Academic Year 2006-2007 Report Introduction Yale was one of the first institutions to address formally the ethical responsibilities of institutional investors. In 1969 Professors John Simon, James Tobin, William Brainard, and Charles Lindbloom along with Yale graduate students Charles Powers and Jon Gunnemann conducted a seminar entitled "Yale's Investments," which explored the ethical, economic, and legal implications of institutional investments. As a result of the seminar, Simon, Powers, and Gunnemann wrote The Ethical Investor: Universities and Corporate Responsibility. Published in March 1972 by the Yale University Press, the book established criteria and procedures by which a university could respond to requests from members of its community to consider factors in addition to economic return when making investment decisions and exercising rights as a shareholder. It remains the definitive work in its field. The Yale Corporation adopted the guidelines outlined in The Ethical Investor in April 1972 and Yale became, according to the New York Times, "the first major university to resolve this issue by abandoning the role of passive institutional investor." The book subsequently served as a blueprint for the ethical policies of a number of universities. In the academic year following the publication of The Ethical Investor, Yale established the Advisory Committee on Investor Responsibility (ACIR). The inaugural committee addressed social responsibility issues ranging from company investment in South Africa, to defense contracting, political lobbying, and environmental safety. Later, the Yale Corporation formed the Corporation Committee on Investor Responsibility (CCIR). The CCIR is composed of Fellows of the Corporation. It recommends policy to the full Corporation and is charged with implementing the approved policy. In discharging its responsibility, the CCIR is assisted by the ACIR. The ACIR is composed of two students (one undergraduate and one graduate), two alumni, two faculty, and two staff members. The ACIR performs the practical work of policy implementation for the CCIR. Two of the ACIR's principal tasks are to advise the CCIR on the voting of corporate proxies dealing with ethical issues and to communicate with companies which might not be in compliance with Yale's ethical policy on investments. Guidelines for the Voting of Shares The CCIR has adopted the "Suggested Guidelines for the Consideration of Factors Other than Maximum Return in the Management of the University's Investments" contained in The Ethical Investor. The Guidelines provide, in relevant part: The University will vote for a proposition which seeks to eliminate or reduce the social injury caused by a company's activities, and will vote against a proposition which seeks to prevent such elimination or reduction, where a finding has been made that the activities which are the subject of the proposition cause social injury. These instructions will not apply to any proposition which seeks to eliminate or reduce social injury by means which are found to be ineffective or unreasonable. The University will not vote its shares on any resolution which advances a position on a social or political question unrelated to the conduct of the company's business or the disposition of its assets. "Social injury" is defined in the Guidelines as "the injurious impact which the activities of a company are found to have on consumers, employees, or other persons, particularly including activities which violate, or frustrate the enforcement of, rules of domestic or international law intended to protect individuals against deprivation of health, safety, or basic freedoms; for the purposes of these Guidelines, social injury shall not consist of doing business with other companies which are themselves engaged in socially injurious activities." CCIR Statement on Proxy Resolutions In 1989, the CCIR advised the ACIR that shareholder action can be taken only in response to issues that involve "substantial social injury" and that are "susceptible to competent evaluation by the University under criteria reflecting broad moral consensus within the academic community." Votes in favor of proxy resolutions "should be preceded by a determination that the issue is one on which it is appropriate for the University to take a formal position as a shareholder." Past Actions South Africa In 1978, the Yale Corporation adopted a policy on investing in companies doing business in South Africa. In subsequent years, Yale engaged scores of companies in dialogue about their responsibilities in the country. When company actions were incompatible with University policy, Yale sold its shares. From 1978 through 1994, Yale divested shares of 17 companies operating in South Africa, representing a total market value of approximately $23 million. In February 1994, recognizing the positive changes occurring in the country, the Yale Corporation lifted all investment restrictions. Tobacco Several times over the past ten years, the Corporation thoroughly reviewed the holding of tobacco related stocks. As a result of the reviews, the Corporation established guidelines on voting of tobacco proxies. In order to give the Advisory Committee on Investor Responsibility guidance for the 1994 proxy season, the Corporation approved instructing the Advisory Committee to vote in favor of well-constructed proxy resolutions relating to tobacco which: (a) embody effective controls on the distribution and marketing of tobacco products to minors; (b) contain appropriate restrictions on, and regulation of, the distribution and marketing of tobacco products overseas; and (c) encourage public education regarding the risks of consuming tobacco products. In 1996, the Corporation Committee on Investor Responsibility voted to supplement the instructions provided to the Advisory Committee on Investor Responsibility in February 1994, by instructing the Advisory Committee on Investor Responsibility to vote, additionally, in favor of well constructed proxy resolutions which: a) call upon tobacco companies to place health warnings about the dangers of addiction, disease and death caused by smoking on all advertising and promotional items for tobacco products distributed throughout the world; b) request companies to cease advertising tobacco products to minors, including all uses of the company's brand names and associated symbols for sponsorships; c) request tobacco companies to support enforcement mechanisms at all governmental levels to prevent illegal sales of tobacco products to minors; d) request tobacco companies to take actions designed to reduce the health risks to minors; e) call upon tobacco companies to report publicly accurate information relating to the ingredients of their products that have probable adverse health effects. The Corporation voting guidelines stem, in part, from an ACIR report which found the possibility of social injury in the marketing and distribution of tobacco products, not in their manufacture. As a result, the University chooses to engage tobacco companies in dialogue, hoping to change objectionable policies and procedures. Private Investments and Ethical Oversight In the 2001-2002 academic year, the ACIR and the Yale Investments Office took up the important issue of ethical oversight of private investments by the endowment. The University emphasizes private holdings in the Endowment, due to their diversifying characteristics and excess return opportunities.  However, the shareholder resolution activity of the ACIR has no analog in private investment holdings. In the realm of private assets, where corporate control rests in a highly concentrated investment group, shareholder resolutions do not exist. To address this issue, the Yale Investments Office, in consultation with the ACIR, developed a framework to address ethical issues relating to private investment that may arise. In particular, ethical investing policies recommended by the ACIR and adopted by the Yale Corporation could be applied to both marketable securities and private investments. The University’s response to ethical issues in private investments would differ in some respects from the process employed for publicly-traded securities, due to the varying nature of the investment structures and potential remedies. Oversight of policy implementation would remain with the CCIR for both marketable and private positions. To our knowledge, this mechanism to address the challenges of non-public investments places Yale University in the vanguard of institutional investors.  As more institutions turn to alternative investments as a means to diversify their portfolios, to reduce the exposure to risks inherent in publicly traded securities, and to enhance long-term returns, we believe that Yale’s example will become a useful one. The Yale Corporation has articulated the following policy with regard to private investments: “When the Yale Corporation, upon recommendation of the Corporation Committee on Investor Responsibility after its consultation with the Advisory Committee on Investor Responsibility, adopts policies regarding ethical investing, those policies will apply to both public and private investments. In the event that the Corporation concludes that Yale's private investment managers have engaged in socially injurious activity, the University will fashion an appropriate remedy including use of voice, disassociation from the offending investment manager, and, as a last resort, disposition of the tainted partnership interests.” Academic Year 2006-2007 Review The ACIR continued its discussions and research in collaboration with the Allard K. Lowenstein Human Rights Clinic at Yale Law School regarding the issue of genocide in Sudan. On January 31, 2006, the ACIR presented a report to the CCIR regarding its findings and recommending a policy of divestment. In February 2006, the Yale Corporation voted unanimously to divest from seven oil and gas companies operating in Sudan, as well as from obligations of the Sudanese government. Click here to read more about the Sudan divestment: Sudan Divestment. Throughout the academic year, the ACIR met three times and voted on numerous shareholder resolutions on subjects as wide-ranging as the environment, executive compensation, tobacco, international labor standards and corporate political contributions. The ACIR also hosted an open meeting in February 2007 to discuss topics of interest to the Yale community.