Thursday, May 9, 2019

Remembering My Catholic School Days through Shareholder Engagement

I can still feel the eyes of Sister Kathleen, principal of St. Monica’s Elementary School in Kalamazoo, Michigan, as I walked down the hall to my 4th grade classroom in 1982. She inspired just the right amount of fear to keep the student body in check.

When I graduated from 8th grade four years later I thought I bid adieux to Catholic school, green plaid uniforms, and the likes of Sister Kathleen. Never in my wildest dreams did I imagine that 20 years later I would be preparing for a meeting with “the Nuns” to discuss access to medicines and the HIV/AIDS epidemic. But that is just what I was doing on a cold January morning, trudging through the slush in upper Manhattan looking for the offices of the Interfaith Center on Corporate Responsibility(ICCR). Fortunately, I was not donning a green plaid jumper or navy-blue knee-high socks. That would have been ridiculous.

I was working for Merck at the time in the company’s Office of Corporate Responsibility and it was our annual meeting with ICCR, which we affectionately coined “our meeting with the nuns.” It’s really a misnomer because, while there are nuns and other members of the Catholic diocese in ICCR, the coalition is a diverse group of nearly 300 faith and values-driven organizations who “view the management of their investments as a powerful catalyst for social change.” In addition to faith-based institutions, ICCR members include socially responsible asset management companies, unions, pension funds and colleges and universities. Collectively, they represent over $400 billion in invested capital.

The coalition explains on its website: "While ICCR members never shy away from making the moral case for action, our fundamental proposition as investors is that responsible and sustainable business practices -- and a strong corporate culture of ethics -- are in the long-term interest of both companies and investors."

ICCR had first reached out to Merck a few years prior, submitting a shareholder resolution pressing the company to report publicly on its efforts to expand access to its HIV/AIDS medicines in sub-Saharan Africa. This began not only the publication of an annual report on the company’s access efforts (a report that eventually morphed into a formal corporate responsibility report) but a series of annual meetings, led by Sister Judy Byron, which continue with Merck today.

Over the years, the topics vacillated between access to medicines in developing countries, to access in the U.S. They pushed us to disclose where we registered products in the developing world, and where the company filed patents. Pharmaceuticals in the environment were usually on the agenda. If there was an issue in the news, such as the litigation surrounding VIOXX®, that was brought up too, with questions on what policies Merck management had put in place to avoid a repeat of the situation.
Just like Sister Kathleen, the nuns and other ICCR members were always direct and unapologetic with their questions. But they were also kind and willing to listen when we peeled back the curtain and let them see inside the company. Sometimes they weren’t satisfied that management was doing enough on an issue and they would move forward with a shareholder resolution, but often our dialogues showed them we were taking steps to address an issue and they would withdraw their resolution. Such was the case on a resolution filed by the late Rev. Michael H. Crosby asking for clarity on Merck’s strategy on pricing in the U.S. Rev. Crosby was tough and wanted action, not talk. He agreed to withdraw the resolution if Merck would host a roundtable in Washington on topic, which we did.

When I moved on from my position in Merck’s CR team, I truly missed my engagement with ICCR (I can’t say the same for my days at St. Monica’s back in Kalamazoo.)
A look at their website reveals that they have kept at it with some 40 shareholder resolutions filed in the 2019 season. Resolutions called for action on a number of issues, including:

·       Pharma companies to report annually to shareholders on the extent to which risks related to public concern over drug pricing strategies are integrated into companies’ incentive compensation policies, plans and programs for senior executives
·       Energy companies to report on how they can reduce their carbon footprint in alignment with greenhouse gas reductions necessary to achieve the Paris Agreement's goal of maintaining global warming well below 2 degrees Celsius
·       Multiple companies to provide a report, updated semiannually, disclosing policies and procedures for all lobbying expenses
Several resolutions were withdrawn due to productive dialogue.
Feeling a bit nostalgic, I reached out to Pat Zerega, Director of Shareholder Advocacy at Mercy Investment Services, the socially responsible asset management program for the Sisters of Mercy and its ministries. A 20-year-plus veteran of ICCR, Pat participated in many of the dialogues with Merck over the  years.
Pat Zerega
MK: How has faith-based investing and engagement with companies changed?

PZ: In the early days, faith-based investors were the main ones practicing socially responsible investing [SRI]. But, today, the SRI field has a lot more people and investment companies. The faith-based investment community continues to have the loudest voice, however: We have about 4 percent of assets under management of social investors but submit nearly 40 percent of resolutions.
Another change – the faith community is shrinking and we’re trying to figure out how we can deal with every issue of concern or, at least, address those that are most important when we have less resources including people to do the work.

In terms of change with corporations, there has definitely been change. I see this especially on the climate issue; companies’ actions are totally different than in 2000 when we were pushing companies  to simply report on their water use and GHG emissions. Companies were asking us “How?”. Today, environmental reporting is commonplace. Measurement was an easy way to start – as the saying goes, what gets measured, gets managed. This was true for climate, but it isn’t the same for all issues such as human rights, where measurement is not as straight-forward.
MK: Have the issues changed?
PZ: Some have. Tobacco issues have moved to a new place; instead of focusing on the tobacco companies, we are spending time asking health and wellness companies such as Walgreens and Rite Aid why they sell tobacco. They are supposed to be healthcare companies!

The nuclear issue is not as prevalent as it was in the ‘90s.  Pharma is still there, but changing; the opioid crisis has just blossomed in the past year. More broadly across industries, there is more focus than there was previously on the connection between governance and social issues. For example, we are seeing more resolutions on how management incentives tie to an issue.

MK: What issues have seen the greatest progress?

PZ: HIV drugs and access has really changed.
MK: Are there new issues?

PZ: In the past five years, there has been an increased focus on human rights. It started with the Ruggie principles. [The UN Guiding Principles onBusiness and Human Rights  are a set of guidelines for States and companies to prevent, address and remedy human rights abuses committed in business operations. They were proposed by UN Special Representative on business & human rights John Ruggie, and endorsed by the UN Human Rights Council in June 2011.] We are grappling with what is the corporation’s responsibility versus that of the state.
ICCR has a new group called the Investor Alliance for Human Rights that is looking at the issue. It’s not what we saw in the  late ‘90s with protesters in parking lots of Coca-Cola facilities being killed. Now, some companies are acting to defend human rights protesters. But there is always the tension between the role of business and the state. In Uzbekistan, we see cotton farmers thrown in jail if they start to protest. What is the responsibility of business to its supply chain or workers in such an environment?
Another important human rights issue that has risen recently is the role of for-profit private prisons, which ICCR sees as at risk for potential human rights impacts. [Note: In December 2018, investor members of ICCR launched a corporate campaign focused on a group of six companies across the private prison, e-commerce, banking and defense sectors deemed at risk for human rights violations as a result of government contracts that support President Trump’s “zero-tolerance” immigration policies.]

MK: As you fight for social change through corporate engagement, what keeps you hopeful?

PZ: The unexpected; when you ask a company to do something and they, unexpectedly, say “Yes, of course, we’ll do it.” This happened for example with a big oil and gas company. We were meeting with their CEO and asked him to train their drivers on the issue of human trafficking. I was shocked when he immediately agreed and, in six weeks, all his drivers were trained. Through dialogues like this we have seen change – today, there is a partnership that includes the oil and gas industry called Truckers Against Trafficking, which works to educate, equip, empower and mobilize members of the trucking and busing industries to combat human trafficking.

MK: What recommendations do you offer companies to ensure a successful dialogue?

PZ: If you don’t think we know enough about an issue, educate us. As fracking began and investors approached companies, one company set up seminars for shareholders so we could ask informed questions on their fracking practices.
Also, don’t send gatekeepers to the meetings; bring subject matter experts. We want someone who knows the topic, not just a representative from IR or the general counsel’s office. Ideally, we’d like someone from the Sustainability team to lead the discussion, bringing in colleagues who can speak on specific topics as needed.
Once you’ve  developed trust through a series of engagement, consider inviting a board member or senior business leader to the discussion.

I have a few other tips that I can’t claim as my own but were passed on to me from a colleague, which also make good sense.
·    Plain English please; talk as if you were speaking to a ten-year-old. We come from different places.
·    No acronyms without spelling them out.
·    No marketing.

MK: Any advice to publishers of CR reports?
PZ: Reports with no metrics are not useful. I want to see numbers that demonstrate change over time. I hear from companies that they don’t want to talk about bad news. I’d rather read about how companies are making progress on a difficult issue than silence. I want to know how companies are approaching issues, especially those that pose risk, such as human rights. Are they conducting their own risk assessment? Make information easy to find; the easier a company makes it, the more we are going to look at their information.
MK: What other sources do you use in your corporate research?

PZ: We do use information from research firms such as ISS [Institutional Shareholder Services], Sustainalytics, and Glass Lewis. Issue-specific indexes and ratings – such as the Access to Medicines Index, Access to Nutrition Index and Know the Chain – are also useful because they take only publicly disclosed information. I am never horrified if, in the first year, a company is at the bottom. That would make sense – they never looked at the evaluation before. But, in the second or third year, I want to see they are making progress.

Pat’s Last Word on Faith-based Investing
In 10 years, I hope: Companies are comfortable talking with shareholders and release more information than they have in the past.
I wish that all companies would: Not see us as the enemy but as a voice that may not be in the room.

I wish that all CEOs would: Meet every once in a while with their CR shareholders – not just with Blackrock – to hear other voices.

If I had a magic wand and could change one thing in the world it would be: That there was a pipeline of people coming into the investing field with a social justice/faith commitment. The faith community is shrinking, and we need some way to carry on the moral voice. We need the next gen of the moral voice.

The best part of my job is: Supporting people within corporations who are trying to do the right thing and figuring out how to make change  happen.

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