It’s illogical – and quite myopic – that many of the nation’s largest institutional investors refer to shareholder-sponsored resolutions addressing material topics such as climate change, resource constraints and environmental stewardship as “special interest,” “non-routine” or involving “special circumstances.”

The opposite is in fact the case. We strongly agree with David Lubin and Daniel Esty’s contention in a recent Harvard Business Review article that sustainability is a core driver of competitive business strategies. Sustainability issues present both opportunities for competitive advantage and risks that, left unmanaged, will cause a company to lag its sector. If companies aren’t addressing sustainability they won’t be producing long-term value for their shareholders.

The financial numbers back this up: A review of 36 studies by Mercer Investment Consulting shows strong linkages between ESG (environmental, social and governance) integration and positive investment performance. “Eighty-six percent of the studies are neutral or positive,” Mercer’s Jane Ambachtsheer told the CalPERS Board of Directors in August.

With this in mind, Ceres recently unveiled the new and detailed Ceres Guidance: Proxy Voting for Sustainability to a Council of Institutional Investors breakfast in Boston. Our guidelines are a tool. But more importantly, they launch a serious effort to get mainstream investors moving now – immediately – to assert their prerogative, as part of their fiduciary duty, on these issues. Ceres, which coordinates the $10 trillion Investor Network on Climate Risk, has the partners in its network to leverage this initiative.

The guidance includes:

- Ceres’ set of Proxy Voting Sustainability Principles covering governance, social issues, environmental issues and general sustainability topics like “Management Accountability for Sustainability Goals” and “Adoption of Specific Environmental Performance Goals and Measurements.”

- Accompanying guidance on how to cast votes on particular sustainability resolutions. For example, when faced with a resolution that proposes independent directors, the guidance advises voting for this proposal applying the Proxy Voting Sustainability Principle of “Loyalty” to shareowners. When faced with a resolution calling for a link between executive compensation and sustainability performance, the guidance advises voting for this proposal applying its “Management Accountability for Sustainability Goals” principle.

- A compilation of sustainability resolutions from recent proxy seasons and the vote counts on these resolutions from the 2010 season. Surprising examples indicative of sustainability trends include a 60.7 percent vote at Sprint on a resolution requiring the company to account for both its direct and indirect political spending and a 53 percent vote requiring coal producer Massey Energy to set greenhouse gas emission reduction targets.

- A compilation of sample proxy voting guidelines already being used by leading investors around the world. Guideline language from big pension funds like Florida’s State Board of Administration on water scarcity and proxy access are highlighted next to guideline examples from the AFL-CIO on performance based equity compensation, TIAA-CREF on charitable contributions, SRI funds like PaxWorld on workplace health and safety and more.

Investors who adopt the Proxy Voting Sustainability Principles will be better positioned to vote consistently and responsibly on the 700-plus sustainability resolutions now being filed with US companies each year. They can adopt these principles as a policy to guide their proxy voting consultants or as a supplement to other proxy guidelines. Pensions funds and other asset owners can similarly press their asset managers to use these principles in voting their proxies. For those developing proxy guidelines for the first time, these principles can provide the framework for shaping a comprehensive set of corporate governance guidelines.

The resolutions are categorized so that investors can determine whether their existing proxy voting guidelines are sufficiently specific to create consistent voting outcomes on these resolutions. The list of common resolutions can also be used as a checklist for investors who wish to ensure that their existing or new proxy guidelines will comprehensively cover sustainability and governance issues arising in the future.

Lastly, and perhaps most importantly, the Ceres Guidance includes more than 75 leading examples of proxy guidelines that asset owners and asset managers can consider as they re-visit their own guidelines and policies. The sample language from public pension funds, asset managers, socially responsible investment funds, labor unions, and foundations covers key sustainability topics such as climate change, water availability, broad environmental risks, ESG-driven executive compensation and board of director governance.

Our message to asset managers, asset owners and voting fiduciaries who have yet to incorporate specific mention of the various sustainability issues into their proxy voting guidelines is clear: Now is the moment to act. You cannot defer to the opinion of specific management bodies in deciding how to vote on issues that will help determine business success or failure and significantly impact long-term value creation in the coming years.

And if you fail to specifically address these issues in your guidelines, you run a serious risk of breaching your fiduciary duty by voting inconsistently or failing to vote on resolutions of critical importance to the companies you own and the shareholders or beneficiaries to whom you owe your fiduciary duty.

Sustainability will not wait. Climate change, water constraints, human rights and labor issues, new rules for corporate behavior or for governance and stakeholder treatment will simply not be ignored in a globalized economy where environmental, economic and social developments move at lightning speed – along with news of corporate failure and its attendant bottom-line and reputational damage.

The opportunity to promote key governance and sustainability reforms at large public companies – including reforms that might have helped avert the ongoing financial crisis – is a key competitive opportunity for those with their eyes open. Investors are increasingly watching – the rise in both the number and vote percentages of recent sustainability resolutions is testament to that. With our new guidance we’re confident they’ll be watching even more.

Kirsten Spalding is the California Director for Ceres. She works with members of the Investor Network on Climate Risk on their initiatives and represents Ceres on the West Coast for all Ceres programs.  Prior to joining Ceres, she served as Chief Deputy Treasurer under California Treasurer Phil Angelides and Director of the Treasurer’s environmental financing authorities.

This article was first published on the Harvard Law School Forum on Corporate Governance and Financial Regulation and is re-published with the author's permission.

“We have the best opportunity ever to advance corporate governance,” said Joe Dear, the head of the Californian pension fund, Calpers, in the middle of the financial crisis. Two years later, the crisis is over, but the governance of banking firms seems stuck in the past. Banks still have to fully clean up their balance sheets and really increase their lending to Main Street. Bankers are again giving themselves outsized compensation packages, despite the fact that many owe their survival to a bail-out with public money. Little wonder that public trust in the banking industry and, by extension, trust in business as a whole is very low.

Where are the bank boards? Many of them have been recomposed with new directors who have much more financial markets’ expertise. So why do they remain so out of touch with society and critical stakeholders who can make or break the company as well as out of touch with what’s needed to re-establish the social legitimacy of their firms? The problem is that the world of CEOs and board directors is made up largely of other CEOs and top executives who in a repetitive routine interact mainly with one another, with management, and occasionally with analysts, consultants and government officials.

Board directors in many widely held companies owe their loyalty to those who nominate them – people from the  same world. In the words of Nell Minnow, head of The Corporate Library, “There’s only one thing that matters, and that’s who gets to decide who sits on the board.” As long as directors are nominated by existing board directors on the Nominating Committee, which often includes the CEO, they will continue to empathize with the CEO of the company on whose board they are sitting. Fellow CEOs are not going to raise the red flag because of a little societal criticism, nor will they deny the company’s CEO and his top people an increase in compensation, since they are in a similar position relative to their own board. There needs to be fundamental change.

We are seeing some steps in the right direction. For widely held companies in the U.S., the SEC now has the legal authority to require shareholder nominees to be included with management’s nominees for election to the board. In the U.K., the Financial Services Authority has been given veto power over the nominees to big bank boards. In Sweden, large shareholders form the nominating committee of listed companies. When minority shareholders are legally protected, as they are in Sweden with strong rights to block certain decisions with a minority vote at the shareholders’ meeting, the net performance advantage increases of having large owners nominate the board directors.

Beyond the owners, bringing direct stakeholder representatives on to the board itself is not the obvious next step. Indeed, the experience of NGOs, partnerships, and other diffusely held organizations shows that too many stakeholders on the board often leads to gridlock. The chairmen of some Northern European companies, I have spoken to, believe that the effectiveness of their boards could be greatly improved by having the employee representatives sit on the nominating committee rather than on the board itself. In fact, the contribution of employee representatives on northern European boards is marginal, because management and the directors elected by the shareholders usually meet before board meetings to settle key agenda items.

Membership of the nominating committee, rather than the board itself, more easily can be extended to include the representatives of other critical stakeholders, to ensure that the directors selected are in touch with stakeholder interests and risks. For example, in investment banks, the nominating committee should have members with direct contact or recent experience in frontline trading, back office risk management and the public oversight of the industry; for oil majors, members with subcontractor, drilling platform and NGO experience or contacts.

There are important advantages to a shareholder/stakeholder-based nominating committee:

-It ensures that the shareholders as a whole elect directors from a list of nominees with the societal, industry and other essential expertise and contacts, desired not only by the owners, but also by other critical stakeholders.

-It requires only a limited time commitment (to the nominating committee) from high-powered stakeholders.

-It breaks the monopoly of power that develops on boards and nominating committees dominated by a CEO/Executive Chairman.

-It increases the chances of getting strong sparring partners onto the board, because the directors owe their loyalty, not to the CEO/Chairman, but to the stakeholder representatives on the nominating committee.

A shareholder/stakeholder-based nominating committee would need specific rules of committee governance to integrate the different perspectives on desirable nominees. Moreover, the increased diversity on the board would complicate the life of the chair in getting the board to work together. However, the board does not have a management role; it does not have to be an integrated team. It has to perform the conflicting roles of both supporting and monitoring management. Especially for the latter role, sadly lacking during the lead up to the crisis, more useful diversity and less harmony is needed on the board.

To improve public trust in business, the search for board directors has to extend beyond the world of top executives, to look for other kinds of nominees in touch with the critical stakeholders, who can bring their perspective into the boardroom and involve management in creating long term value, rather than short term gain. To get this in a systematic way, the nominating committee needs a transformation.

This article was first published on February 14, 2011.

Paul Strebel is the Sandoz Family Foundation Professor of Governance, Strategy and Change at IMD, a leading global business school based in Lausanne, Switzerland. He directs IMD’s High Performance Boards program.

To the dismay of activist investor groups, Senate negotiators are seeking to limit proposed proxy access provisions in the financial reform bill.

Senate Banking Committee chairman Christopher Dodd  of Connecticut proposed this week that investors seeking to nominate directors for shareholder votes -- the essence of a proxy access provision already approved separately in the Senate and House -- would be required to own at least a 5% interest in the company for two years.

Few, if any, institutional investors would be able to meet such a requirement.

Senate conferees Thursday defeated 8-4 an effort by Sen. Charles Schumer of New York to eliminate the threshold.

Sen. Dodd's move prompted the Council of Institutional Investors to urge members opposed to the 5% limit to contact White House advisor Valerie Jarrett, a key figure in the negotiations.  Various reports said Jarrett, the administration's liaison to the Business Roundtable, was encouraging the proxy access limitations.

"As a senior advisor to President Obama, Jarrett has significant influence over the ongoing House-Senate conference committee negotiations, particularly regarding the proxy access provision," the Council said in an "Urgent" email to members.  "Tell Valerie Jarrett and the Obama administration to publicly oppose the Senate's proxy access amendment imposing a 5% ownership requirement." 

The  Dow Jones Newswires quoted Kurt Schacht, managing director of the CFA Institute, an association for investment professionals, saying the proposed 5% threshold would "render this important shareholder right useless."

Bloomberg reported that the chief investment officer of the  California Public Employees Retirement System wrote Ms. Jarrett that the 5% limit "is completely unacceptable to responsible long-term investors such as Calpers."

The Senate proposal  would still have to be accepted by House negotiators.

Other shareholder-related provisions previously adopted by the House or Senate also appear to be under attack. RiskMetrics Group's blog said Senator Dodd had indicated Senate conferees had agreed to drop a provision requiring public companies to have a majority voting threshold in uncontested director elections. "While a large majority of S&P 500 firms have adopted majority voting policies, most mid- and small-cap companies have not done so," RiskMetrics said.

And it said Senate conferees had declined to accept a provision in the House bill to mandate votes on "golden parachute" pay packages.

In an action hailed by environmental groups as “ground-breaking,” the U. S. Securities and Exchange Commission voted to provide guidance to publicly-listed companies regarding the level and quality of their disclosures on climate change and its "material"  impact on their businesses.

Commission attorneys said that under the new guidance shareholder reports should evaluate the potential impact on a company of new climate change laws and regulations, both domestic and international. Other factors to be considered would include the impact of severe weather; a decreased demand for goods that produce significant greenhouse gas emissions; and increased competition to produce products that satisfy consumer demand for greener goods.The SEC action doesn’t change existing disclosure requirements, but it does put pressure on companies to step up the quality of information and analysis on climate risk that they provide to stockholders.

In announcing the action at a hearing in Washington, D.C., SEC Chairman Mary Schapiro said the Commission was “not opining on whether the world’s climate is changing” but only providing guidance on how companies should report.

Pressure from Investor Coalition

The SEC was pressed to provide the guidance by a coalition representing some of the nation’s largest public pension funds – such as the California Public Employees' Retirement System (CalPERS) – and other institutional investors with about $1.4 trillion in assets under management. The coalition was organized and largely driven by Ceres, a national network of investors and environmental organizations working on sustainability issues.

“Today’s vote is a clarion call about the vast risks and opportunities climate change poses for U.S. companies and the urgency for integrating them into investment decision making,” said Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk, a network of 80 institutional investors with $8 trillion in collective assets. “The business risks of climate change cannot be ignored. With this guidance investors can make more sound decisions based on better information – and businesses will have a level-playing field with clear standards and expectations for disclosure.”

In its filings with the SEC, the coalition argued that “climate related risks are material to investors’ decisions” and it asked the Commission to issue formal guidance on what and how companies should disclose information. A “lack of hard data and long‐term planning disadvantages investors, who require this information to make informed investment decisions and protect their portfolios,” the coalition said.  “Furthermore, voluntary disclosures of this type lack the rigor and accountability inherent in 10‐K reports certified by senior management pursuant to enforceable legal requirements.”

The investor group cited two reports which they said showed that S&P 500 companies are providing scant climate-related disclosure to investors.

The first report assessed disclosure by100 global companies in five sectors - electric utilities, coal, oil & gas, transportation and insurance - and found overall limited disclosure: 59 of the 100 companies made no mention of their greenhouse gas emissions or public position on climate change; 28 had no discussion of climate-related risks they face; and 52 failed to disclose actions and strategies for addressing climate-related business challenges.

The second report reviewed over 6,000 SEC filings by S&P 500 companies from 1995 to 2008.   While the study found “some modest improvement” in climate risk disclosure since 1995, it said that in 2008 75% of annual reports filed by S&P 500 corporations “failed to even mention climate change and only 5% articulated a strategy for managing climate-related risks.”

by Michael Connor

There will no doubt be a fair amount of theater this week as the Financial Crisis Inquiry Commission holds its first public hearings exploring the causes of the 2008 financial crisis that nearly catapulted the U.S. and world economies into a 21^st century Great Depression.

Front and center on the commission’s first Wednesday panel will be four men likely to be cast as star players.  They are CEOs of the nation’s top banking companies: Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JP Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America.

As with much great theater, however, there’s another potential star in this drama that you might want to keep on eye on: the commission’s chairman, Phil Angelides.

While not a familiar name in most American households, Angelides is well-known to Californians.  A native of that state, he’s a career politician who most recently ran and lost as the Democratic candidate for Governor in 2006.

The financial industry is very familiar with him as well.  Angelides has been a leader in the corporate reform movement and has long been engaged in socially responsible investing.  As California's state treasurer from 1999 to 2007, with responsibility for overseeing the California Public Employees’ Retirement System (CalPERS), the largest state pension fund in the nation, he pressed banks and Wall Street firms for greater disclosure and transparency for investments

Angelides was also among the most vocal critics calling for the resignation of New York Stock Exchange Chairman Richard Grasso, after the scandal over his $140 million pay package. “It is fundamentally important that Grasso resign so that the New York Stock Exchange can restore its moral authority,” he said at the time. Angelides also threatened to stop giving state business to Wall Street firms that didn't meet conflict-of-interest standards.

So what can we expect from Angelides as chair of the federal commission?  He and the commission’s vice chair, Bill Thomas, a Republican and former Congressman, have hired a staff of professional lawyers and investigators.  They’re charged with identifying the causes of the financial meltdown and maybe (just maybe) reforms that might prevent another one from happening any time soon.   Their full report is due December 2010.

In a video interview last September with Nightly Business Report’s Darren Gersh, Angelides laid out an ambitious agenda for the commission.   Drawing conclusions about what really happened, he said, is critical.  What role did credit rating agencies play?  What was happening in the mortgage markets?  What did regulators do, or not do?

The commission is likely to identify criminal behavior, Angelides told Gersh, though its goal is not a “star chamber” proceeding where investigators “line 20 perps up against a wall.”  Indeed, Angelides notes, it’s likely that the commission will identify much that’s non-criminal, “egregious practices that we don’t want repeated again” but which were “applauded” only a few years ago.

There’s an understandable tendency by pundits and public alike to view the likely outcomes of this process with some skepticism.   There doesn’t appear to be any serious consensus on potential reform of the finance industry; in fact, not much has changed, and with Wall Street likely to announce a new round of enormous bonus awards this week, bad habits are seemingly being reinforced.

The process will play out, and if we’re lucky, it will establish at least some official record of events in addition to the inevitable theater that surrounds such hearings and investigations.  But the results need not be entirely without merit.  The 9/11 Commission appointed by President George W. Bush – officially known as the National Commission on Terrorist Attacks Upon the United States – did not rock the world with its revelations, but it did at least generate a factual basis for later discussion and debate.

The hope is that Angelides, together with his fellow commissioners and staff, will be able to build sufficient consensus around some scenarios and theories regarding causes of the financial meltdown.  And from that, hopefully, will emerge some consensus for reform.   It’s probably wishful thinking, but in the absence of some leadership on these issues, we’re likely doomed to have this awful bit of financial history repeat itself, probably not far into the future.