A Modest Proposal

Investors can voice their interests to a company’s board of directors with a strong, unified front by submitting a proxy proposal and rallying other shareholders behind their recommendations.

Some shareholders vote on these proposals in person at a company’s annual meeting. Others vote by “proxy,” indicating their preferences on a form and mailing them back to the company.

“Proxy battles” take place when activist shareholders and management each try to garner as much shareholder support as possible for their side of a contest.

Shareholder motions face an uphill battle. Less than 20 percent of resolutions win a majority, according to Alex Pulisic, senior mutual fund analyst for U.S. Research at Institutional Shareholder Services.

And many proposals are not binding, even if they are successful. A company’s board must consider the recommendation but not necessarily act upon it.

“The proxy proposal system wasn’t really created for shareholders to run companies,” says Virginia Rosenbaum, a senior research analyst at the Investor Responsibility Research Center (IRRC), another proxy analysis firm. “It was created so shareholders could talk to management and bring its points up.”

Some types of resolutions are binding, including Harvard’s campaign last summer to terminate the manager of Korea Equity Fund. The proposal would have been binding had it won 51 percent of the vote, says Megan Kelleher, general counsel at Sowood Capital Management, which handled the campaign.

The total number of proposals submitted by shareholders hit an all-time high “in the wake of Enron and the other scandals,” says Patrick McGurn, executive vice president and special counsel at Institutional Shareholder Services.

While “corporate governance” proposals deal with a company’s management, resolutions can also address social responsibility issues like labor or the environment.

The proposals submitted by Harvard appear limited to the governance of closed-end funds.

“Very few educational institutions have filed corporate governance or social responsibility proxy proposals at publicly traded companies in recent years,” McGurn writes in an e-mail. “The reason for this is not clear—although the general decline in campus protest efforts is sometimes cited as the cause.”

McGurn notes that universities are more likely to engage in divestment activities—like the Harvard Corporation’s decision last year to divest from PetroChina.

The University’s wide-ranging holdings give it the opportunity to cast its vote on a number of social responsibility resolutions each year—last year, it voted on 157 proposals. The Corporation Committee on Shareholder Responsibility decides how to vote Harvard’s shares after consulting the recommendations of the Advisory Committee on Shareholder Responsibility, a group of faculty, students, and alumni.

For example, last year the committees voted down proposals for Kellogg, Yum! Brands, and Safeway to report on their use of genetically engineered ingredients, but supported a proposal that Boeing develop a human rights policy and report on its operations in China.