Risk & Compliance

Social vs. Fiduciary: The Responsibility Debate

A small but vocal mutual fund says environmental policies at some companies are hurting shareholder returns.
Marie LeoneMarch 29, 2006

An activist shareholder claims executives at Goldman Sachs and General Electric Co. are shirking their fiduciary responsibilities to shareholders by appeasing environmental activists. Free Enterprise Action Fund (FEAF), a year-old mutual fund with $5.7-million under management, submitted shareholder resolutions to both companies last fall, requesting that they explain the business case for their environmental programs.

The group’s most serious claim is that a potential conflict of interest exists at Goldman based on Henry Paulson’s dual role as chairman of both the investment bank and the Nature Conservancy, an environmental activist group. In a March 21 letter to shareholders, FEAF asserted that Goldman’s adopted environmental policy mirrors the Nature Conservancy’s agenda, which states that greenhouse gases negatively affect the global climate, that indigenous people should have the right to approve local development projects, and that logging should be limited based in environmental criteria.

According to the letter, “Goldman has not justified its Environmental Policy as either promoting shareholder value or, at least, not harming shareholder value.” Indeed, green groups are oppressing business by forcing corporations to adopt environmental policies, argues Steve Milloy, FEAF’s portfolio manager.

The FEAF also questions a Chilean land deal in which Goldman donated 680,000 acres to the Wildlife Conservation Society. Milloy says the environmental group, perhaps best known as the owner of New York’s Bronx Zoo, counts Paulson’s daughter, Merritt, on its Board of Advisors. That, he argues, violates Goldman Sachs’s general ethics code, which prohibits personal interests, including those involving family members, from improperly conflicting with the bank’s business interests. The land was acquired through a loan default, according to the FEAF letter.

Milloy also concludes that Goldman’s slow response to FEAF’s queries regarding the business case for environmental policies caused the mutual fund to miss the October filing deadline that would have allowed a shareholder resolution to be included on the proxy ballot. Instead, the FEAF proposal will be listed on a special ballot available only at the Goldman meeting. Shareholders will not be able to vote on the proposal by proxy.

A Goldman press officer said the company would not comment on the FEAF proxy proposal issue before the company’s March 31 annual meeting.

In another dramatic letter, issued to shareholders on March 17, FEAF declared that GE CEO Jeffrey Immelt is “lobbying against the company’s earnings.” The claim calls into question GE’s decision to join two groups — The Pew Center on Global Climate Change and the Northeast Climate Change Group — that advocate more stringent controls on greenhouse gas emissions.

FEAF officials believe that a stricter emissions policy in the U.S. would raise energy prices, harming the economy and adversely affecting GE. Indeed, Milloy points out that GE’s 2005 annual report noted that earnings were flat, in part, because of high energy costs.

FEAF also notes that GE’s “Ecomagination” marketing initiative to sell fuel-efficient technology to customers may be good business. However, in its proxy resolution, the group declares that Ecomagination is partly based on the supposition that reducing greenhouse emission will mitigate climate change problems, and FEAF wants to see proof.

To that end, FEAF’s shareholder resolution asks GE to prepare a report for investors that discloses whether the company’s lobbying for global warming restrictions is based on “pertinent scientific and economic facts or perhaps has its roots in appeasement of anti-GE activists or public relations.”

GE spokesperson Peter O’Toole insists that Ecomagination is an economic business strategy. “It’s not a climate change policy, it is a growth policy. We see very good growth [in the Ecomagination technology market] and that will elicit good returns for our shareholders,” adds O’Toole.

The GE resolution will be put to a shareholder vote at the company’s annual meeting on April 26. Both Goldman and GE recommend that shareholders vote against the FEAF proposals.

Milloy says FEAF exists to counter environmental activists, who have long enjoyed “great success” using proxy resolutions to further environmental causes. “Greens have done a great job marshalling like-minded institutional investors” into action, he says.

So far, the FEAF has invested in 393 of the largest companies in the S&P 500. According to Milloy, FEAF’s pro-business stance advocates an “ideological return, as well as an investment return.”