Stock options: holding corporations accountable

When a federal judge granted class-action status to a sex-discrimination lawsuit against Wal-Mart last June, few could have been less surprised than Sr. Barbara Aires. Treasurer of the Sisters of Charity of St. Elizabeth in Convent Station, New Jersey, Aires had advocated since 1990 for better employment practices at the retail behemoth, including increased attention to providing equal opportunity for women and minorities.

"As I said to the company two years ago, I knew the litigation was coming. They should have listened to us back in 1990," said Aires, whose congregation owns Wal-Mart stock in its pension fund. "And '91, and '92, and '93 ..." She trailed off, her frustration apparent in her sigh.

Aires, a thirty-year veteran of the shareholder activist movement, has been joined in recent years by a growing number of like-minded investors who have agitated for corporate reform by initiating dialogue on issues like corporate governance, the environment, and human rights. According to Social Investment Forum, a nonprofit group that promotes shareholder activism, shareholder-advocacy activity increased 15 percent from 2001 to 2003.

Perhaps more important, the average percentage of shareholders voting in favor of shareholder resolutions--proposals from stock owners that can appear on a company's yearly proxy statement--also grew, from 8.7 to 11.4. Shareholder resolutions are the most effective way for activists to make their voice known within a company, and while these numbers may seem low, just a 5-percent vote can force a company to take notice, if not action.

The boom in shareholder advocacy, prompted in part by recent corporate scandals such as those at Enron and World-Com, can be traced to its predecessor, socially responsible investing. That umbrella term covers investments made according to certain criteria, such as a refusal to purchase shares in tobacco companies or defense contractors.

Religiously motivated investing is also becoming more popular, especially among individual investors, according to Frank Coleman, executive vice president of Christian Brothers Investment Services, which manages $3.5 billion for more than one thousand Catholic institutions and handles proxy voting for the United States Conference of Catholic Bishops. "People are trying to connect with their values," he said.

The concept of socially responsible investing goes back to the Quakers, who refused to contribute to industries that supported war or the slave trade. But socially responsible investing really gained prominence in the Vietnam era and during the anti-apartheid movement. Several Christian denominations--the Episcopal, Methodist, and Catholic churches, among others--as well as Jewish congregations and Muslims have contributed to the movement's growing popularity. Pope John Paul II's 1991 encyclical Centesimus annus reminded Catholics that "profitability is not the only indicator of a firm's condition," and in November 2003, the U.S. bishops released revamped guidelines on investing, with expanded focus on stem-cell research, the environment, and access to pharmaceuticals.

New York's Interfaith Center on Corporate Responsibility (ICCR) is probably the most respected player in the field. Founded in 1971, the coalition counts 275 Christian and Jewish institutional investors, about two-thirds of which are Catholic. Through resolutions and dialogue with companies, members promote initiatives to end predatory lending, to effect sound environmental and labor practices, and to establish ethical criteria for military contracts.

Since ICCR deals exclusively with institutions, it cannot help individuals seeking to invest according to their beliefs or to raise issues with companies in which they hold stock. Two groups of Catholic funds have appeared in recent years that do cater to both institutions and individuals: Ave Maria Mutual Funds, based in Bloomfield Hills, Michigan, and the Catholic Equity Fund, in Milwaukee. The two firms illustrate divergent approaches. The Ave Maria fund screens out companies whose practices it considers unethical. The Catholic Equity Fund takes a more activist approach, seeking to change a company from within by proposing resolutions against practices to which it objects, or in favor of actions it thinks a corporation should take.

"We started as a screening fund but came to the conclusion that that was not the way to go," says Catholic Equity Fund chairman Dan Steininger. "Fellow CEOs said 'we love it when you don't own our stock.'" The Catholic Equity Fund currently screens out five companies that directly participate in abortion, but otherwise the list of companies it invests in mirrors the S & P 500, an index of leading companies. As an associate member of ICCR, the fund has filed resolutions to limit executive compensation with corporations like Alcoa, Bristol-Myers Squibb, and Coca-Cola. The fund is beginning to expand its efforts into other issues too: it successfully negotiated with Federated Department Stores to eliminate the use of child labor in rug production.