Shareholders are about to flex their muscles and gain real power, predicts Leon Pein.

Shareholders are about to flex their muscles and gain real power, predicts Leon Pein. No more cosy votes of confidence from fund managers and institutions. Instead, the smaller shareholders - maybe disruptive, maybe with special interest agendas - will need to be wooed.

New corporate governance rules require directors to demonstrate to shareholders that they have assessed the risks attached to all their assets and activities and have taken action to limit or remove their exposure to risk in each area. In addition, the UK government's pensions disclosure regulations, which come into force on 3 July 2000, will provide a second jolt to the system. Pension funds' statements of investment principles must cover:

  • the extent to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments
  • the policy directing the exercise of the rights (including voting rights) attaching to investments.

    There will be new players
    Active shareholders will increasingly become the norm, asking searching questions. Any board which is behind its competitors in strategic risk management may well be vulnerable. Perhaps this has left some of you quaking in your boots, giving you sleepless nights. But what if a new and novel approach could actually reduce risk?

    You will need new solutions
    Your company will need to cater for the beliefs of many (ethical) investors and other stakeholders. Sleeping with the enemy is a controversial title. I prefer engagement. In the good old days, it used to happen before the sleeping. Those companies that don't do it may see their share price affected. A fund manager once confided to me: "We research, read weighty tomes from analysts, discuss a stock at length, visit the company, meet the board ... and then we take a bet." How much better life would be for fund managers if they could rest assured that the company had taken steps to protect its long term interests. A number of reports have documented how companies with proactive, environmenlally respectful and socially respectful policies have done better.

    Tomorrow's company
    The Tomorrow's Company report (Royal Society for the Encouragement of Arts, Manufactures and Commerce) highlighted how companies that emphasised their "licence to operate" produced better returns on the stock market. The licence to operate is granted by stakeholders: the local, regional and national community, customers, suppliers and employees as well as the shareholders. Tomorrow's company could be your company, Tomorrow could belong to you. The Shareholder Action Service introduced its bespoke Financially Advantageous Shareholder Action service (FASA) for institutions and pension funds. It is a win-win-win, triple whammy, lower-risk approach to ethical investments. It's not only good for the client, but good for the company as it attempts to improve its bottom line. It marries shareholder engagement to environmental concern with the attraction of potentially improved stock market returns.

    Traditionally, most ethical investors have sold a stock if they object to the company. However, the FASA service gives them the opportunity to retain the share, the dividend, the warm glow of a rising share price and still exercise their views. They can have their cake and eat it. Did I write win-win-win? I meant win-win-win-win. For, more than that, this is ethical investment with zero risk from disinvestment or increased volatility. It's legal, it's open and it doesn't endanger returns. Under these circumstances, doing the opposite and disinvesting could mean small company bias, decreased sales, pension fund trustees open to the charge of ignoring an opportunity to increase returns ... and potential litigation - something that trustees dread as they are now personally liable.

    Ethical investors could be your friends
    Ethical investors are the most loyal of investors. In these days of volatility and sliding share prices in the "old economy", investors that stick with you through thick or thin could be worth their weight in gold. A Bath University report showed that when ethical investors incurred a two per cent shortfall per annum in their fund, over 90% retained their holding. With a two per cent ethical benefit, more than 95% retained their holding. In other words, they were easily pleased, as interested in the ethics as in the finance, and less likely to be one of the now ubiquitous fly-by-night investors in the new economy. Large companies suffer from the "finger in many pies" problem, meaning that they are likely to fall foul of one or more of the common ethical investors' objections. Small company bias is a problem, and fund managers of ethical investors would be delighted if main market companies were to give them the slightest excuse to hold on to stocks instead of disposing of them. Sales of your stock by disenchanted investors could be reduced by proactive engagement. With the rise in take-overs in recent years, a little-known problem is that a popular stock with ethical investors may be "force-sold" if it is taken over by or takes over an "objectionable" company. When a stock becomes non-ethical, it is sold. This effect could be reduced by proactive checking and prior disposals or, better, by amelioration of a company's position on the problem issue. Of course, this would apply mostly to noncore issues only. A tobacco company will always be anathema, but it may gain investors on the margin, by, for example, acting perceptibly in some way against sales to minors and thus occupying the high ground. Among your stakeholders are millions of people who supported Vietnam war marches in the 1960s, anti-apartheid demonstrations in the '70s, Live Aid events in the '80s, and Red Nose Day events in the '90s. Others give clothes to Oxfam or recycle their bottles, cans and newspapers. They are, arguably, more likely to be decision-makers and people of influence. Companies do, sometimes, respond admirably, even to the smallest of investors. One particular client of ours held just {.150 of shares in a company worth billions of pounds, one of Britain's largest. His shareholding accounted for approximately 0.000 006% of the company. We indicated his concerns to the company and were pleasantly surprised to be invited to a board-level meeting.

    Public pressure
    Public, pressure group, ethical investor and City-based pressure is frequently interwoven and overlapping. There is growing concern among the public about ethical issues. For example, four out of five people want to avoid animal testing for cosmetics (EIRIS 1998)

    Campaign group economic pressure
    Many campaign groups have shifted their activities from disengagement from poorly performing companies to constructive dialogue with companies that show a commitment to improve. Pressure groups' tactics can be disruptive of company operations and can have publicity repercussions far beyond the scope of the actions.

  • Shell had 11 oil wells closed in Nigeria due to indigenous peoples' protests.
  • An estimated 70% of the FTSE 100 companies have been targeted by one or more pressure groups.

    There is a plethora of pressure groups. Large and vulnerable companies that don't already engage with them will need to start doing so. You can''t just hope they will go away. If their concerns are legitimate, it may be better in the long term to meet them. Companies also need to know how pressure groups (including disaffected customers) use the internet to further their aims. This is an important part of managing risks to a company's reputation.

    City pressure
    Jupiter Tyndall, a leading ethical investment fund, in its statement of investment principles states: "We believe that companies' environmental efforts should be recognised - and one way that we can do this is by investing in them."

    A US report found that oil spills and other environmental disasters cut oil companies' share prices by 1.5% and reduced their market value by an average of$390m. Losses on share value cost far more than the clean-up operations required.

    "This suggests that the market is factoring in other potential and future effects and possibly showing the influence of ethical investors disinvesting," according to Peter Webster (Ethical Investor magazine, Nov 1997).

    Investor pressure
    Individuals are becoming more aware of the power they have and will be able to influence the way companies behave. For example, in the row over Shell's Brent Spar disposal, Shells image suffered and a European boycott loomed.

    The rapid growth of ethical investment funds shows that conscience could be a factor in the market, especially if more people knew about these funds, according to Investment Adviser (October 1997). Since 1997, the amount of money invested in the ethical sector has tripled to over £2bn, but this will increase exponentially with changes to the rules affecting pension funds.

    Institutions control 80% of shares. An EIRIS survey found that over 50% of respondents did not know where their money was invested and it worried them. Individual shareholders are putting increasing pressure on them to reflect their views. In the USA, 10% of all funds under management are invested according to one ethical criterion or more.--
    Leon Pein, director, Shareholder Action Service, was ethical investment adviser at the Ethical investment Research Service 1995-1998, and previously a business and environment consultant for corporate companies.

    Guide to action groups
    Pressure groups range from the widely acceptable, such as Consumers Association, publishers of Which?, to fanatical fringe activists, such as The Group With No Name that recently targeted investors in Huntingdon Life Sciences which runs Europe's largest animal testing laboratory. Perhaps one of the most chilling messages comes from Global Response's website (although Global Response itself merely encourages people to lobby the environmentally unfriendly) which quotes U. Utah Phillips: "The Earth is not dying - it is being killed. And the people who are killing it have names and addresses". Below are some groups and their aims:

  • Action for Solidarity, Equality, Environment and Development (ASEED)
    Established in the run-up to the UN conference on environment and development in Rio, a youth network with "hubs" in all continents, using activism and lobbying. Involved in campaigns such as a food, biotech and a globalisations campaign focusing on the ED biotech directive and the WTO; and a transport campaign working with local resistance to TransEuropean Network projects

  • Amnesty International
    A worldwide campaigning movement with supporters in 162 countries and territories, Amnesty International works to promote all the human rights enshrined in the Universal Declaration of Human Rights and other international standards

  • Animal Rights Coalition
    A network of over 300 local groups plus many individuals. Campaigns against animal abuse in the UK and worldwide

  • Consumers' Association
    Aims to empower people to make informed consumer decisions and improve goods and services. Comprises two separate linked bodies - Consumers' Association (CA), a charity, and Which Ltd, a non-charitable subsidiary responsible for CA's trading activities

  • Campaign for Nuclear Disarmament (CND)
    Aims to free the world of all weapons of mass destruction, nuclear, chemical and biological, mainly by lobbying

  • Compassion in World Farming
    Seeks to eliminate factory farming of animals

  • Earthwatch Institute
    Promoting sustainable conservation of natural resources and cultural heritage, putting people in the field to assist scientists in their field work

  • Friends of the Earth
    The largest international network of environmental groups, represented in 58 countries and with campaigning local groups. FOE commissions detailed research and provides information and educational materials. Campaigns against governments and industries to protect the earth against further deterioration and repair environmental damage, as well as a wide range of other environmental, social, economic and political issues. Promotes environmentally sustainable development on local, national, regional and global levels.

  • Global Response
    Encourages people to join forces with communities, organisations, and citizens around the world to stop environmental destruction.

    International but mainly US focus
    Undertakes specific projects such as the GRACE Factory Farm Project to eliminate factory farming in favour ofasustainable, economically viable and environmentally sound agricultural sector and the GRACE Nuclear Project, which works with a global network called Abolition 2000, among other things calling for a treaty to eliminate nuclear weapons. GRACE also links with activists engaged in issues affecting the environment, public health, and corporate accountability.

  • Green Alliance
    Works for a better environment by seeking to ensure that the environment is a prime consideration in all decision-making, focusing on the processes by which decisions are made in a broad range of institutions, bringing together relevant groups and individuals to debate environmental problems and explore solutions, complementing the work of other organisations by providing interpretation and analysis from a broad perspective, and advancing the environmental agenda.

  • Greenpeace
    Organises public campaigns for the protection of oceans and ancient forests, for the phasing out of fossilised fuels and the promotion of renewable energies in order to stop climate change, for the elimination of toxic chemicals, against the release of genetically modified organisms into nature and for nuclear disarmament and an end to nuclear contamination.

  • National Society for Clean Air and Environmental Protection
    Aims to secure environmental improvement by promoting clean air through the reduction of air pollution, noise and other contaminants while having due regard for other aspects of the environment. NSCA brings together pollution expertise from industry; local and central government; and technical, academic and institutional bodies.

  • Royal Society for the Protection of Birds (RSPB)
    UK with some international involvement
    Protecting birds in the wild, including their habitats, employing specialist staff to guide its actions on issues which impact on the natural environment, and involvement in activities throughout Europe and beyond, through the Birdlife International partnership

  • Transport 2000
    An environmental transport pressure group, providing public information, lobbying and policy action. Main areas of interest are research on transport, urban planning, land use and EC activities, including comparisons between countries (involved in the European I Environment & Transport Federation)
    (local websites)

  • Wildlife Trusts (The)
    The marketing name of the Royal Society for Nature Conservation, this Network of 47 local nature charities and 52 urban wildlife groups, aims to achieve a UK richer in wildlife by working to protect it.

  • World Resources Institute International
    Provides information, ideas, and solutions to global environmental problems. Its mission is to move human society to live in ways that protect the earth's environment now and for the future, using knowledge to catalyse public and private action.

  • World Wide Fund for Nature
    international Directed towards protecting the diversity of life on earth, WWF works in over 25 countries to raise awareness of the threats of climate change to wildlife and natural ecosystems, to pressure governments to take action, and to find solutions with business and industry.