Who's
Minding the Store?
Foundation
News and Commentary
Mar/Apr 2003 Vol 44, No 2
by Caroline Williams, Chief Financial and Investment Officer, Nathan Cummings
Foundation
The decline in foundations' assets is just one reason funders should feel compelled to use their proxy votes in exercising oversight of corporate conduct. Soon, they also may be required to meet a new standard of transparency.
Foundations have experienced three years of declining endowment values, and during this period newspaper headlines have gone from extolling exuberant markets to decrying corporate scandals. One might well ask, Who's been minding the store?
In the good times of rising stock prices, everyone seemed happy to leave that to corporate management. Now there's new emphasis on oversight responsibilities, driven partially by new regulatory requirements and partially by greater public awareness of the issues involved. For investors, then, the mechanism to exercise their fiduciary oversight is through voting shareholder proxies.
Foundations are major investors in corporate America. They hold $400 billion of U.S. equities‹little more than 2 percent of the total market value. Institutional investors as a group hold 56 percent. But many investors don't make the connection between the stocks in their portfolios and corporate conduct. To them, proxies are peripheral to investment portfolios‹just paperwork.
Some foundations invest through mutual or co-mingled funds, and so, automatically delegate their proxy voting to investment managers. Foundations with actively managed portfolios also often delegate proxy voting to investment managers. Many foundations, and most investment managers, take the position that they bought the stock because of company management. Thus, they often vote proxies as corporate management recommends. Such reluctance on the part of investors to exercise their oversight duties brings to mind the adage of the fox guarding the henhouse:
Self-selecting boards of directors may waive conflict-of-interest policies and approve large compensation packages for management.
Investment managers may mechanically vote the investors' proxies as management recommends, while courting the very same companies for their pension fund business. Management may use aggressive accounting to create earnings, and then exercise options, while stonewalling investors and regulators on lending, OSHA and environmental issues.
Rules,
Regulations and Resources
Added to the U.S. Department of Labor's requirement for pension funds to have
proxy-voting policies was the Securities & Exchange Commission's decision
in January 2003 to require mutual funds and investment managers to have‹and
make public‹their proxy policies and their actual votes. In addition, the
Office of the Comptroller of the Currency is considering requiring bank trust
departments to disclose how they vote proxies for clients whose money they
manage. So, with managers of capital now having to meet a standard of transparency,
can foundations be far behind?
Routine issues of corporate governance can seem daunting enough. When you add shareholder initiatives on proxies, investors can easily feel overwhelmed. However, there are resources to help foundations with this:
Institutional investors that allow public access to their proxy polices on their websites include The Nathan Cummings Foundation (www.nathancummings.org ), The Boston Foundation (www.tbf.org ) and California Public Employees' Retirement System (www.calpers.ca.gov ).
The Investor Responsibility Research Center provides analyses of proxy issues (www.irrc.org ).
Institutional Shareholder Services (ISS) (www.issproxy.com ) and Rockefeller Philanthropy Advisors (www.rockpa.org) help foundations develop proxy policies based on their values. ISS also makes voting recommendations and will handle proxy voting according to their recommendations or the foundation's own policy.
Votes
Do Count
Under most corporate bylaws, not voting usually counts as a vote for management's
recommendations. Delegating your vote to an investment manager is a vote,
but investment managers tend to vote in line with corporate management. The
Nathan Cummings Foundation recently requested the voting record of a fund
it holds and found the proxies were all voted. With the exception of "poison
pill" and "golden parachute" proposals, it was a "straight ticket" with management,
including "against" votes on all the shareholder resolutions. Cummings holds
some of the same stocks directly through other managers and the net result
was that its own votes were canceled out.
Foundations, along with other institutional investors, have the voting power to exercise oversight of corporate conduct. Recent business headlines have shown that the lack of oversight severely diminished foundations' endowments and, therefore, their ability to pursue their missions. Reasonable people will disagree on specific issues and not all issues will be important in the context of each foundation's values. Knowledge and discussion of the issues lead to better oversight and accountability.
The value of your foundation's endowments may be down, but the actual number of your proxy votes, and, therefore, your capacity to have an impact on corporate behavior, has not diminished. It is in our own interests, financially and, therefore, programatically, to become knowledgeable and active in voting proxies.
AMONG
502 FOUNDATIONS
Preliminary findings from the Council on Foundations 2002 Foundation Management
Survey indicate that among 502 foundations responding to a series of questions
on proxy voting, 43 percent vote the proxies for the shares their foundation
holds, 54 percent delegate proxy voting to investment managers and 3 percent
delegate it to a voting service. Somewhat less than half of the responding
foundations (46 percent) automatically vote their proxies in accordance with
the recommendations of company management.
Only 9 percent (25 foundations) of those that do not automatically vote in accordance with management recommendations have written guidelines for voting proxies. Among those 25 foundations with written guidelines, most (17) have guidelines that cover corporate governance issues (e.g., auditor conflicts, options programs, compensation) and many (15) have guidelines that cover social or program-related issues (e.g., climate change, pollution, recycling, predatory pricing, discrimination).
