BY: JOSEPH HENZLIK and SUZANNE FALLENDER
Mr. Henzlik is business development manager, Social Investment Research
Service (SIRS) unit, Institutional Shareholder Services, Northfield, IL. Ms.
Fallender is managing director, SIRS. SIRS provides portfolio screening and
proxy voting to socially responsible investors and their investment managers.
Catholic Health Care Systems Are Using Stock Holdings to Push for Corporate
For a number of years, many Catholic health care systems have sought to align
their investment decision-making processes with their institutions' underlying
mission and social goals. To achieve a balance of financial and social objectives,
many of these systems' financial managers have encouraged their investment managers
to utilize portfolio screening strategies consistent with their organizations'
social missions and investment policies and with the mandates of the church.
Moreover, an increasing number of health systems have begun to leverage their
holdings by creating comprehensive proxy voting programs and engaging in shareholder
activism, not only to push for greater corporate accountability, but to protect
the value of their own investments. Lawsuits over alleged discrimination, high-profile
controversies, and inadequate environmental controls can have a significant
impact on a company's bottom line, and thus on shareholder value.
Today Catholic health care systems are increasingly using the tools of socially
responsible investing (SRI)—screening, shareholder advocacy, and community investing—to
push for greater corporate accountability and advance mission.
Interest in SRI tactics was on the rise even before the corporate scandals
and collapses of 2001-2002. The modern SRI movement, the roots of which are
in the movement to curtail corporate investment in South African firms during
the apartheid era, has experienced considerable growth over the past
two decades. According to the Social Investment Forum, by 2001 one out of every
$8 was invested through the use of social criteria—an estimated $2.34 trillion
in assets.1 Catholic health care systems, along with other religious
organizations, mutual funds, foundations, and a number of public pension funds,
have buoyed the movement through their attempts to incorporate values in the
investment process and have worked to ensure that all risks—including financial,
labor, environmental, and reputational risks—are effectively managed by the
companies in which they invest.
2003 Proxy Season
For many years, the leaders of Catholic health care organizations and their
colleagues at the Interfaith Center on Corporate Responsibility have played
a key role in engaging companies in dialogue and submitting shareholder proposals
on a range of corporate social responsibility issues. In the interests of marrying
organizational mission with activism and reducing their own costs, Catholic
health care organizations have tended in recent years to mobilize their annual
activism campaigns around core health issues, such as affordable prescription
drugs and tobacco-related concerns. Health-related proposals put forth by Catholic
health care organizations were voted on during the 2003 proxy season at a number
of large U.S. companies, including Merck & Co.; ExxonMobil Corp.; Eastman
Chemical Co.; R. J. Reynolds Tobacco Holdings, Inc.; and Oxford Health Plans,
Inc. In addition to filing health-related proposals, Catholic health care organizations
sponsored or cosponsored proposals related to other issues in line with the
teachings of the Catholic Church, namely the support of international labor
standards, environmental reporting, and control of military weapons. See Table,
below for a description of these initiatives.
It is important to note that shareholder proposals on social issues usually
receive relatively low levels of support since corporate management often recommends
opposing the proposals. However, since proposals are often used as a tool to
continue dialogue with a corporation, success is often registered by receiving
a sufficient number of votes to enable those who sponsored such a proposal to
file it again at the next annual general meeting. The Securities and Exchange
Commission (SEC) requires of the proposal a minimum level of support of 3 percent
in the first year, 6 percent in the second year, and 10 percent in the third
and each subsequent year. Clearing these hurdles is not the only measure of
success, however. Even seemingly low levels of support are often sufficient
to raise awareness among a company's top executives and result in increased
disclosure of information about the issue in question, sensitivity to its societal
impact, or action on it.
The corporate scandals of recent years have only served to reinforce the importance
of the need for corporate transparency and accountability that shareholder activists
have long championed. This increased attention from the media and Wall Street
has contributed to a number of notable successes during the 2003 proxy season,
including a steep increase in the percentage of shareholders supporting proposals
sponsored by the socially responsible investment community. In 2003, votes on
14 different resolutions registered support in excess of 20 percent support.
Among these were Unocal (to adopt a code of conduct: 32.8%), EMC (to increase
board diversity: 32.17%), and ExxonMobil (to increase investment in renewable
energy: 20.19%). The current public focus on corporate governance and reforms
proposed by the New York Stock Exchange and the SEC have also had an impact
on the proxy voting policies of many socially responsible investors; such investors
are now amending their policies to require greater board and auditor independence.
Opportunities and Responsibilities
Catholic health care organizations have used their stock holdings to affect
corporate policy on core social responsibility issues, but they have before
them a great opportunity to extend and deepen these efforts. Currently, a significant
number of organizations have already developed comprehensive voting programs
and activism programs. However, other organizations either have not begun to
vote their proxies or have simply delegated this task to their investment managers.
When Catholic health care organizations fail to vote their proxies in support
of proposals filed by other Catholic health care organizations, they are unwittingly
working at cross-purposes. Similarly, when an organization's operations work
to provide high-quality health care and serve communities, but its investments
support companies that may produce harmful products, increase health costs,
and harm the communities they serve—then the ultimate success of the organization's
primary goal is inevitably undermined.
In recent years, regulatory agencies, common law, and self-regulatory standards
have come to emphasize a fiduciary's responsibility to exercise stock ownership
rights—specifically a fiduciary shareholder's responsibility to analyze and
vote all proxies and, where appropriate, to participate in corporate dialogue
and sponsor shareholder proposals. Active share ownership is required especially
when an institution's holdings are restricted to stock indexes, preventing the
institution from selling out of individual stocks that may be problematic. Although
institutions screen their portfolios for a number of key issues, such as tobacco
and weapons, they may overlook holdings in companies with significant pollution
or labor concerns. Proxy voting offers an effective complement to screening
programs and offers the opportunity to continue to own a stock for activism
To begin the process of aligning their investments with their values, many
Catholic health care systems have developed a set of proxy voting guidelines
and simply voted their proxies. Once the proxy voting program is up and running,
these organizations have begun to cosponsor resolutions filed by other health
care systems or socially responsible investors and to participate in dialogue
campaigns. Catholic health care organizations have justified their participation
in shareholder advocacy objectives by stressing the importance of stewardship
and the goal of improving public health. Colleen Scanlon, senior vice president
for advocacy, Catholic Health Initiatives (CHI), Denver, notes:
It's the practice of CHI to utilize its financial resources to emphasize
human dignity, social justice, and the promotion of healthy communities. As
a socially responsible steward, CHI not only refrains from investing in companies
whose products, services, or actions are contrary to our mission, but also
participates in direct community investments and shareholder activism. Such
efforts allow CHI the opportunity to advance its advocacy priorities and to
go on record on important health and social issues.
According to Donna Meyer, PhD, director, community health services, Christus
Health, Irving, TX:
By attacking issues dealing with smoking and tobacco-related products, as
well as others seeking drug price restraint within pharmaceuticals, on many
different levels and by joining with other socially responsible organizations
that share the same values, we can make an effective impact on the behavior
of the companies that are directly or indirectly involved in these businesses
and encourage them to work with us to create healthier community environments.
Sr. Susan Vickers, RSM, director, advocacy, Catholic Healthcare West, San
Francisco, notes that
Our socially responsible investment program is one of the most successful
examples where we have integrated our mission into our business operations.
Having an investment program that includes exclusive and inclusive social
screens, shareholder activism strategies that embrace both company dialogues
and proxy voting, as well as a wonderfully successful community development
investment program, gives Catholic Healthcare West a real opportunity to have
a broader influence on community health issues both here and around the globe.
A successful socially responsible investment program begins with comprehensive
and up-to-date investment and proxy voting policies. Your organization may already
have established policies; the first step in the process is to establish whether
these policies are sufficiently aligned with your organization's mission and,
if it is not, to make any necessary revisions. If your organization does not
have an existing formal investment or proxy voting policy, the organization's
investment committee can begin discussions regarding which core values should
be reflected in these policy documents. One good starting point for these discussions
is the Socially Responsible Investment Guidelines developed by the U.S.
Conference of Catholic Bishops (available at www.usccb.org/financial/srig.htm).2
In addition, the policies of other leading Catholic health care systems can
serve as useful references, particularly with respect to understanding how those
organizations have incorporated the USCCB's recommendations and leading corporate
governance concerns into their own guidelines. Building a policy consistent
with those of other Catholic health care systems can help to strengthen the
ministry's position on key health care and Catholic investment issues.
Investment consultants and proxy advisory service firms can also assist you
during the policy development process by providing policy templates and information
regarding recent trends in socially responsible investing and corporate governance.
An increasing number of investment management firms are also becoming more attuned
to the specific screening and proxy voting needs of Catholic institutions and
have developed appropriate procedures and policies that may be of assistance
to your organization in establishing a new program.
There are a number of different options for the implementation of investment
and voting policies.
Engage Investment Managers New policies can be provided to the company's
investment managers for incorporation as part of the overall management procedures
for your accounts. If you choose this option, it is critical that your organization
have a procedure in place with which it can assess the managers' compliance
with the policies, either through quarterly reporting or annual portfolio audits.
Handle Proxy Process In-House A second option is for the organization
to exercise the voting proxy process itself. The organization will need to appoint
a dedicated staff member to review and cast proxy votes on its behalf. This
option is generally restricted to those organizations with smaller portfolios
containing mainly U.S. equities due to workload issues.
Outsource Research and Vote Execution A third option is to outsource
the proxy voting research and vote execution to a proxy advisory service. Under
this option, all of your organization's holdings are voted collectively according
to your own proxy voting policy, minimizing the possibility that individual
managers would vote differently on the same agenda item.
In choosing an option, you'll want to consider a number of factors, including
staffing concerns, the size of the portfolio, whether the holdings are domestic
or global, and the level of control that the organization intends to retain
over the process.
The current focus on accountability offers an opportunity for Catholic health
care organizations to draw greater attention to core issues they have been raising
for years. Leveraging investments as a group is an effective bargaining tool
during the corporate dialogue process. The more Catholic health care organizations
participate in proxy voting, the more they will strengthen levels of support
for key proposals, thereby focusing the attention of corporate executives on
key social responsibility issues. Working together, Catholic organizations can
both protect the long-term value of their investments and ensure that those
investments are in line with the core objectives of providing quality health
care and promoting healthy communities.
- Social Investment Forum, 2001
Report on Socially Responsible Investing Trends in the United States,
November 28, 2001.
- U.S. Conference of Catholic Bishops, "Socially Responsible Investment Guidelines,"
Origins, November 28, 1991.
Copyright © 2003 by the Catholic Health Association of the United States
For reprint permission, contact Betty Crosby or call (314) 253-3477.