Giving voice to the endowment

BY ANDY KROLL
Daily Investigative Editor
Published March 17, 2009

Editor’s Note: Today’s story is the third in the Daily’s four-part “Anatomy of an Endowment” series. It discusses how the University’s investors take into account social responsibility and ethics when investing the endowment’s funds. By the end of the series, our goal is to have dissected, described and analyzed in simple terms a massive, intricate financial portfolio — one that is critical to the University’s success.

The purpose of the University of Michigan’s endowment is simple.

As University Chief Financial Officer Timothy Slottow wrote in his “Statement on University Investment Policies” in November 2005, “There is one overarching principle related to our endowment and investment strategy: The University’s governing board and officers have a fiduciary responsibility to protect our assets for the long term, so that we may leave to succeeding generations a University at least as strong as the one with which we have been entrusted.

“Therefore, the primary purpose of our endowment,” he concluded, “is to generate the greatest possible income, subject to an appropriate amount of risk, in support of the University’s missions of teaching, research and service.”

But for nearly as long as colleges and universities have had endowments, there has been pressure on these institutions to not only focus on maximizing endowment gains, but also to act as engaged, socially responsible shareholders with an interest in the policies, practices and transparency of the companies and corporations in which they invest.

This concept of shareholder activism in the United States began in the 1940s, when federal regulations allowed shareholders to introduce resolutions about a company’s affairs on which all shareholders could vote, according to a working paper written by Harvard Business School Prof. Michael Toffel and Harvard Business School doctoral student Erin Reid.

One of the most vivid examples of shareholder activism took place in the 1970s and 1980s, as American opposition to apartheid in South Africa reached a fever pitch. At that time, many different individuals, companies and institutions, among them universities, looked at the investments they had involving apartheid South Africa and, in many cases, decided to divest their holdings as a repudiation of that country’s policies.

The University of Michigan was one of the schools to divest, pulling its investments in the late 1970s.

More than 20 years later, in 1999, many in the University community voiced concerns over the endowment’s investments in tobacco manufacturing and tobacco-related companies. In response, a temporary committee of faculty, staff, students and alumni, the Ad Hoc Advisory Committee on Tobacco Investments, was created to assess whether the endowment’s tobacco-related investments were irreconcilable with the University’s teaching, research and service missions.

The ad hoc committee ultimately recommended to the University Board of Regents to “sell all of the University’s currently owned shares of stock (and not to purchase any new shares) in companies that, either themselves or through their subsidiaries, manufacture significant quantities of cigarettes or other tobacco products,” the University Record reported.

Soon after, then-Chief Financial Officer Robert Kasdin soon after instructed the University’s investors to sell all stock holdings pertaining to the tobacco-related investments within the next 10 months.

One of the only major divestment campaigns since then came in 2006 when a group of University students called on University officials to investigate the possibility of divesting from any investments with companies doing business in Israel. There was no official action on the part of the University and its investors in response to this campaign.

SPEAKING UP AS A SHAREHOLDER

Divestment is one of the more severe forms of shareholder activism.

Indeed, there are other ways the University, as a shareholder, can speak out about how the companies in which it is invested operate and can weigh in on issues of social, ethical and even environmental responsibility as they arise within each company.

One of the main ways University officials and investors, acting on behalf of the University as a shareholder, can voice their opinion is through proxy voting — or voting on resolutions introduced by shareholders on issues of concern — without having to attend actual shareholder meetings. That means the University could still vote on issues relating to a company located in Hong Kong or Moscow using the proxy votes it receives as a shareholder.

Because outside investment managers make the actual investment transactions for the University, those outside groups are the ones dealing with proxy votes for the companies in which the University’s endowment is invested. Even then, the University could still have a voice in the governance and policies of these companies by instructing its outside managers to vote certain ways on different issues.

Right now, the University delegates its proxy voting authority to its outside managers and gives them written directives on how to vote on proxy resolutions pertaining to broader issues like anti-takeover measures, preserving “one-share, one-vote” standards and dealing with proposed mergers and acquisitions.

But in proxy votes concerning social, political and environmental issues, the University instructs all of its outside managers to not vote at all and not voice the University’s position on such issues, according to a University policy approved by the Board of Regents in December 1994.

A MORE CONSCIOUS VOICE

A group of University students, however, wants to change that.

These students want to create a permanent University shareholder responsibility advisory committee that would evaluate proxy resolutions coming from companies in which the endowment is invested. The committee would then advise University officials and outside investment managers on how to vote on those resolutions.

So rather than abstaining from proxy votes involving social, political or environmental issues, the University could have much more of a voice as a shareholder.

“We’re not advocating for the University to file proxy resolutions, but advocating that they vote on them,” said Arthur Peterson, a graduate student in the Ross School of Business and the School of Natural Resources and the Environment.

Peterson said he believes that instituting an advisory committee makes sense from a business standpoint, because it urges companies in which the endowment is invested to be more transparent about their practices, like releasing information on a company’s emissions or environmental impact.

An advisory committee could also signal to companies and corporation specific issues of concern to the University, Peterson said, while also providing students with the opportunity to learn about issues of shareholder responsibility and proxy voting.

A number of other major colleges and universities have similar shareholder responsibility advisory committees, according to data from the Sustainable Endowments Institute.

Columbia University’s Advisory Committee on Socially Responsible Investing makes proxy voting recommendations to the school’s Board of Trustees and hosts an annual meeting at which the university community can express its opinions on issues concerning the committee. Harvard University has two such committees: The Corporation Committee on Shareholder Responsibility and the Advisory Committee on Shareholder Responsibility, a committee that includes students, faculty and alumni.

SUBSTANCE OR SYMBOLISM?

Whether shareholder activism through proxy voting actually has any impact is unclear.

As Business School Prof. Gerald Davis explained, shareholder votes are advisory, meaning a company’s leadership can legally ignore the results of those votes.

“To be brutally frank,” Davis said, “shareholder votes are mostly symbolic and have no real effect on what companies do. That and the University is too small to be a significant shareholder in any company.”

Davis cited a case from the 1990s in which restaurant chain Cracker Barrel Old Country Stores Inc. instituted a policy saying that it refused to employ workers “whose sexual preferences fail to demonstrate normal heterosexual values.” The company subsequently fired multiple gay employees, according to a 2002 journal article co-authored by Davis.

Despite a proxy proposal submitted by one of the company’s institutional investors saying Cracker Barrel Old Country Stores should prohibit discrimination on the basis of sexual orientation, the company downplayed the proposal and tried to prevent shareholders from voting on it. After multiple years of fighting over whether to hold a shareholder vote on the proposal, Cracker Barrel’s shareholders finally did, with a vast majority opposing the proposal and upholding the existing policy.

Davis added, however, that he believes shareholder voting can have a symbolic importance on the part of the University, and that a permanent shareholder responsibility advisory committee could be beneficial.

“The final product of how (the University will) vote won’t make much difference,” he said, “but the process of deciding what is proper standard for corporate behavior, that could be illuminating.”

Morgan Simon, the executive director the Responsible Endowments Coalition, a nationwide network of students, faculty and alumni committed to promoting socially and environmentally responsible endowment investing, said she believes shareholder responsibility advisory committees can exert influence both on campus and in the boardroom.

“Overall, we see that these advisory committees are win-win situations for the universities protecting their investments; it’s a way of putting money toward proactive use in society; and it helps corporations move in right direction,” she said.

Simon added that her organization has helped to start similar advisory committees at schools like Columbia University and Amherst College, and is advising the University of Michigan students currently advocating for an advisory committee here in Ann Arbor.

In addition to shareholder voting, investors are increasingly bypassing the shareholder voting process and exerting direct pressure on executive managers to address social, political and environmental issues and policies.

Toffel, of the Harvard Business School, and Harvard Business School doctoral student Erin Reid have described in a recent working paper that shareholders are successfully pushing companies in which they invest to provide more information on emissions and other environmental issues without using shareholder votes.

"Some activist shareholders," they write, "have begun bypassing the formal process of shareholder resolutions, which are formally addressed to fellow shareholders and members of boards of directors, by directly requesting executive managers to provide more information about corporation social actions."

On Thursday, University graduate student Peterson will be presenting the student committee’s proposal for a shareholders responsibility advisory committee to the Board of Regents during the "Public Comments" section at their monthly meeting.

Ultimately, he said that even though numerous other colleges and universities have similar advisory committees, the value of having a similar committee at the University of Michigan is important.

“I think that our goal is to really make the case for it on its merits,” he said. “It’s worth doing."

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Daily reporters Andy Kroll and Kyle Swanson will be taking questions all week about the series and about the University's endowment, in general. Click here to access their Q & A.

Past installments in the "Anatomy of an Endowment" series can be found here.