Tuesday, April 20, 2010

Shareholder Pressure for Social Responsibility

After a shareholder resolution submitted by Harrington Investments, Intel announced that sustainability performance and reporting is now an official fiduciary duty of its corporate board. Although Intel was initially reluctant and had in fact rejected the resolution the year previous, the shareholder was successful in getting the company to change its corporate charter by requiring the Governance and Nominating Committee to report the following:

“...matters of corporate responsibility and sustainability performance, including potential long and short term trends and impacts to our business of environmental, social and governance issues, including the company’s public reporting on these topics”

The notion that the board of directors is considering more than just shareholder value is not a new phenomenon. In the early 1990s, 30 states in the US enacted stakeholder statutes that permitted directors to consider the interests of non-shareholder constituencies (e.g. communities, employees, consumers, environment, farmers) when making corporate decisions. German law requires employee representation on second-tier boards of directors while the Companies Act of Great Britain mandates that company directors include the interests of employees in decision-making. Moreover, the well-known corporate governance models of Japan presume that corporations exist in a network of stakeholders while the 2004 Principles of Corporate Governance launched by the Organization for Economic Cooperation and Development explicitly noted the importance of cooperation with stakeholders.

But these were times when stakeholders (employees, communities, NGOs) and shareholders were at odds with one another. Increasingly, however, shareholders are showing signs of a change of face as they put pressure on firms to consider these stakeholders through corporate social responsibility. For instance, the number of investor proposals urging director attention to environmental issues nearly doubled between 2004 and 2008. Board directors of Ford Motor Company were behind a detailed climate change plan that pledged to reduce emissions from its new vehicle fleet by at least 30% by 2020 while board directors of American Electric Power docked part of the CEO’s bonus because the firm had received too many notices of possible environmental regulatory violations. Lester Hudson, chairman of American Electric Power’s governance committee explained that the earth’s sustainability “has become a much more important part of every board’s activities”.

But are these merely exceptions? Just a couple of days ago BP shareholders voted ‘no’ on oil sands transparency. The shareholder resolution was meant to require the company to commission and review reports that explain the assumptions “about future carbon prices, oil price volatility, oil demand, anticipated greenhouse gas regulation, and legal and reputational risks associated with the projects” in Alberta. The interesting thing about this is that all these requirements are directly related to the financial welfare of the firm. There is nothing in here about reporting on environmental impacts such as biodiversity loss or tailing ponds or water use. I’m perplexed by this one. Perhaps this shows that different types of shareholder perceptions and interests exist in different types of companies. Are BP shareholders a bit less conscious then Intel or Ford shareholders?

What does increased shareholder interest in the sustainability domain mean for business and for business education? Managers are already facing pressure from employees, communities, customers, government, and others to be more socially responsible. Shareholders represent another on the list hinting at a broader movement towards managerial accountability to multiple stakeholders. While there are plenty of examples where meeting the needs of employees, customers, communities and the environment aligns with shareholder value, these are perceived to be low hanging fruit or what has come to be known as the “business case” for sustainability. For example, changing light bulbs, reducing waste and energy use not only helps to protect the environment but also improves shareholder value through reduced costs.

But things get more complicated when these ends do not align and managers presume that tradeoffs are inevitable. For example, encouraging people to use less of your product because of its impact on the environment might not go well with revenue generation. Or moving away from processed food which affords companies like General Mills and Kellogg with handsome margins and access to far off markets would dramatically dissolve chunks of these firms’ market caps. Or eliminating the use of antibiotics (which are now creeping into human health systems) in factory farms of 6,000 cows or more would mean smaller cows, more disease, and less $ per kg of cow. Aligning these sorts of behaviours with sustainability requires a much more radical and fundamental shift that, up to this point, managers have been happy to avoid.

So does this mean that shareholders are willing to forego financial return because they’ve become more altruistic in their investment decisions? Likely not. It is more likely that increasing shareholder pressure means that the onus is on the CEO to revisit business models and the firm’s ‘bread and butter’ to figure out how to avoid these tradeoffs in the first place. Managers are losing their ability to fall back on their “duty to protect shareholder wealth maximization” as an excuse and will be expected to revisit these more fundamental questions of how firms maximize value for a number of stakeholders, including shareholders, concurrently and without tradeoffs. This may represent the challenge of business graduates in the 21st century. Those business schools that make the appropriate adjustments to educate future managers on how to face this very challenging task may be deemed the Harvard’s of the future.

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