Saturday November 22, 2014

Investors Seek Focus on Non-Financial Issues

Shareholder resolutions on social and environmental issues are becoming both more common and more successful.

The 2010 proxy season was marked by an uptick in the number of shareholder resolutions on social and environmental issues, which has increased 27 percent over the past decade, according to a recent study by Ernst & Young. Furthermore, these proposals are gaining traction. In 2005, just 2.6 percent of proposals gained at least 30 percent shareholder support; in 2010 26.8 percent reached this level. EY estimates that social and environmental resolutions will comprise half of all shareholder proposals in 2011.

The push for boards to consider issues other than board structure and executive compensation is further supported with data from, a tool developed by the Manhattan Institute for Policy Research to track shareholder proposals at Fortune 100 companies. In 2010, 37 percent of all submitted proposals were focused on social policy, a classification including environmental proposals, human rights and political spending. (This was higher than the 35 percent of proposals concerning corporate governance or the 28 percent on executive compensation.) In contrast, social policy represented just 29 percent of total resolutions in 2009.

The clamor for environmental and social awareness in the boardroom is seen in more than just shareholder resolutions. These issues, grouped under “corporate social responsibility,” have often taken a back seat to areas clearly tied to shareholder value. However, a growing number of investment groups are analyzing environmental, social and governance (ESG) performance as an indicator of long-term shareholder value creation. Under funds such as Domini Social Investments and Calvert Group, socially responsible investing (SRI) assets under management have increased more than 18 percent since 2005, according to the Social Investment Forum. The Forum also estimates that SRI funds now account for $2.7 trillion, roughly 10 percent of professionally managed funds in the U.S.

Despite the growing investor focus on ESG performance, NACD data suggest little response from the boardroom. In the 2010 NACD Public Company Governance Survey, corporate social responsibility is frequently ranked as one of the lowest boardroom priorities, listed by just 1.9 percent of directors as a “highest priority.” The percentage of boards with a standing committee devoted to public affairs/policy/social responsibility has remained unchanged since 2008 at 3.4 percent.

There are several possible explanations to this apparent lack of boardroom response. Some boards may have incorporated social and environmental issues seamlessly into oversight of corporate strategy. Alternatively, these issues may still be bypassed for lack of quantitative explanatory metrics. It is relatively easy to disclose financial performance through stock price, return on investment and cash flows. There are fewer globally recognized data points explaining performance in areas like consumer safety and climate change.

However, there are signs of progress. Over the past decade, the Global Reporting Initiative (GRI) has made strides in developing and publishing a global set of sustainability reporting guidelines for companies to use when reporting ESG performance. The number of companies using GRI Guidelines has grown roughly 300 percent since 2005, when 370 reported. It is estimated that in 2010 nearly 2,000 organizations in at least 63 countries used the guidelines, a dramatic increase from just 43 companies at the beginning of the decade. In the U.S., a 20 percent increase in documented GRI users was reported from just 2009 to 2010.

Current events—ranging from violence over mineral conflicts in the Congo to natural disasters in Japan—point to the need for active board oversight of non-financial areas such as supply chain management. Selecting a dashboard of critical ESG areas to review provides directors a distinct competitive advantage.

Kate Iannelli is a research analyst with NACD.

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