by Michael Connor

Shareholder proposals on social and environmental issues constitute about half of all resolutions in the 2011 proxy season and have become a serious strategic consideration for corporate boards and their members, according to a new report from the consulting firm Ernst & Young.

Proxy_Crop_iS_FeatureThe report found that the number of shareholder proposals related to environmental issues rose from  from 150 in 2000 to 191 in 2010, while  those proposals garnered average voting support of 18.4% of votes cast in 2010, compared to just 7.5% a decade earlier.

“And it’s not just that there are more of these proposals than there have been previously. Rather, the degree of support for these types of resolutions is growing among mutual funds and other important investors” the report says. “Partly, this is because investors and regulators such as the Securities and Exchange Commission (SEC) are becoming more aware of the reputational and financial risks associated with social and environmental issues.”

The percentage of social and environmental shareholder resolutions that garnered at least 30% shareholder support, “a critical threshold for many corporate board members,” rose from just 3% in 2005 to 26.8% in 2010, according to the report.

The report recommends that board members and senior management work actively to mitigate shareholders’ concerns.  “Failure to respond to a shareholder proposal that receives 50% or more of votes cast may result in votes against directors in the following year,” the report says. “First steps toward addressing shareholder concerns related to environmental risk include understanding their investment philosophies and voting policies; knowing who is responsible for key voting decisions; and becoming familiar with shareholders’ history of activism with other target companies.”

The report notes a 2010 survey conducted by Institutional Shareholder Services, the proxy advisory firm, which found that 83% of investors now believe environmental and social factors can have a significant impact on shareholder value over the long term.

“A growing number of shareholder proposals are linking social and environmental matters to traditional governance issues such as compensation and the qualifications of board members,” Ernst & Young says. “For example, some resolutions advocate tying performance metrics used for determining executive compensation to environmental goals. Others seek to ensure that board members have the environmental expertise needed to deal with sustainability and other environmental issues.”

Social and environmental issues on 2011 proxies make up the largest portion of proposals and focus on issues including political contributions and lobbying, human rights and labor practices, sustainability and greenhouse gases, environmental risk and toxic chemicals, according to Ernst & Young.  “Board-focused” proposals constitute the second-largest category of proposals, focusing on issues such as board composition, independent leadership, majority voting to elect directors and board declassification.

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