Proxy power: Part 5

By Todd Cohen

Getting involved in shareholder resolutions can involve social, environmental and corporate issues that are complex and may seem remote from the philanthropic issues foundations face, activists say.

But foundations should pay attention to those issues, they say, both to generate healthy returns to support their grantmaking, and to keep their investments in sync with their philanthropic mission.

While it was dipping its toe in the proxy world by joining the Merck shareholder resolution, the Nathan Cummings Foundation in New York City also was doing homework on Smithfield Foods.

And in April 2003, the foundation filed a shareholder resolution asking Smithfield Foods to prepare a report on the environmental impact of its hog-raising operations.

Co-filers for the resolution were the Sierra Club in San Francisco and Amalgamated Bank in New York City, which manages the pension fund for what was then the Union of Needletrades, Textiles and Industrial Employees.

In response to the resolution, officials of Smithfield Foods began meeting with officials of the foundation, but the talks bogged down.

While the company agreed to provide data on the environmental impact of its hog-processing plants, it would provide only limited data on its hog-raising farms, says Caroline Williams, the foundation’s chief financial and investment officer.

While it once mainly focused on processing hogs, the company in the past five years has purchased a lot of hog-raising operations and signed long-term contracts with hog farms, she says.

With nearly two in three of its hogs raised on “contract” farms owned by independent farmers, she says, Smithfield has shifted its long-term business model, becoming a vertically integrated firm that reaches “deeper into the supply chain to raise the pigs.”

That shift also has magnified the significance of the environmental impact of those hogs, as well as the risk that impact might have on the company and its shareholders, she says.

In declining to provide data on the environmental impact of its contract farms, she says, Smithfield Foods said it was not liable for its contract suppliers.

But federal courts and regulators are moving to make “integrators” liable for their contractors, Williams says.

In a case involving Tyson in Springdale, Ark., for example, a federal district court in Kentucky ruled last November that the company was responsible for environmental pollution caused by some of its independent contract farms, she says.

And the U.S. Environmental Protection Agency proposed regulations, rejected by the Bush administration, that would have made vertically integrated firms liable for their contract suppliers.

“We think, long-term, Smithfield is going to be liable for pollution occurring from contract farms, and we think it’s important for the company to monitor the circumstances, to know what’s going on, to have the information, so it can start to put in place systems and procedures to manage it’s liability,” Williams says.

In September, at Smithfield Foods’ shareholder meeting in Richmond, Va., the resolution filed by the foundation received 20.1 percent of the vote, with abstentions receiving 3.7 percent, and votes against the resolution totaling 76.2 percent.

“So, excluding shares owned by management, one in three shareholders voted against management on this issue, and that’s huge,” Williams says, who added the foundation will continue to talk to the company and likely will re-file the resolution next year.

“We’re an endowed institution, so we’re a long-term investor,” she says. “We think in some industries there are big questions about whether certain business models will work long-term.”

Other stories in the series:

Part 1: Foundations flex proxy muscle.

Part 2: As shareholders, foundations can take a stand.

Part 3: Foundations have options for being more active shareholders.

Part 4: Foundations use proxies to link investments, program interests.

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