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Shareholder Responsibility: Harvard Is Halfway There

By H. JEFFREY Leonard

Since the days in 1970 when Campaign GM was one of the hottest issues among students, Harvard has taken a leading--if somewhat dispassionate--role among major institutional investors attempting to ensure that the companies in which they invest display socially responsible behavior. In 1972, President Bok established an Advisory Committee on Shareholder Responsibility (ACSR) to make recommendations to a subcommittee of the Harvard Corporation on how to vote Harvard's stock at annual meetings of its portfolio companies.

The ACSR is made up of student, faculty, administration and alumni members and, since its inception, has recommended that Harvard vote in favor of a number of shareholder resolutions calling upon major corporations to improve their "social behavior" in many different areas--strip mining, pollution, equal employment, foreign involvement, military production, etc.

The Corporation Committee on Shareholder Responsibility has followed these recommendations frequently and they have almost never voted against a proposal the ACSR favored (usually the Corporation has abstained from voting, rather than opposed the ACSR)..

Yet there is one side of shareholder responsibility that Harvard--and most other universities--have tended to ignore in the few years since they began to actively vote their proxies, instead of voting the way corporate managements wanted. This area involves proposals concerning the operations of the company made to shareholders by the managements themselves. Harvard has generally taken the attitude that the management of a company knows better how to run its business than anyone and that it should therefore approve of any reasonable recommendations made by the management.

The issues involved in these so-called management proposals are generally different from those involved in proposals made by shareholders--they usually concern financial, rather than social questions. They attracted virtually no attention from the students and faculty who mounted the pressure in the late 1960s and early 1970s that led Harvard to begin addressing social issues.

Ironically, a large number of banks--which have traditionally refused to support shareholder resolutions on social issues--have taken a very active role recently in opposing large numbers of the management proposals. The reasons for opposing these management proposals are a matter of self interest, the banks say. According to some of the banks voting against managements, many of the proposals could have a negative impact on the potential value of shareholders' stock and result in further insulating corporate managements from their shareholders.

In a report issued last week, the Investor Responsibility Research Center (IRRC)--an organization Harvard helped found three years ago to do research for institutional investors--cites some of the kinds of management proposals to which many large banks object. The IRRC report says that over 80 per cent of the large banks surveyed this year voted against some management proposals. Although the report does not indicate the names of most of the banks (they requested anonymity), the 1974 IRRC annual report lists most of the major New York banks--Chase Manhattan, First National City Bank, Morgan Guaranty Trust, etc.--and large banks from all over the country among its subscribers.

The issues which IRRC says most upset the banks this year involved proposals to eliminate pre-emptive rights (which give shareholders preferential treatment if a company issues new stock); to elect boards of directors in different classes serving staggered terms, instead of holding annual elections for all directors; and management proposals to raise the per cent of shareholder votes necessary for the approval of mergers and other business transactions.

The banks told IRRC that they opposed the elimination of pre-emptive rights because the rights gave them a special opportunity to purchase new shares of their companies. They said they did not want to approve of the management's proposals on boards of directors and voting requirements because the proposals reduced the chances that an outside company or individual would attempt to gain control of a corporation's stock by buying out shareholders at a price above the market value. The banks, quite simply, oppose the idea of giving up a chance to make extra profit from their stock. They also say that these two types of proposals help to entrench managements and make it more difficult for shareholders to bring about changes in managements they consider irresponsible.

Harvard's ACSR has in the past discussed some of the issues involved in management proposals with experts from the Harvard Law and Business Schools. But Stanley Surrey, Smith Professor of Law and Donald F. Turner, professor of Law--the former and present chairmen of the ACSR--and George Putnam, Harvard treasurer, all say that the committeee has neither the financial expertise nor the time to develop guidelines upon which Harvard can judge the management proposals.

The Corporation has also talked about some of these issues in the past, but sources say that Hugh Calkins '45, chairman of the Corporation Subcommittee, has been adamant in drawing a distinction between social and financial questions facing stockholders. Reportedly, Calkins does not believe the Corporation should attempt to meddle in the actual running of corporate financial affairs.

The Harvard Management Company, the in house money management group established in 1974, now votes all of Harvard's stock--if it does not receive instructions from the Corporation, it must decide how to vote. During its first proxy season, the company voted along with management's recommendations on most issues not taken up by the ACSR and the Corporation.

Shareholder activists have for years tried to make the argument that shareholders should vote for issues seeking to improve corporate social behavior because ultimately these issues translate into financial ones. This is an argument that has been cited by many of Harvard's own financial people--including Putnam and Walter M. Cabot '54, president of the management company. It is also an argument that does not stand up in all cases. At best, it is difficult to draw a direct financial connection for all social issues.

But in the case of management proposals that affect the rights and opportunities of shareholders, the financial connection is clear. By routinely giving approval to even questionable proposals made by managements, Harvard may actually be foregoing financial gains--which are the major goals of any investor.

At a time when corporate managements are pleading guilty to tampering in domestic and international political matters, and are engaged in numerous other activities that have aroused public ire, some may question the granting of a "blank check" to managements to extend their tenures and reduce their accountability as "socially irresponsible behavior.

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