Harvard Faces a Flood Of Shareholder Resolutions
For most people, the year consists of four seasons; but for the corporate world, there is a fifth, running from late winter through spring--the proxy season. During this period companies send annual reports and proxy statements to all their shareholders, in preparation for annual meetings. The proxy statements often include shareholder resolutions.
Under a set of rules established by the Securities and Exchange Commission (SEC), any issue related to a corporation's policies or major social questions is subject to shareholder resolutions, while matters pertaining to the ordinary affairs and day-to-day operations of a company are not. The SEC has final authority to decide what is an appropriate resolution, and decides on the final wording of the resolution also.
Any shareholder, private citizen or gigantic institution, may initiate a resolution, if he disagrees with the corporation's policy. Initiating a resolution involves thoroughly researching the issue at hand, formulating a stand on the question, and filing the resolution with the corporation in compliance with SEC rules. Resolution sponsors may include statements to support their positions, and companies may include statements in rebuttal.
The resolutions and ballots appear in the corporation's proxy statement mailed to all the shareholders. Resolutions which the management does not support are almost always defeated by substantial majorities, because many, if not most, shareholders do not bother to vote at all. Abstentions are counted as votes with management.
With investments of several hundred million dollars in dozens of corporations, Harvard must contend with a plethora of resolutions each year. This year, for example, the Corporation will consider 40 shareholder resolutions in more than 20 corporations. Before the Corporation votes on the resolutions, however, the Advisory Committee on Shareholder Responsibility (ACSR) considers each resolution and advises the Corporation how to vote. The ACSR will spend the next month discussing resolutions.
When times were simpler, and shareholders didn't raise such a fuss about the way management was running things, there were much fewer resolutions to worry about. Before the early '70s, most resolutions were on technical decisions that management wanted the shareholders as a whole to ratify. Then church groupshlike the activist Interfaith Center for Corporate Responsibility realized that initiating resolutions was a good way to put public pressure on corporations.
This year the Corporation will consider resolutions asking Philips Petroleum and the 3M company to withdraw their operations from South Africa, a resolution asking Kodak to stop sales of certain kinds of photographic equipment to the South African government, a resolution calling on Exxon not to expand its South African operations, a resolution calling on Bristol Meyers to change its Third World infant formula marketing practices, resolutions prohibiting ex-government officials from taking jobs with General Electric and several other companies, and resolutions on redlining, political contributions, and journalistic practices.
The Kodak resolution is similar to one defeated at the annual meeting last year. Unless a resolution gets 5 per cent of the proxy votes it cannot be reintroduced the next year. The SEC makes sure slightly-reworded resolutions do not slip through.
One resolution particularly worth noting asks Mobil to recognize black trade unions. The resolution is sponsored by a group of Cornell students called the Corportate Responsibility Project, which studies its University's investment practices and buys stock in specific companies so it can introduce shareholder resolutions. Cornell's student trustees serve on the project, as well as undergraduates and law students. The money to purchase stocks comes partly from student fees.
Before Bok established the ACSR, the Harvard treasurer decided how to vote the proxies. Before shareholder activism kicked up, this posed few problems. But in the early '70s, as the number of resolutions rose, then-Treasurer George F. Bennett '33 continued to routinely throw out the proxy statements, or vote with management. The University had no way to collect information on resolutions and make responsible decisions.
President Bok established the ACSR in 1972 to advise the Corporation on shareholder resolutions and on the general social and ethical responsibilities it faces as a shareholder. The Corporation follows the ACSR's recommendations 85 to 90 per cent of the time, according to Lawrence F. Stevens '65, secretary of the ACSR. By the time the ACSR germinated, the university had already spent several years wrestling with its relationship with the corporate world.
In 1970, then-President Pusey '28 assigned the Committee on University Relations with Corporate Enterprise, chaired by Robert W. Austin, the task of "examining and clarifying the relationship of universities (and in particular this University) with corporate enterprise in general in the United States," in order to "recommend ways in which universities and corporate enterprise can work together for constructive social purpose."
In its report released in January 1971 the committee listed several propositions it considered "basic, if not axiomatic" in examining university-corporate relations. Because the University is foremost a "center of free inquiry," the committee stated, it should maintain a neutral stance on political and social matters except those "where there is no longer room for argument among people who accept our basic socio-economic political system." One such unarguable issue, the committee stated was racism. Harvard adopted an official position of "hostility (whether in the University's role as center of learning, contractor, employer, or investor) to anything smacking of racism."
Pusey echoed that sentiment in a letter to then-Dean John T. Dunlop, chairman of the University Committee on Governance, saying the Corporation would not make investments that support "activities whose primary import is contrary to fundamental and widely shared ethical principles." Furthermore, he said, in deciding on investments the University would consider whether a company "acts as a good citizen in the conduct of its business."
The Austin committee also reached some specific conclusions on Harvard's role as an investor. While urging the University to make investments to achieve "maximum return," the committee noted some exceptions to that general rule. It said Harvard should avoid investments in South African corporations but added. "When it comes to investing in American corporations that do business in foreign countries, a policy line would be even more difficult to draw." (The University had no investments in South African corporations at the time of the Austin committee report and now has a policy of not investing in such companies.)
As a responsible investor Harvard should sometimes, according to the Austin committee report, "attempt to influence management in directions that are considered to be socially desirable."
Since 1972, the ACSR has had the responsibility of seeing that Harvard invests its money and votes its proxies. Stevens says "The very fact that this is a public community process is already a position by the Corporation on behalf of its responsibility as a shareholder." But whether the process is a strong enough statement of Harvard's social responsibility is a matter of controversy, especially when it comes to the question of investments in corporations doing business in South Africa.
In a report issued March 24, 1978, the ACSR outlined several basic propositions that had emerged from its discussions throughout the preceding winter. Acknowledging that both the University and corporations have "responsibilities of citizenship" that may supercede economic considerations, the ACSR stated, "When the policies of actions of a company in the Harvard portfolio are not consonant with good citizenship, the University has an obligation to advocate that such policies and actions be changed."
The ACSR also decided that in the case of South Africa, the corporations themselves would have to prove their good citizenship. The ACSR listed a series of guidelines that companies choosing to remain in South Africa should follow in order to "ameliorate the effects of apartheid with respect to their own employees, even where such action impinges on profitability." The guidelines are based on principles first proposed in 1977 by Rev. Leon Sullivan, a director of General Motors Corporation, and would require a company to end discriminatory practices in employment and working conditions.
In addition to improving employment practices and policies, companies operating in South Africa should provide descriptions of product lines and services offered in South Africa, reports on sales to the South African government and its public corporations, reports on the extent to which labor practices meet the ACSR's criteria, and an annual income statement and balance sheet for operations in South Africa, the ACSR stated.
Because corporations are under no legal obligation to disclose all the information the ACSR requests, and because the South African government prohibits the release of some of this information, the committee considered a few options for dealing with intransigent companies. The ACSR rejected the option of divestiture of stock in such firms except in extreme cases because, according to the March 1978 report, "Our investigations persuade us that the act of divestiture by Harvard alone is unlikely to result in financial consequences to the divested company of sufficient magnitude to force a change in policy."
In its statement of April 27, 1978, based on the ACSR report, the Corporation concluded that divestiture "is only appropriate under extremely limited circumstances" because "it is a relatively ineffective means of pursuing ethical ends." The statement called divestiture a "last resort" to be employed only when a company fails to adhere to reasonable ethical standards, long-term efforts to change company policy have failed, and future efforts seem doomed to failure.
With divestiture essentially ruled out as a way to change corporate policy, the ACSR turned to the question of how to vote shares in Harvard's portfolio, specifically on resolutions calling for the withdrawal of corporations from South Africa. Unable to reach a consensus, the committee recommended evaluating the question of withdrawal on a company-by-company basis.
The Corporation agreed with the ACSR's position and established specific conditions under which it would support a resolution calling for withdrawal, including the following:
* A company fails to disclose all the information required by the ACSR's guidelines.
* A company refuses to demonstrate within a reasonable period of time its determination to implement the employment practices and policies set forth in the ACSR report.
* The nature of the company's operations in South Africa is such that its continued presence inevitabley does more to strengthen the existing regime than progressive employment and social policies can contribute to the welfare of non-white employees and the eventual destruction of apartheid.
Stevens believes the ACSR faces two major problems in deciding on questions of withdrawal. First, the committee must acquire "a decent base of information on which to judge," he says. "The second problem is you have to have some feel for what is net negative and net positive in South Africa," he adds. To obtain information, the ACSR and Corporation often write directly to companies, and sometimes Corporation members who know company directors can use their personal relationships to extract information.
Much of the information which the ACSR and Corporation use comes from the Investor Responsibility Research Center, a non-profit organization based in Washington that was created by universities and foundations in 1972 to investigate corporate practices and supply its sponsors with relevant information.
If attempts to obtain information fail, the ACSR recommended, in its report of January 1979, that the Corporation initiate what it termed "information resolutions," noting that requests for information by universities are especially appropriate because "their primary purposes revolve around education, learning, and the dissemination of knowledge." It distinguished "information" from "action" resolutions, and said the latter should be used even more sparsely.
Harvard has never sponsored a shareholder resolution.
Says Stevens: "The charge has been made so often that the University has no policy. It has a very clear policy. It has one of the few clear policies that exist at any university-type investor in this country."
But Stevens acknowledges that the policies are still a matter of debate. "The question is not whether we have a policy or not, but whether the policy we have goes far enough," he says. Many people, including the hundreds of members of campus organizations and the thousands of students and faculty who have signed petitions demanding the University divest, believe Harvard's policies do not go far enough.
And, that disagreement will lead Harvard from a relatively mild winter into a stormy proxy season.