Principles Newsletter Q4 2011
I. Active Ownership in 2012
CBIS will engage 31 companies in 2012. Three companies are new to our active ownership efforts.
We will file three resolutions: at News Corp., seeking an independent board chairperson; at ExxonMobil, seeking reduced greenhouse gas emissions; and at Crocs, concerning a human rights policy for its supply chain. Our issue priorities for 2012 include human trafficking, distribution of pornography and hydraulic fracturing.
CBIS will file at Crocs, the footwear company based in Niwot, CO, after two attempts at initiating a dialogue with the company on global standards and corporate sustainability disclosure. The resolution asks for disclosure of policies and practices related to supply chains, working conditions and the environment. CBIS holds $435,000 of Crocs stock in the CUIT Small-Capitalization Equity Index Fund.
CBIS will join a dialogue with Halliburton, the oilfield services company based in Houston, TX, to encourage the company to adopt best-practices related to its involvement in hydraulic fracturing, or “fracking”. Over the past three years, hydraulic fracturing has become a significant issue for shareholders concerned about lack of transparency, environmental impacts and effects on local communities. CBIS holds over $2.3 million in Halliburton shares.
News Corp — (Corporate Governance/Appoint an Independent Chair).
CBIS is the lead filer. We first filed in 2011 as a floor resolution where only shareholders in attendance at the company’s annual shareholder meeting had the ability to vote.
ExxonMobil (Environment/Adopt greenhouse gas emissions reduction goals). CBIS is a co-filer. Last year’s resolution requesting greenhouse gas emissions reductions received a vote of 27% in favor. CBIS has filed at ExxonMobil ten of the past 11 years.
Crocs — (Human Rights/Supply Chain). CBIS is the lead filer. This will be the first filing at this company on this topic.
Corporate Supply Chains
In November 2011, CBIS co-authored a new report with The Interfaith Center on Corporate Responsibility (ICCR) and Calvert Investments — “Supply Chain Accountability: Investor Guidance on Implementation of The California Transparency in Supply Chains Act and Beyond” — to help companies implement the new law. (You can read the press release and paper at the CBIS website.)
CBIS intends to work with companies to better understand how they are monitoring their suppliers and we will be evaluating corporate disclosure on this issue in 2012. We have already engaged with Ford on the topic due to its cutting-edge work there, and we have sent our new report to Dillard’s and Macy’s to support our active ownership engagements with each company. We intend to monitor their policies and practices related to human trafficking and to continue to work with them on the issue.
Archer Daniels Midland — (report on sustainable use of water resources). The co-filer reports a lack of commitment from the company to engage.
Siemens — (impacts of conflict minerals in the Democratic Republic of Congo). Although a subsidiary is taking steps to address conflict minerals, the parent company is not addressing the issue.
Tyson — (report on food sustainability). The co-filer reports a lack of commitment from the company to engage.
Cash America — (payday lending). The company has been unresponsive for more than five years.
Alcoa — (human rights/global standards). The company sold the division subject to our engagement.
Cisco — (corporate governance — Exec Comp). We attained our goals.
Eli Lilly — (Access to Health – TB and Malaria). The company is engaged in fetal tissue research and subject to Principled Purchasing guidelines.
2011 Active Ownership Highlights
Issue Brief: Pornography
Parental controls that block unwanted content are available for cable and satellite television, and third-party software is available to block unwanted content from computers and laptops. However, consistent, effective content filters do not exist for web-enabled mobile devices. This has become an increasingly important concern as cell phone use among children increases. According to a 2010 report from the Pew Research Center, 75% of teens ages 12-17 have cell phones. Children are getting phones at increasingly younger ages — the same report found that 58% of 12-year-olds have cell phones. As smart phones become more prevalent, easy access to on-line pornography becomes harder to control.
CBIS will lead the dialogue at AT&T and will coordinate a shareholder initiative to engage all major cell phone service providers and manufacturers in order to make available effective content blocking options for mobile devices. We believe that companies should offer customers the ability to block access to websites that contain inappropriate content and to regulate access to games, music, and videos based upon industry ratings.
CBIS will be initiating a dialogue with AT&T, service provider to smart phones using the Apple, Android, and Windows operating systems. ICCR colleagues will engage Sprint, Verizon, Apple, Google and Microsoft.
Issue Brief: Fracking
Fracking-related risks include contamination of drinking water, inadequate treatment and recycling of waste water, and waste water leaks that affect surrounding ecosystems. Concerns have also been raised due to the proximity of fracking sites to communities.
ICCR members and other shareholders have asked companies to disclose the chemicals used in the fracking process, to reduce the use of toxic chemicals and adopt operational best practices for reusing and treating waste water. Four resolutions filed in 2011 received over 40% support for additional disclosure. Some of the companies that have been engaged include Anadarko Petroleum, Chesapeake Energy, Chevron and Exxon Mobil. CBIS will join a dialogue with Halliburton in 2012 led by the Adrian Dominicans.
(M) = Dialogue is in the monitoring phase. (N) = New engagement in 2012
For thirty years, CBIS has served the Catholic community under the guidance and care of two trusts, the Catholic United Investment Trust (“CUIT”) and the Religious Communities Trust (“RCT”). While this structure has served CBIS and our participants well, the boards of the two trusts have recently come together to agree on a restructuring that they believe will better serve participant needs as we move forward into our next thirty years. At the beginning of 2012, the two trusts will begin the process of consolidating into a single trust, offering our participants a unified voice in guiding and protecting their investments.
For our participants, the most important thing to know is that this change will have no impact on your investments. The managers, expenses, investment objectives and performance history of all RCT and CUIT Funds will not change. In addition, no action is required on behalf of participants, and the transaction itself will be completely transparent. We anticipate that the consolidation will be complete by the second quarter of 2012.
CBIS and the CUIT and RCT boards believe that this change will position CBIS and our Funds to serve the Catholic institutional market more effectively. For our participants, the consolidation will offer substantial benefits going forward, including:
While we believe that this new structure will provide us with the agility and efficiency needed to move forward, we do this with a deep appreciation of the contributions of RCT and CUIT. The hard work and dedication of current and former RCT and CUIT Trustees has allowed a thirty-year-old dream of becoming the preeminent provider of socially responsible investment solutions for Catholic organizations to become a reality. We expect the next thirty years to be equally fulfilling.
Should you have any questions, please do not hesitate to contact your CBIS Investment Advisor.
III. Low Yields Bring Changes to CBIS’ Cash Strategies
Interest rates reached historically low levels in late 2011 after months of grinding pessimism about global GDP growth, the U.S. debt drama, the EU sovereign debt crisis, and the perceived failure of developed nation governments to grapple with an intransigent set of political and economic challenges. As of early December, the three-month Treasury yield stood at zero and extension out to two years produced a yield of only 0.25%.
Federal Reserve statements suggest that its zero Fed Funds rate policy is unlikely to change before mid-2013. Deflationary pressures will likely continue to prevail as monetary and fiscal stimulus seem unable to address balance sheet and solvency issues. Concerns about the ability of European banks to access short-term lending, and potential runs on deposits, recently reached levels not seen since mid-2008. And protracted low interest rates and heightened volatility, driven by the uncertainty attendant with this period in financial markets (the likes of which have not been seen since the 1930s) seem likely to persist.
As a result of these market conditions, CBIS made changes to the RCT Flex Cash and Short Bond Funds investment strategies effective in late 2011.
RCT Flex Cash Fund
RCT Short Bond Fund
We expect Longfellow to use high-yield bonds opportunistically due to the cyclical nature of credit spreads. Such positions can offer the prospect for price gains as spreads tighten in addition to the benefit of favorable issue selection within the array of high-yield offerings. Longfellow’s relatively small size ($4 billion in assets) permits it to be nimble when acquiring positions sold as larger high-yield investors raise cash to finance purchase of longer, higher-yielding new issues and when buying small “tail” positions that appear attractive.
The extraordinary environment for bond investing that began in the early 1980s when interest rates and inflation began their two-decade-long decline — a period in which cash and bond yields were generous and cash management decisions seemed relatively easy — is a thing of the past. We now must deal with conditions as they exist today in order to continue to be good stewards of your assets. CBIS will focus on providing solutions that not only help you grow your assets, but equally importantly, help you preserve your assets.
A new e-mail scam has surfaced, ostensibly notifying the recipient of a problem with an ACH transfer. The e-mails often appear with a heading like “ACH Transfer Canceled,” or “Rejected ACH Transfer,” and seem to come from NACHA, the regulatory body that governs automated payments. In reality, they are scams that can be used to gain information from recipients or install malicious software on the recipients’ computer. Because many CBIS participants utilize the ACH service, we wanted to assure you that CBIS will not use e-mail to inform you of a problem with an ACH transfer. If you receive such an e-mail, please do not click any links in the e-mail or respond directly. Call our Service Center at 800-321-7194 to check the validity of the message.
CBIS and SRI partners help companies respond to California’s new anti-trafficking law.
With The California Transparency in Supply Chain Act, or SB 657, set to become law on January 1, 2012, the Interfaith Center on Corporate Responsibility (ICCR), Christian Brothers Investments Services (CBIS), and Calvert Investments have published a corporate guide to ensure effective compliance with the California Transparency in Supply Chains Act: “Effective Supply Chain Accountability: Investor Guidance on Implementation of The California Transparency in Supply Chains Law and Beyond”.
The first legislation of its kind in the U.S., SB 657, which takes effect on January 1, 2012, requires manufacturers and retailers doing business in California to disclose on their corporate websites their efforts to eliminate slavery and human trafficking from their direct supply chains. The requirements apply to companies that conduct business in California and have global gross receipts exceeding $100 million. It is expected to affect more than 3,000 companies worldwide.
The Guide identifies good corporate practices to ensure corporate compliance with the law, the business case for compliance, shareholder expectations, and the elements of a comprehensive human rights due diligence framework. ICCR, CBIS and Calvert Investments, all of which are dedicated to socially responsible investing, developed the Guide based on their long-term corporate engagements on human rights and supply chain issues.
“The California Transparency in Supply Chains Act will have a far-reaching impact in the business world and it is critical that companies understand exactly what is expected of them,” said Julie Tanner, Assistant Director of Socially Responsible Investing at CBIS. “The law may have California’s name in its title, but its effects will be felt far beyond the state. Most major retailers and manufacturers doing business in California will need to comply, regardless of where they are headquartered. Our guide offers straightforward guidance on complying with the Act that comes from experienced and concerned investors with a vested interest in our companies’ success. At CBIS, we have been working for more than a decade to promote supply chains that are free of forced and child labor,” continued Tanner. “We understand all too well the implications and risks inherent if problems are discovered.”
Specifically, the Act requires companies to disclose the extent to which they assess and address risks of human trafficking in their supply chains, conduct audits of suppliers to evaluate compliance with company standards, train employees, certify that materials incorporated into the product comply with trafficking laws, and maintain internal accountability standards and procedures for employees or contractors failing to meeting company standards. The Guide summarizes the law’s key requirements and presents the business case for compliance. It also makes recommendations for more robust human rights programs that will transcend the California law and withstand future legislation as well as the scrutiny of responsible investors and analysts globally.
Mike Lombardo, Senior Sustainability Analyst and Manager, Index, at Calvert Investments, said, “Ensuring that companies comply with regulation and actively manage human rights risks is an essential component of Calvert’s sustainable investment analysis. The Guide is intended to help companies go beyond compliance with the Act’s minimum requirements. We offer a broader strategy for companies to eliminate business and reputational risks associated with human rights abuses in their supply chains. This Guide identifies good practices that show what leading companies are doing to systematically incorporate human rights in their due diligence processes.”
Companies highlighted in the Guide for good practice include Ford, Hewlett Packard, Nucor, Levi Strauss & Co., Gap, and Adidas.
David Schilling, Program Director for Human Rights at the Interfaith Center on Corporate Responsibility, said, “We believe that additional legislation, at both the state and federal levels, addressing these egregious human rights violations in company supply chains is inevitable. The California Supply Chain Act may be the first law of its kind in the nation, but it will most certainly not be the last. As shareholders, ICCR members have worked with leading companies across many sectors on good practices around supply-chain transparency and accountability, and they are stronger and more resilient as a result. As responsible investors, we understand that exposing and eliminating these abuses is in everyone’s best interest.”
VI. CBIS Presents Resolution at News Corp. Annual Meeting
In June 2011, a phone hacking scandal erupted at the British tabloid News of the World, prompting its owner, News Corp., to cease operations at the publication. A government investigation was launched in the U.K. and U.S. and remains ongoing. The scandal has taken a serious toll on News Corp. in terms of jobs and reputation, but the most serious impact was on those who were victims of the hacking, as well as their family and friends.
In response to the scandal, CBIS filed a resolution that asked News Corp. to appoint new, independent leadership to run the board. Currently, Rupert Murdoch holds both the CEO and board chair positions, while his family and close associates compose the majority of the board. While there is no guarantee that an independent chair would have prevented the gross abuses that occurred, better board oversight could substantially limit the chance that a scandal like this will occur in the future.
On Friday, October 21st in Los Angeles, Julie Tanner, Assistant Director of Socially Responsible Investing at CBIS, presented our resolution to the News Corp. board and to approximately 100 shareholders in attendance.
Some of the world’s largest institutional investors expressed their support for CBIS’ resolution, including a representative from California Pension Employee Retirement System (CalPERS) with $235 billion in assets under management, the Church of England, and the International Brotherhood of Electrical Workers. Our resolution and accompanying press release also caught the attention of The Wall Street Journal, Bloomberg, Fortune and The Financial Times among others.
The following week the company released the results of the shareholder votes on CBIS’ resolution, on the election of directors and on the proposal to approve the executive compensation package. Because voting for CBIS’ resolution was limited solely to those in attendance at the meeting, it did not pass, but its inclusion on the ballot enabled us to present our position to the board and to ensure that CBIS’ voice was heard in the public debate on this issue.
Shareholders clearly expressed their desire for a more independent board with their votes against Rupert Murdoch’s sons, James Murdoch and Lachlan Murdoch, who received votes against their reelection of 34% and 32% respectively, a strong vote of disapproval made even more so by the fact that the Murdoch family controls approximately 40% of the voting shares.
These strong votes should send an unmistakable message to the board. But is the board listening? CBIS will look to file another resolution in 2012 at News Corp. if significant changes are not made and if the board does not conduct a thorough and transparent investigation into the hacking scandal.
Of course, it is only through your partnership with CBIS that we are able to do this work. Together, we are making a real and tangible impact on improving corporate behavior and in bringing corporate mismanagement to light.
Thank you, as always, for trusting us with your assets.
Q: CBIS recently increased emerging market exposure in the CUIT International Fund to approximately 10% of fund assets, with a limit of 15%. Why the change and why now?
A: The change reflects the increasing role of emerging markets in institutional portfolios and a response to participant and consultant feedback. The delineation between emerging and developed markets has lessened over the past decade due to globalization of trade and finance as well as rising cross-border capital flows. Emerging market company reporting, transparency and liquidity have improved, although significant differences certainly remain. The maturation of stock markets in less-developed countries has produced a growing selection of investments. These are the primary reason for structurally increasing exposure to emerging markets. Some investors believe that emerging markets offer higher returns; however, there are many studies that refute this. We assume that returns for both emerging and developed markets will be comparable in the years ahead, although not perfectly correlated. We considered implementation in January of 2011 but postponed due to central bank tightening in emerging markets and imposition of credit controls to fight food and energy inflation. As the situation stabilized in September, in part on weakening global economic growth projections, CBIS decided to go forward with the move.
Alternatives at CBIS