Socially Responsible Investment (SRI) firms often support individual directors on the boards of portfolio companies, even when those same individuals are deeply implicated in the dirty and dangerous industries from which SRI recoils.
In the latest director voting disclosures it was revealed that Domini Social Investments, one of the nation’s leading socially responsible investment companies, voted in support of 57 individual directors that also happen to hold board level positions in various arms manufacturing, defense contracting and nuclear energy companies.
While it is unfair to single out Domini Social Investments, since they are widely recognised as one of the leading lights in the SRI industry, the case study is intended to raise general questions concerning the application of socially responsible voting principles to director nominations.
As a socially responsible investment (SRI) company, Domini Social Investments is very careful about where it invests. Domini applies a set of inclusionary and exclusionary screening criteria to its index of 400 stocks (Domini 400 Social IndexSM).
Domini also engages in shareholder activism by sponsoring or co-sponsoring shareholder resolutions and by voting in accordance with its publicly disclosed voting guidelines for principled decision making on human rights, environment and corporate governance issues.
In board elections Domini applies a number of governance-related considerations to candidates: board attendance, board diversity, board independence, independent chairperson, independent committees, and number of other directorships.
However, board candidates are not evaluated on the same social criteria as are applied to shareholder and other management-sponsored resolutions. Domini is not alone in this regard, but this does highlight a massive gap in the SRI industry: individual accountability of board nominees.
I applied Domini’s weapons and nuclear power screens to board elections reported in Domini’s first N-PX filing (24 August 2004)1 to identify nominees that were supported in their elections to Domini 400 socially screened company boards, but who hold leadership positions at companies in the weapons and nuclear power industries.
Sixty-nine weapons, defense and nuclear power companies were identified that would have been excluded from the Domini index based on the criteria provided at the Domini website. Some of these companies, for instance, Lockheed Martin, Northrop Grumman, Raytheon, FPL, Unicom and Stone & Webster are explicitly mentioned at the Domini website where the screens are explained.
Directors of these companies accounted for 103 nominations in the board elections of Domini Social Investment Fund’s portfolio companies. In 72 cases (70%), Domini Social Investment Fund voted in support of the nominee. The 72 nominations supported are accounted for by 57 individuals.
Some of these individuals are CEO-Chairpersons of the boards of the excluded companies: Marshall Larsen is CEO-Chair of Goodrich Corp, an aerospace and defense company (nominated to the board of Lowe and supported by Domini), Nicholas Chabraja is CEO-Chair of General Dynamics Corp, an aerospace and defense company (nominated to the board of Ceridian Corp. and supported by Domini), John Rowe is CEO-Chair of Exelon, a nuclear power plant owner and operator (nominated to the boards of Unemprovident, where support was withheld, Sunoco and Northern Trust Corp., where Domini supported his nomination) and Lewis Campbell is CEO-Chair of Textron, a defense supplier (nominated to the board of Dow Jones & Co, where his nomination was supported by Domini).
Chairperson of Alliant Techsystems, an aerospace and defense company, Admiral Paul Miller is also amongst those supported by Domini in his nomination to a Domini portfolio company board (Donaldson Co.). Admiral Joseph W. Prueher is on the board of Fluor Corp, a defense contractor, and was on the board of Integrated Defense Technologies, and aerospace and defense firm, until it was acquired by DRS Technologies in 2003. He was supported in his nomination to the board of Merrill Lynch & Co.
Mayo Shattuck, CEO, Chairman and President of Constellation Energy, a nuclear power plant owner and operator, is also a director of the Nuclear Energy Institute, the US membership organization and lobby group for the Nuclear Energy industry. His nomination to the board of Gap, Inc., was supported. Support for his nomination to Capital One was withheld. John Deutch, director of Raytheon since 1998, was director of the United States Central Intelligence Agency from 1995 to 1996, Deputy Secretary of Defense from 1994 to 1995 and Undersecretary of Defense, Acquisition and Technology from 1993 to 1994. His nomination to the board of Cummins Inc. was supported by Domini.
This analysis is intended to raise the following questions:
If the motive for SRI is social conscience, should the champions of nuclear energy and the arms industry receive the stamp of approval from SRI shareholders concerned about these very issues and not prepared to allow their investments to flow into these operations?
If the motive for SRI is to change the way that businesses operate, would the market for corporate leadership respond if candidates for corporate leadership positions were evaluated on social principles?
If the motive for SRI is long-run returns based on strong stakeholder relations, are the captains of corporations that violate stakeholder relations the best representatives of the screened portfolio corporation in relations with stakeholders?
1This covers voting, from July 2003 to June 2004, at Domini’s portfolio of 400 socially screened stocks comprising the Domini Social Equity Fund.