Meshing Proxy With Mission

Few foundations do much to influence shareholder votes

As part of its campaign to fight global warming, the Coalition for Environmentally Responsible Economies

has for the past two years been trying to persuade several large commercial and residential real-estate companies to do a better job of making their properties energy efficient.

The coalition has achieved mixed results, persuading some companies to adopt more efficient designs and use energy-saving materials, while others have resisted its efforts.

Among the tactics the coalition pursues: encouraging shareholders to put pressure on the companies to change their ways.

The environmental group has helped religious organizations and private foundations that own stock in the companies to write shareholder resolutions urging the companies to increase their energy efficiency.

One such resolution will be voted on next week at the annual meeting of Standard Pacific, in Irvine, Calif., which is among the nation’s largest home builders. Another, introduced last year at Liberty Property Trust, a large commercial real-estate company in Malvern, Pa., has prompted the company to hold discussions with environmental groups about how it can best ensure that its buildings don’t waste energy.

Seeking Support

Among the shareholders that the coalition is appealing to for support is the William and Flora Hewlett Foundation, a major supporter of environmental organizations. Last year Hewlett awarded $18.4-million to environmental groups, including a total of $1-million to five members of the coalition: the National Wildlife Federation, the Natural Resources Defense Council, the Rocky Mountain Institute, the Sierra Club, and the Union of Concerned Scientists.

The Hewlett Foundation owns nearly $3-million of Standard Pacific and Liberty Property Trust stock. But the coalition is not likely to get much help from Hewlett as it tries to persuade shareholders to cast their votes, known as proxies. That is because the foundation leaves decisions about proxy votes to the private companies that manage its endowment.

In the vast majority of cases, private money managers cast the proxies in support of whatever position a company’s management supports — and that almost always is the opposite of what a shareholder resolution seeks. For instance, Standard Pacific opposes the coalition’s resolution because it says it already ensures that its properties don’t waste energy.

The Hewlett Foundation is not alone among the nation’s foundations in its approach to proxy voting. A Chronicle survey of the nation’s 50 wealthiest private foundations shows that 29 other foundations ask their money managers to make all decisions about proxy voting. (Nine of the foundations refused to comment on their investment policies at all.)

The lack of attention that foundations pay to proxy voting has drawn criticism in some quarters.

“There’s $600-billion sitting in foundation endowments,” says Doug Bauer, a senior vice president at Rockefeller Philanthropy Advisers, in New York, an organization that advises wealthy donors. “We worry all the time about the 5 percent of that foundations pay out in grants, but we don’t worry about how we can involve the other 95 percent for social good.”

A big reason foundations hesitate to get involved in proxy votes is that they say it would drain too much of their staffs’ time. For example, Hewlett’s president, Paul Brest, says the foundation does not oversee its own proxy voting because doing so would require hiring more staff members.

“If we went that route, we would take it as seriously as we take our grant making,” he says. “We would create a staff to advise our investment managers that would parallel in some ways the staff of our programs.”

The foundation takes such a hands-off position that it says it does not know how its money manager voted on the Liberty Trust resolution, or what it plans to do at Standard Pacific.

A few of the nation’s big foundations do make efforts to ensure that their proxy votes mesh with their philanthropic missions, as do numerous small foundations.

Of the grant makers in The Chronicle’s survey, only two — the Ford Foundation and the Rockefeller Foundation — have policies specifically designed to ensure such consistency between investment and program goals. Both Ford and Rockefeller consult members of their grant-making staffs before casting proxy votes on resolutions that relate to social issues.

“The board has for many years felt that if we were going to be long-term investors, then we must be responsible for the long-term effects of our investments on our mission,” says Linda Strumpf, chief investment officer at Ford. “If we can influence behavior for the positive, we try to do that.”

At the William Penn Foundation, the private investment managers hired to handle its endowment are urged to vote proxies “in the most socially responsible manner,” but the philanthropy does not involve any of its grant-making officials in the process nor provide the investment managers with guidelines on how to cast their votes on particular issues.

Leaders of the Annie E. Casey Foundation are considering whether to establish a proxy voting policy, but the foundation’s board has not yet taken up the matter.

Among the institutions with the most-extensive policies on investments is the Charles Stewart Mott Foundation. Its policy focuses on protecting the value of the shares, not social issues. Mott’s policy explicitly calls for the foundation to vote with a corporation’s management on resolutions dealing with social and noneconomic issues, unless the actions requested in the resolution present a clear financial benefit to shareholders.

The one exception is a provision instructing the foundation’s proxy committee to vote in favor of any resolution that prohibits discrimination based on sexual preference. Robert E. Swaney, who is stepping down this month as Mott’s chief investment officer, says those resolutions are treated differently because the foundation itself has an employment policy against such discrimination.

Influencing Companies

The potential that shareholder resolutions hold for effecting change should not be underestimated, advocates of the tactic say.

In recent years, shareholders have persuaded several home-improvement stores to stop selling items made from timber cut from older forests, which are almost impossible to replace because it takes so long for their trees to reach maturity. They have led American companies operating in Africa to establish HIV/AIDS education and health-care programs for their workers. And they have persuaded several major electric utilities to begin programs aimed at reducing the emission of greenhouse gases.

Those successes have prompted organizations that work closely with donors and foundations to step up efforts to persuade foundations to pay more attention to their proxies.

Rockefeller Philanthropy Advisers and the As You Sow Foundation have joined forces to publish a paper, titled “Unlocking the Power of the Proxy,” that explains how grant makers can use shareholder resolutions to advance social goals. Last month they published “Proxy Season Preview,” evaluating resolutions proposed this year.

Jed Emerson is a visiting fellow at the Skoll Center for Social Entrepreneurship, at the University of Oxford, and for 10 years ran the Roberts Enterprise Development Fund, a philanthropy created by the investor George Roberts. Mr. Emerson says grant makers who delegate to outside money managers the key decisions about how to use their endowments are violating one of the important duties of running a major nonprofit organization.

“In the past few years there have been all kinds of foundation scandals around how much people get paid, and the kinds of benefits people have,” he says. “The most dangerous scandal that is about to break is the scandal of trustees who are forgoing the fulfillment of their fiduciary responsibility by turning over 95 percent of the assets that they supposedly are overseeing to outside actors who are managing those assets with no reference whatsoever to the social or environmental mission of their institution. If that’s not a violation of fiduciary responsibility, I don’t know what is.”

Mr. Emerson says he believes that if foundations do not exercise more involvement in how their money is used, Congress should consider removing their tax-exempt status.

“If we’re just managing funds in order to get a 5-percent payout, then let’s go to Congress and we can overturn the legislation that created these institutions to begin with,” he says. “But if you’re going to tell me that foundations deserve to get a tax credit for being created, and they’re going to advance the public good, protect the planet, and create a better society for all of our children, there’s a different standard they should hold themselves to.”

Social activists who have tried to persuade grant makers to support shareholder resolutions say one reason many foundations have resisted change can be found in the makeup of their boards.

“Sitting on those boards are a lot of corporate executives,” says Sister Patricia Wolf, executive director of the Interfaith Council on Corporate Responsibility, in New York, a nonprofit group that has helped draft thousands of shareholder resolutions on social issues for more than a decade. “Some of those corporate people may be getting shareholder resolutions aimed at their companies. I don’t think there’s a lot of support from the board level to think through the relationship between the mission of the organization and how they develop their investment policy.”

Staff Time

Like Mr. Brest at the Hewlett Foundation, many other foundation officials said they delegated proxy voting decisions to their money managers because taking on the job themselves would require hiring more staff at additional cost, or having existing staff do the job at the expense of their other responsibilities.

But some foundations that vote their corporate proxies have found ways to do so without expanding their staffs. Victor De Luca, president of the Jessie Smith Noyes Foundation, in New York, says that Noyes employees reviewed 117 company proxy statements last year, with Mr. De Luca making the final decisions and casting the ballots himself.

“It takes some time to go through them, but we narrow it down to deal with the things that we care about,” he says, adding that he took the annual reports home and read them before bedtime. “It’s the remedy for sleeplessness.”

Other foundations, rather than voting the proxies themselves, have developed extensive guidelines for their investment managers, instructing them how to vote.

Balancing Act

In many cases, proxy votes puts foundations in awkward positions.

The Mott Foundation, which owns $7-million in Chevron stock, also supports Amazon Watch, a San Francisco environmental group that for the past three years has been asking shareholders to force the oil company to reveal how much money it has spent defending itself against a $5-billion lawsuit in Ecuador. Residents of Ecuador charge that Texaco (which merged with Chevron in 2001) never adequately cleaned up the pollution caused by oil drilling there over three decades. Chevron officials oppose the resolution, saying it has done all it is legally and ethically obligated to do, and that therefore there is no reason to spend the money it would cost to produce the report.

Mott Foundation officials declined to say how they voted on the resolution in prior years, but the terms of its proxy voting guidelines suggest it would not have supported it and will not do so when the issue comes up again at Chevron’s annual meeting in May.

Chevron also faces a resolution that urges the company to examine the business risks involved in drilling for oil on environmentally sensitive lands, and that poses a conundrum for other foundations. The Sierra Club and the U.S. Public Interest Research Group are among the sponsors of the resolution, which was developed as part of a campaign to stop oil companies from drilling in the Arctic National Wildlife Refuge.

The Houston Endowment, which owns about $3-million in Chevron stock, supports those organizations, and leaves proxy voting to its outside money managers.

“We’ve discussed the subject of socially responsible investing every couple of years with the investment committee, and there’s just no interest,” says Sheryl Johns, executive vice president of the Houston Endowment.

The same campaign to block drilling in the Arctic refuge also led to a shareholder’s resolution at ExxonMobil. The Union of Concerned Scientists provided much of the scientific expertise used by campaign organizers.

Among the shareholders the group is appealing to for support is one of its longtime benefactors: the John D. and Catherine T. MacArthur Foundation, which owns more than $7-million in ExxonMobil stock.

The foundation, which awarded $45-million in grants to environmental groups from 2002 to 2005, leaves its proxy voting decisions to its outside investment mangers, instructing them to handle all investments “in a way that maximizes shareholder value,” says Andrew Solomon, a foundation spokesman.

He declined to comment on how that translates into proxy votes on resolutions aimed at social or environmental issues.

Foundation Objectives

In many other instances, foundations do not provide grants to groups involved in developing shareholder resolutions, but own stock in companies where resolutions relate directly to their philanthropic goals.

The Bill & Melinda Gates Foundation owns more than $450-million worth of stock in pharmaceutical companies that have been considering shareholder resolutions designed to make HIV/AIDS drugs more available in poor countries. The foundation has devoted much of its grant making to fighting the spread of the disease, especially by financing efforts to send low-cost drugs to Africa.

Several advocates of shareholder activism say that the size of the foundation’s holdings, coupled with Mr. Gates’s influence in the corporate world, could allow the foundation to make a tremendous impact on the outcome of the resolution votes. But Monica Harrington, a senior policy officer at Gates, says the foundation does not believe it should get involved in proxy voting, and has established a “wall” between its program staff and the outside company that manages the foundation’s investments.

“We want people to understand that the people at the foundation are trying to figure out how to help the people in our areas of focus, and we don’t spend our time thinking about the investment portfolio,” Ms. Harrington says.

She says that the only person who might give advice to the manager is Mr. Gates himself, but declined to pass along a question to him about proxy voting. The investment manager, Michael Larson, would not comment about his work for the foundation. Mr. Gates’s father, who is co-chair of the foundation, says his son’s only concern in directing the foundation’s investments is to make sure they generate the greatest possible return.

Other foundations that seek to improve health also find themselves dealing with potential conflicts on proxy votes. For instance, among the big foundations that have no proxy-voting policies, four make a large number of grants to health organizations and also own stock in tobacco companies facing shareholder resolutions aimed at persuading black people to cut back on smoking. The grant makers are the Duke Endowment, the Conrad N. Hilton Foundation, the Houston Endowment, and the W.K. Kellogg Foundation.

The W.K. Kellogg Trust, which handles the Kellogg Foundation’s endowment, hired the Bank of New York as its corporate trustee to make investment decisions, including how to vote proxies. Kevin Bannon, executive vice president of the bank, said it asks outside proxy consulting firms to evaluate the resolutions and then vote “in the best long-term interest of the trust.”

At the Hilton Foundation, its chief financial officer, Patrick Modugno, says the absence of a proxy policy is rooted in how the foundation’s creator, the hotel entrepreneur Conrad Hilton, made his money.

He notes that much of the hotel chain’s money comes from gambling casinos in its Nevada hotels, so he says the foundation felt that using its proxy votes to offer its views on how other companies should improve their social responsibility “would be quite hypocritical.”

He adds: “We discussed it at board meetings, and over the course of a number of years we just decided not to go that route, because of the finger pointing that could be thrown back at us. It’s a sensitive issue, but one that we have thoroughly thought about.”