A Season of Accountability
Spring is the time of year when most corporations hold their annual meetings and shareholders cast votes on the board of directors, executive compensation and proposals submitted by shareholders.
Our proposals are conversation starters. They get executives’ attention, and hold it long enough for us to make our case. The shareholder proposal is a tool to help us persuade companies to see our point of view. The Domini Impact Equity Fund has submitted more than 250 shareholder proposals since 1994.
After we submit our proposals, we often receive a phone call from the company’s Corporate Secretary to get a better understanding of our concerns and to see if they can convince us to withdraw the proposal. This year, these conversations led to agreements with Best Buy, First Solar, and Target. We also worked with our colleagues at Clean Yield Asset Management to withdraw our proposal at Whole Foods. Read more about these agreements.
But what happens when we are unable to reach agreement? At that point, the process reaches a public stage – the company annual meeting.
At the annual meeting, we have an opportunity to make a brief speech in the presence of the CEO, the Board of Directors and other shareholders (Some of these meetings are also webcast, taking our message to a global audience).
The Chipotle annual meeting, in Denver, was a lively one, following a nationwide rash of e-coli and norovirus outbreaks that has battered confidence in the brand. At the meeting, a couple of people spoke about working conditions at a Chipotle supplier, and several questions were asked about food safety.
Our speech began with a reminder that sustainability is key to the long-term success of this company. We applauded Chipotle for its efforts to embed sustainability into the brand, exemplified by its commitment to “Food with Integrity.”
After several years, however, we have been unable to convince Chipotle to publish meaningful sustainability information. Although Chipotle increasingly discusses sustainability on its website (and provided some metrics in its proxy, in response to our proposal), the company still fails to provide comprehensive information to help us understand how it is managing its key sustainability risks. Our speech sought to educate the Board about the critical importance of sustainability reporting to risk management (references to ‘our company’ in these speeches refers to the company that we, as shareholders, collectively own):
An annual report that identified our company’s key sustainability challenges would have flagged food safety long ago. It would have helped to build confidence in our company’s food safety systems. It would have helped management identify gaps, receive feedback, and improve its efforts. It might not have prevented last year’s outbreaks, but it would have helped to build trust, an essential driver of long-term value that is now very much at risk.
Sustainability reporting is about accountability, not marketing. It is a key part of getting the job done.
We were told that Chipotle will be releasing more information around sustainability and that we will be happy with the results. Our proposal’s strong 43% vote should send a strong signal that our message resonates with the company’s shareholders.
For many years, we have been concerned about the flood of ‘dark money’ in our elections – money that cannot be traced to anyone. This spending undermines confidence in our democracy and, we believe, weakens our economy’s overall resilience. We have therefore been working to convince corporations to publicly disclose their spending on elections.
In 2007, Verizon began full disclosure of its direct spending on elections, in response to a Domini proposal. In 2012, Domini welcomed AT&T’s decision to begin full disclosure of its direct electoral spending, including additional details about its board oversight process.
We continue to seek disclosure from both companies of an even riskier area of political spending. We are asking Verizon and AT&T to disclose their indirect political spending -- payments to trade associations and 501(c)4 organizations that are used to influence the outcome of elections.
From our speech at the Verizon meeting:
Verizon speaks about its need to participate in politics to allow it to compete fairly in the marketplace. Is it fair for Verizon to keep its indirect financing of American elections secret?
Fair competition is based on honesty and transparency. Disclosure is a bedrock principle of our capital markets and our democracy. Neither can function properly without it.
Disclosure would cause management and the board to think twice before funding political spending it would not wish to be associated with. It would lead to better decision making.
We also pointed out that both companies can simply ask these organizations not to use their money to finance elections, a step a number of other companies have taken.
At Nucor’s annual meeting in North Carolina, we called for a report on the company’s lobbying activities and drew attention to a press leak in 2012 that revealed that Nucor had contributed to the Heartland Institute, a notorious climate denial organization. We raised concerns with the company at the time, and determined last year to take this a step further when we saw that the company still had not produced any form of public report on these activities.
Nucor’s mission includes a commitment to being “environmental stewards in our communities where we live and work.” As the nation’s largest recycler of steel, we want to ensure Nucor’s lobbying is consistent with that commitment.
This year, we also delved into a more traditional corporate governance area, because we see significant implications for sustainability – capital allocation decisions and share buybacks.
The temptation to devote capital to share buybacks is strong. Shareholders celebrate the short term boost in stock price and the increase in earnings per share, which may explain the very low vote we received on our proposal at 3M. But while share buybacks may boost stock prices in the short term, we are concerned that they can deprive companies of the capital necessary for creating long term growth. In conversations with both Target and 3M, we questioned whether sufficient capital was being allocated to climate change mitigation or to employee development.
Our proposal is designed to help ensure that future capital allocation decisions are not influenced by executive compensation incentives that may be impacted by large buybacks. In our speech, we asked whether 3M’s priorities were properly aligned:
In October, a columnist for Market Watch asked about 3M: “What do you make of a company that announces restructuring moves that include possible job cuts while it buys back shares?”
We would also ask what to make of the fact that 3M, a company that is driven by innovation, has spent $16 billion in research and development and capital expenditures over the past five years to support organic growth programs, and $21 billion to buy back its own shares. If you add in $6 billion spent on strategic acquisitions during that period, 3M has split its spending to grow the business roughly equally with spending to buy its shares.
As long-term investors, we question whether the line is being drawn in the right place. We question whether incentives might be misaligned.
Throughout the year, on behalf of our fund shareholders, we will continue to ask the hard questions that help corporate management to see risks and opportunities in a new light, in order to help to build value for all of us.
Domini Proposals that Went to a Vote this Season
|3M||De-link executive compensation incentives from share buybacks||5.8%|
|AT&T||Indirect political contributions disclosure||29%|
|Chipotle Mexican Grill||Sustainability reporting||43%|
|Nucor||Political lobbying disclosure||32.3%|
|Verizon Communications||Indirect political contributions disclosure||30%|
|UPS||Political lobbying disclosure||22.6%|