investors, average support by mutual funds for climate change-related resolutions grew from 14 percent in 2004 to 27 percent in the 2009 proxy season, and the percentage of abstentions increased as well. In the same period, opposition to those resolutions fell from 76 percent to 55 percent, reflecting a sharp departure from traditional voting policies. The Ceres analysis evaluates proxy votes on climate change-related proposals by 46 mutual fund companies with more than $5 trillion in total assets under management.

Director Expertise, Compensation Targeted
A growing number of shareholder proposals are linking social and environmental matters to traditional governance issues such as compensation and the qualifications of board members. For example, some resolutions advocate tying performance metrics used for determining executive compensation to environmental goals. Others seek to ensure that board members have the environmental expertise needed to deal with sustainability and other environmental issues.

For example, at a 2010 annual meeting for a large oil and gas company shareholders filed a proposal requesting that the company have at least one board member with expertise in environmental matters relevant to hydrocarbon exploration, and that the business and environmental communities recognize the board member as an authority on environmental matters. This proposal received support from 27 percent of the votes cast. A similar initiative last year at a large mining and metals company was supported by 34 percent of votes cast. This year, shareholders of a major energy company asked the company to spell out how it planned to strengthen its risk management function to better prepare for environmentally related incidents, and how it would move to a low-carbon economy.

Corporate responsibility resolutions receiving highest levels of voting support to date include those requesting:

• A sustainability report disclosing the company’s environmental, social and governance performance, including a discussion on water risk and greenhouse gas reduction targets and goals (92.8 percent of votes cast)
• A report on the company’s risk management efforts related to coal combustion waste (52.7 percent)
• A report on the board’s oversight of process safety management and related operational safety efforts (54.3 percent)
• Disclosure of the company’s policies and procedures for making political contributions and expenditures, directly and indirectly, with corporate funds (53.3 percent)
• An amendment of the company’s EEO policy to explicitly prohibit discrimination based on sexual orientation and gender identity (61.7 percent)

The specific proposal requesting a corporate sustainability report received a dramatic and historically unprecedented level of support in part because a similar proposal at that company’s 2010 meeting had received 60.3 percent of votes cast and shareholders appeared to be dissatisfied with the company’s response. Another factor in raising the 2011 support is that, in an unusual step, management recommended that shareholders vote in support of the shareholder proposal.

Actions to Take
Risks related to sustainability, including climate change risk and other environmental issues, matter a great deal to shareholders. Yet many corporate directors lack a deeper understanding of these issues. Board members, as a result, would greatly benefit from formulating a strategy for anticipating shareholders’ future concerns. At a minimum, companies and their boards must be prepared to do the following:

• Enhance dialogue with shareholders and improve disclosure in key areas, particularly those related to social and environmental issues. Robust sustainability reporting can help with this.
• Ensure that directors’ skills are relevant to the chief areas of stakeholder concern, including risk management tied to social and environmental matters. In particular, companies must communicate with shareholders. They could, for example, take advantage of the SEC disclosure rules around director qualifications to explain how the qualifications, backgrounds and skill sets of their directors—both individually and as a group—contribute to overall corporate strategy, including risk mitigation.
• Consider whether using non-traditional performance metrics—including those related to environmental/sustainability issues—could help align compensation with risk. In addition to financial metrics, performance goals could align with overall environmental strategy, including clearly defined metrics relating to energy efficiency, water usage and the reduction of carbon emissions.
• Shareholders are paying closer attention to environmental and social matters, believing them to bear closely upon the risk to which investee companies are exposed and, ultimately, upon the financial performance of those companies. The 2011 proxy season reflects this deepening trend. Driven by concerns about the financial and reputational risks associated with climate change, institutional investors will likely push harder for action on these matters. Forward-thinking companies will be prepared to address their concerns.

Takeaway: Leading Practices in CSR Governance

Shareholder pressure and increasing legislative and regulatory requirements are driving boards to take a more active role in managing corporate strategy and engaging stakeholders. Here are some steps your organization may want to consider taking to improve its CSR-related governance:

• Board. Make sure your board has a standing agenda item to review emerging environmental and social issues, opportunities and risks.
• Board committee. Install a dedicated board sub-committee to oversee the company’s management of environmental and social issues, opportunities and risks.
• Committee composition. Ensure that relevant committees are composed of executive and non-executive directors with the expertise to assess the organization’s progress in environmental matters.
• Materiality. Apply a systematic process to determine which environmental and social issues are most relevant to the organization.
• Accountability. Hold individual leaders accountable for environmental performance, and schedule regular presentations to the appropriate committees to document progress.
• Reporting. Establish clear frameworks for reporting on the issues most material to the organization. Regularly publishing a sustainability report is one of the best ways to do this. Relevant board committees should sign off on all sustainability reports.
• Assurance. Obtain both internal and external assurance of all reports to gain independent insights on emerging risks and progress, and to be confident that disclosures are accurate.

Steve Starbuck is Americas Leader and Ann Brockett is Americas Assurance Leader for Climate Change and Sustainability Services at Ernst & Young LLP.

Highlights of the SEC Guidance
The SEC guidance highlights four ways in which climate change may trigger disclosure obligations:

1. Impact of international climate change accords; Indirect consequences of climate change regulation or resulting business trends, such as (a) decreased demand for carbon-intensive goods and services related to carbon-based energy sources and a corresponding increased demand for goods and services with a low carbon footprint, (b) increased competition to develop innovative products, and (c) increased demand for alternative energy sources;
2. Physical impacts of climate change, such as (a) property damage and disruption to operations on coastlines as a result of rising sea levels or severe weather, (b) indirect financial and operational impacts from disruptions to operations of major customers or suppliers from severe weather, (c) decreased agricultural production in areas affected by weather-related changes, and (d) increased insurance claims, premiums and deductibles for public companies with facilities in areas subject to severe weather.

If material to a registrant’s business, disclosure of the foregoing potential impacts of climate change may be required under Regulation S-K, specifically Item 101 (description of business), Item 103 (legal proceedings), Item 303 (management discussion and analysis) or Item 503(c) (risk factors).

Implications of the SEC Guidance
Public companies should keep the following issues in mind in preparing their annual reports to shareholders, Form 10-Ks and other public filings.

• Consider both the risks and opportunities of climate change: Companies should not focus solely upon the risks of climate change, but also on the opportunities of climate change (such as sales of allowances in a cap and trade system or increased demand for products with a low carbon footprint).
• Consider both indirect and direct risks and opportunities of climate change: The SEC Guidance provides examples of direct climate change risks (such as potential physical impacts or costs to improve facilities) as well as indirect risks and opportunities (such as changing demand for certain goods and services or reputational harm).
• Resolve doubts concerning the materiality of climate change in favor of disclosure: Although the SEC Guidance does not alter the traditional standard of “materiality” — which requires disclosure if a reasonable investor would view the information as important in making an investment decision — doubts whether information is material should be resolved in favor of disclosure.
• Ensure that adequate disclosure controls and procedures are in place to evaluate the materiality of climate change issues: The SEC Guidance does not require public companies to disclose their carbon footprint, but management needs sufficient information concerning greenhouse gas emissions and related operational matters to evaluate the likelihood of a material effect. Therefore, companies must have adequate controls and procedures to process information potentially subject to disclosure. Such controls and procedures should already be in place for management to make required certifications under Sarbanes-Oxley, but disclosure committees should now add an assessment of the materiality of climate change issues to the company’s business.
• Reconcile voluntary and mandatory disclosure of climate change issues: Many public companies voluntarily disclose information regarding their greenhouse gas emissions and climate change risk in corporate sustainability reports and various greenhouse gas reporting programs, such as the Climate Registry, the Carbon Disclosure Project and the Global Reporting Initiative. Companies should ensure that any mandatory SEC disclosure is consistent with prior voluntary disclosure or be prepared to explain any differences.

Richard M. Schwartz is a litigation partner and head of the environmental practice group in the New York office of Fried, Frank, Harris, Shriver & Jacobson LLP. Donna Mussio is a senior associate in the environmental practice group. Coleman Kennedy, an associate in the environmental practice group, also contributed to the preparation of this article.