Friday, 3 November 2006

Should shareholders get a vote on business ethics?


After years of being stonewalled by the law, shareholder activists are hoping to catch a break in parliament. The federal government is expected this week to table updates to the Canada Business Corporations Act (CBCA), which governs the way corporations make decisions. The hope is that activists could use an amended CBCA to force shareholders of public companies to weigh a corporation's ethics along with its profits. Last September, Industry Canada completed a six-year review of the CBCA, including a section on shareholder proposals. Under the present law, a company can refuse to circulate any proposal that questions the environmental or human rights record of a company. "The current situation is an embarrassment because rights are being limited," says Bill Davis of the Taskforce on Churches and Corporate Responsibility (TCCR), a lobby group representing an ecumenical body of churches. Under the present law, owners of shares in a publicly traded company can circulate concerns about management and governance issues at annual meetings as long as they do not fall under certain exclusionary criteria. According to CBCA paragraph 137 (5b), any proposal deemed to promote "general economic, political, racial, religious, social or similar causes" is considered irrelevant to corporate interests. If activists had their way, proposals would force companies like Talisman Energy Inc. to deal more directly with their social responsibility records. TCCR has attempted to circulate proposals demanding that Talisman address its involvement with the repressive government in Sudan, where a 16-year civil war has displaced and killed thousands. In 1999, the company exercised its right to disregard TCCR's proposal, only to spend the next year fighting bad publicity. In December 1999, some major institutional investors from New York State put their weight behind the human rights issue; although no formal announcement has been made, the company is expected to circulate the proposal at its upcoming annual meeting. "We shouldn't have to rely on the goodwill of companies to deal with prudent issues raised by legitimate parties," say Eugene Ellman, executive director of the Social Investment Organization (SIO). Pointing to the hundreds of shareholder proposals that circulate annually in the U.S., he is advocating the establishment of an independent arbitration body. The U.S. Securities Exchange Commission regulates publicly traded companies and can insist that a company circulate a proposal. Canadian securities regulators cannot. Because a "political" human rights issue can lower share prices, as Talisman has learned, Ellman wants the CBCA to catch up with reality. But legal interpretation has also supported the divide between social responsibility and profit. Since 1987, judges have excluded proposals dealing with South African divestment, gender diversity on boards of directors and environmental management. If groups like SIO or TCCR had the funds to fight in court, Ellman says, they could challenge these precedents. Instead, he would prefer to see 137 (5b) removed altogether. The review of the CBCA is the first significant revision this legislation has received in 20 years. According to Lee Gill of Industry Canada, the amendments have been made, but the introduction in parliament is up to the ruling Liberals.


While activists call for a looser law, another coalition wants it tightened even more. A group of law firms and publicly traded companies represented by the Coalition for CBCA Reform wants the terms of 137 (5b) tightened and clarified. They fear looser rules will produce a deluge of frivolous proposals from "gadfly" investors who purchase a single share so they can raise issues only marginally relevant to business interests. But experience at Canada's major banks, where activist proposals are allowed under the Bank Act, suggests such concerns are overstated. Since 1997, activist Yves Michaud has advanced shareholder proposals related to gender equity, executive compensation and shareholder rights. His efforts have lengthened the time required to complete annual meetings, but no wave of gadfly activists has appeared. To screen proponents, the Coalition for CBCA Reform wants new eligibility thresholds that would require shareholders to hold a minimum of 1,000 in market value of securities for at least one year before they can ask for a vote on any issue. Both sides agree that only "registered" shareholders should be eligible to file proposals. The other 70 per cent of investors, those classified as "beneficial," are ineligible. Any person or institution with money invested through a broker is a beneficial shareholder, while the broker is assigned the status of registered shareholder. An investor who holds shares through a mutual fund is also a beneficial shareholder, and ineligible to submit a proposal. Duff Conacher is chair of the Corporate Responsibility Coalition, which has submitted 17 recommendations on CBCA reform, including suggestions for greater disclosure of information and more accountability to shareholders. He is not optimistic that the forthcoming amendments will benefit activists, anticipating that paragraph 137 (5b) will be changed so that activists have to demonstrate the proposal's bearing on the corporation's affairs. But Ellman believes smart companies listen to shareholders when they plan for future market developments. After Home Depot received a proposal urging the company to cease selling lumber sourced from old-growth forests, it reconsidered its policies. Although the proposal did not win over a majority of shareholders, Ellman says management "embraced the spirit" and began drafting a new purchasing policy that addresses sustainable lumber practices. This kind of policy could insulate Home Depot from a possible boycott in the future, says Ellman. By anticipating the concerns of consumers who do not want to deplete old-growth forests, the company may gain a marketing advantage.

Paul Pellizzari is the author of two books on corporate social responsibility and senior writer for Corporate Ethics Monitor. from:

No comments: