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A Bigger Voice for Small Nonprofits

By Jessi Hempel

Article re-printed from BusinessWeek April 5, 2004


They're starting to realize that they can wield outsize influence as activist shareholders, much like pension funds have been doing

Last September, as investors at Smithfield Foods' annual shareholders' meeting looked on, Nathan Cummings Foundation Chief Investment Officer Caroline Williams stepped up to the microphone. Her request to the pork producer's directors: Please publish measures of "the status of the research to identify environmentally superior and economically feasible alternatives to waste lagoons and spray-field systems." In short, tell us how you're farms are doing at environmental sustainability.

Nathan Cummings Foundation, a $414 million nonprofit, has always made its business protecting the environment. On last year's grant-making roster: Greenpeace's Take Back the Earth Campaign, Earth Day Network's Campaign for Communities Initiative, and the Tides Center's Honor the Earth Project, among many others. But Williams wasn't speaking to Smithfield as a grant-maker last September. She was exercising her voice as an investor with 31,600 shares of stock.

She had helped propose a question for Smithfield's annual proxy ballot, and though the Securities & Exchange Commission had knocked it off shortly before the meeting, Williams used the investors' forum to voice her concerns. Says foundation President Lance Lindbloom: "We found that by voting our stock, we could better address our social and economic justice concerns."

STRANGE PREDICAMENT. Williams and Lindbloom are two of the nonprofit leaders launching a get-out-the-proxy vote campaign among foundations. Their endowments totaled $400 billion in assets last year. And in many companies, foundations are substantial stockholders. Yet 62% leave their investments to outside money managers, according to a recent Council on Foundations survey. And only 54% report that they don't automatically vote with management on proxy ballot resolutions.

Leaders of the proxy-voting movement say these foundations are overlooking a powerful tool for social change. "Foundations do a lot of good with the 5% of their assets they must give away each year," says Neva Goodwin, co-director of the Global Development & Environment Institute. "But they don't realize how much power they could exercise by being wise about the 95% of their assets they don't give away."

Most foundations stick with traditional investing practices, meaning many endowments invest in stocks and bonds that have little to do with the philanthropist's aims so they can produce the highest possible returns and thus increase grant-making capabilities. Sometimes this serves cross-purposes. By seeking the highest possible returns, foundations can find themselves in the strange predicament of donating funds to fight cancer, for instance, while investing their assets in tobacco company stocks.

LUMBER RESOLUTION. Of course, philanthropists can screen out objectionable stocks. But that strategy has its limitations: With only a 2% share of the equities market, foundations don't throw enough weight around. On the other hand, even a shareholder resolution that gets just 8% to 12% of the vote can be enough to bring companies to the negotiating table, says Conrad McKerron of the As You Sow Foundation, who recently authored the manual Unlocking the Power of the Proxy, which was funded by the Rockefeller Philanthropy Advisors.

In 1999, for example, an 11% shareholder vote, combined with a grassroots organizing campaign, persuaded Home Depot to phase out sales of old-growth timber. As You Sow and Trillium Asset Management filed the original resolution.

Pension funds and religious organizations learned this lesson a long time ago. They gained visibility in the early 1990s by pressuring companies to stop doing business in South Africa under apartheid. But foundations have lagged behind other big institutions when it comes to exercising their rights as corporate owners. When they do vote on proxy issues, only 1 in 20 foundations instructs money managers to follow their priorities, according to a Council on Foundations survey.

"OPEN A DIALOGUE." In the past three years, several high-profile do-gooders, such as the Rockefeller Brothers Fund, the Needmor Fund, and As You Sow, have joined longtime proxy voter Ford Foundation. Two years ago, the $630 million Boston Foundation became the first community foundation to develop voting guidelines because "proxy voting rights have moral as well as economic value and therefore should be treated as assets," says James A. Pitts, senior vice-president for administration and finance.

These foundations look to the success of the Nathan Cummings Foundation as an example for their own work. At Smithfield, Williams' question was taken seriously. Says Dennis Treacy, vice-president for environmental, community, and government affairs: "We had already begun to go down that path, and we thought it would be useful to open a dialogue."

So Smithfield held several conference calls with Nathan Cummings representatives. Treacy says Smithfield will soon release an environmental report with new measurements of water use, nitrogen oxide emissions, and natural gas consumption, among other indicators, for its primary business operations.

Williams and Lindbloom want more. They say Smithfield should report for its subsidiaries as well as its main business, and they're already drafting a resolution for next year's proxy ballot. It's change they hope to accomplish by putting their mission where their money is.

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