Quelling Activists’ Revolt on Human Rights

In every sense of the phrase, Weatherford International recently decided it wouldn’t stand the heat in Sudan.

The $7.8 billion oilfield services company faced strong shareholder opposition to doing business in the war-torn, authoritarian nation. Sudan is a small market for Weatherford anyways, which employs more than 40,000 people. So in March, the company ceased doing business in the country, donating its equipment to a non-profit group drilling water wells in Darfur.

“Sudan is not a popular place to be. It was a distraction,” says Burt Martin, Weatherford’s general counsel. “There are plenty of opportunities for us to do work elsewhere.”

And there’s the plus that Weatherford headed off trouble with the various state and union pension funds clamoring for divestiture from Sudan. Martin fully agrees that their pressure counted.

“As a public company, they’re our owners,” Martin says about the shareholders. “We care about the issues that matter to our shareholders. We listen.”

As reports of human rights abuses mount in Sudan, Tibet, Burma, and elsewhere, expect companies to be listening to shareholder complaints a lot more often. Regarding Sudan alone—where a United Nations commission in 2005 found that government forces and militias supplied with weapons by the government conducted indiscriminate attacks throughout the Darfur region—60 U.S. universities, 24 states, and 19 cities have adopted divestment policies, according to the Sudan Divestment Task Force.

2008 has also seen twice as many shareholder proposals as 2007 calling for companies to develop or review human rights policies or to create board committees on human rights, according to As You Sow, a San Francisco-based organization that pushes for greater corporate accountability. Many other proposals ask that companies report on operations in countries with documented human rights abuses.

In the case of Sudan, shareholder activism primarily targets financial institutions that support the large, non-U.S. oil extraction companies. The Sudan Accountability and Divestment Act, signed at the end of 2007, bans federal contracts with companies that operate in Sudan’s oil, power, mineral, and military sectors, effectively preventing most U.S. companies from doing business there. However, many large U.S. investment firms have holdings in the foreign oil companies operating there, including PetroChina, which is controlled by the government-owned China National Petroleum Corp.

Last fall, shareholder coalitions—including Amnesty International and several socially responsible investment firms—filed resolutions at CitiGroup, JP Morgan Chase, Wells Fargo, Morgan Stanley, Merrill Lynch, and T. Rowe Price, asking them to adopt policies dealing with companies that contribute to human rights violations in countries with a pattern of mass atrocities. The shareholders withdrew the proposals from Morgan Stanley, Merrill Lynch, and T. Rowe Price after the companies took steps acknowledging the human rights issues.

T. Rowe Price went so far as to sell its holdings in PetroChina, but the company does not attribute the sale to shareholder activism.

“One has to keep in mind that the selling of shares in a particular company is an investment decision,” says Brian Lewbart, a T. Rowe Price spokesman. “What has to be the driver of our investment decisions is investment considerations.”

The investment firm was simply following sound investment strategy—business as usual—in selling its shares in PetroChina, Lewbart says. If that strategy happened to coincide with the shareholder activists’ agenda, so be it.

“There has been a bit of a convergence between the issues that have been raised about what’s going on in Sudan and the implications of that for companies doing business in Sudan,” he says.

GENOCIDE-FREE INVESTING

Investors Against Genocide offers the following sample shareholder proposal for genocide-free investing.

Genocide-Free Investing Shareholder Proposal for [Insert Fund Name Here]

Whereas:

[Company name here] portfolio managers make investment decisions based on financial and legal considerations while seeming to ignore other issues. Even in the face of the most egregious violations of human rights, such as genocide, [Company name here] has released no policy to prevent investments that help fund or support such human rights violations.

Ordinary individuals, through their investments in [Company name here], may inadvertently invest in companies funding genocide because of investment decisions made on their behalf by [Company name here]. With no policy to prevent these problem investments, [Company name here] may at any time increase its holdings or involve new funds in such problem investments.

We believe that this problem is not merely theoretical, since [Company name here] was one of the largest holders of PetroChina, which, through its closely related parent, China National Petroleum Company, is providing funding that the Government of Sudan uses to conduct genocide in Darfur.

We believe that in the face of the most extreme human rights crises investors share responsibility to act, individually and collectively, in addition to the role and responsibility of governments.

We believe that investors do not want their pensions and family savings connected to genocide. In KRS Research’s 2007 study, 71% of respondents said companies should take extreme cases of human rights abuses, such as genocide, into account rather than base investment decisions solely on economic criteria. Further, over 150,000 people have objected to financial firms about such problem investments. Reasonable people may disagree about what constitutes socially responsible investing, but few people want their savings to be complicit in genocide.

We believe that negative publicity resulting from the many national press reports and widespread consumer protests can damage the company’s reputation, hurt employee morale, increase its costs to acquire customers, and reduce the shareholder base for distributing expenses, all of which can negatively impact [Company name here] shareholders.

We see no compelling reason to invest in companies that fund genocide. We believe there are ample competitive alternatives and flexibility of investment choices, even with index funds. As noted by Gary Brinson’s classic study, investment returns are affected much more by asset allocation than individual security selections, so avoiding a small number of problem companies need not result in any significant effect on performance.

Investor pressure has proven effective in influencing foreign governments. The campaigning against Talisman Energy contributed to the January 2005 Comprehensive Peace Agreement between Khartoum and South Sudan.

RESOLVED:

Shareholders request that the Board institute procedures to prevent holding investments in companies that, in the judgment of the Board, substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.

DISCUSSION:

In addition to preventing future investments in problem companies, the proposal calls for corrective action to address existing investments in problem companies. If the fund can effectively influence the problem company’s management, then this may be an appropriate action. If not, the security should be sold.

Source

Investors Against Genocide.

Whether companies publicly acknowledge the influence that shareholder activism plays is not of great concern, says Amy O’Meara, a spokeswoman for Amnesty International USA. For the most part, the companies in talks with Amnesty International on Sudan are the companies that were handed resolutions, she says; how they justify their decisions is far less important than them simply taking action.

O’Meara

“The shareholder proposal is a tool you use to engage a company to talk about an issue and try to make a change,” O’Meara says. “I can tell you with absolute certainty that the companies we’re speaking to are doing things they never intended to do in the first place. Getting us to withdraw the shareholder resolution played an enormous role in their willingness to move quickly.”

To Divest or Not to Divest

Engagement, rather than divestment, is the human rights community’s preferred tactic when it comes to exercising shareholder power. Amnesty International evaluates each case on its own merits, but most often it determines that divestment is not the best way to end human rights abuses. For one thing, it can be difficult to gauge the effect of divesting, and for another, divesting can effectively silence an important voice of dissent, O’Meara says.

“It’s a practical, versus an ideological, position: Is it going to be beneficial for Sudan if these [investment] companies pull out?” O’Meara says. “The reality of the investment world is that stock just moves around. Divestment sends a message, but what happens after that?”

O’Meara says her group is not yet willing to give up on engagement, but she is careful not to denigrate the efforts of those seeking divestment in Sudan.

“It takes all kinds of activism from investors to really influence companies. The divestment movement is strengthened by the engagement movement,” she says.

For Investors Against Genocide, the time for engaging companies doing business in Sudan is over. The group’s chairman, Eric Cohen, says he respects the idea of engagement, but the urgency of the atrocities in Sudan demands more aggressive tactics like outright divestment.

Investors Against Genocide submitted a shareholder resolution to more than 50 mutual funds, asking them to develop human rights-related policies. The resolution does not explicitly demand divestment, but the clear implication is that the funds should get out, Cohen says.

“The reality with cases like PetroChina is they don’t change when you call them,” he says. “If you’re a small shareholder in PetroChina, given this long history, your voice is probably not going to have any impact.”

Shareholder resolutions rarely win a majority of votes, and human rights-related proposals typically receive support in the single digits. By that standard, the proposals submitted by Investors Against Genocide have won remarkable support: 25 percent of shareholders in Fidelity’s Mid-Cap Fund, 27 percent of its Capital and Income Fund, and 28 percent of its Select Health Care Portfolio Fund, voted for the genocide-free investing proposal this year.

Age-Old Question

The question of whether companies should engage with rogue nations or divest completely harkens back to one of the earliest instances of shareholder activism over human rights: divesting from South Africa under the apartheid regime.

Smith

“It’s a long-standing discussion,” says Tim Smith, director of socially responsible investing at Walden Asset Management. “It’s not like there’s only one morally pure answer. Our position is that these financial companies need to take seriously their obligations as investors to engage companies that are involved in human rights abuses.”

Even the Sudan Divestment Task Force, despite its name, considers engagement usually to be more effective than divestment. But given the immediacy of the genocide in Sudan, divestment may be a necessary “tool of last resort,” says Adam Sterling, director of the task force.

“We feel companies should be given a chance to change problematic behavior,” Sterling says. “In Sudan, engagement efforts can take quite a long time. There is a need for a hybrid approach.”

Companies that face the prospect of shareholder demands over human rights should take the initiative to develop policies and practices, says Arvind Ganesan, director of the Business and Human Rights program at Human Rights Watch.

“It is incumbent on companies to get ahead of these issues,” Ganesan says. “The question about whether a company should stay or go comes up constantly. In today’s world, it’s the company’s obligation to clearly articulate policies and practices to respect human rights.”

In the case of divestiture campaigns, companies should not delay in addressing the concerns because they tend to focus on the worst atrocities, he says: “They should take those concerns seriously because they’re not going away.”