A confrontation at the Council of Institutional Investors conference in Washington last week pitted big business against big-labor and big-government pension funds; they were disputing the value of socially related investment criteria and the need for tougher corporate governance reforms.
At a panel on the future of corporate governance, panelist Thomas J. Donohue, president and chief executive officer of the U.S. Chamber of Commerce, Washington, criticized pension funds for using socially related investment criteria to advance a political agenda that doesn't add to the value of corporations.
"Advancing social and environmental issues doesn't necessarily benefit shareholders" or improve shareholder value, Mr. Donohue told the crowd.
The boards of directors should not be used to help advance political agendas, he said, adding that such socially related investment activism by public and union pension funds comes at "the expense of fiduciary obligation."
"Strong corporate governance is absolutely vital to the strength of the capital markets," Mr. Donohue said. But "if we take American companies and make them like the government, we'll pay a high price we'll never recover from," he added. Corporations must be entrepreneurial and take risks to produce the high stock prices that provide good benefits to retirees, he said.
Another panelist — Damon A. Silvers, associate general counsel, AFL-CIO, Washington — defended pension funds' commitment to corporate performance. He pointed out that public and union pension funds have led the effort to initiate corporate reform, restore investor confidence and recover shareholder value after the market was devastated by corporate scandal.
Mr. Silvers, defending shareholders' use of social, labor and environmental criteria to evaluate corporate investments, said, "Labor's view of what creates value may not be the same as" the views held by Mr. Donohue or John J. Castellani, president of the Business Roundtable, Washington, and another panelist. "Treating employees fairly is a better way to create value," Mr. Silvers said.
Alan G. Hevesi, New York state comptroller and sole trustee of the $117.45 billion New York State Common Retirement Fund, Albany, stood up from the audience of some 400 attendees and challenged Mr. Donohue.
"You've demonized social issues," Mr. Hevesi said, "but these issues have bottom-line consequences that could damage a company." He listed a number of examples, including shareholders' efforts to elicit information from corporations about pollution impact and work force discrimination. All these issues have potential liability risk to corporations that could harm shareholder value, he said.
Mr. Hevesi also called for shareholders to have the ability to nominate some directors, especially in egregious cases where indictments have been issued against corporate officials.
Ralph V. Whitworth, principal, Relational Investors LP, San Diego, defended shareholders who raise socially related issues, saying that in his experience, boards find the concerns enlightening.
Even with the disagreements, the panelists agreed on one thing: A majority-vote standard for electing directors is worth at least consideration and study. Mr. Castellani noted the American Bar Association set up a task force to evaluate legal and related majority-vote issues. It could take a year to for the task force to produce a report on that effort. In all but about a half-dozen U.S. corporations, directors are elected on a plurality standard, in uncontested elections. As Mr. Castellani said, "No board of directors should be sitting a director that doesn't have the support of a majority of shareholders."