Concept of “Social Injury”
At the heart of The Ethical Investor’s approach to institutional investor responsibility is the concept of social injury. As defined in the “Suggested Guidelines for the Consideration of Factors Other than Maximum Return in the Management of the University’s Investments” contained in the The Ethical Investor (the “Guidelines”), “social injury” means “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 purposes of these Guidelines, social injury shall not consist of doing business with other companies which are themselves engaged in socially injurious activities.”
Guidelines for the Voting of Shares
With respect to the exercise of voting rights, the University relies on the Guidelines, which 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. This paragraph 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.”
A more detailed summary of Yale’s approach to proxy voting as it relates to social issues can be found at the Annual Report page.
CCIR Statement on Proxy Resolutions
In 1989, the CCIR clarified further the University’s policy with respect to proxy voting and 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.”
In 2013, the CCIR reaffirmed the policy and noted, among other things, that proxy initiatives should not be supported where the “resolution would impose a serious competitive disadvantage on the company in relation to other companies in the same industry which are engaging in similar social injury,” or “the activity in question neither violates nor frustrates the intent of governing laws and regulations that represent a balance struck in the context of competing political influences in a democratic society.” These general principles may be superseded by specific guidance on a particular issue, as occurred in the case of tobacco companies and private prisons.
Guidelines for the Divestment of Shares
With respect to divestment, the Guidelines provide that:
“Notwithstanding a finding of social injury or grave social injury – a) The university will not exercise its shareholder rights under the foregoing paragraphs, but will instead sell the securities in question, if a finding is made that … (i) it is unlikely that, within a reasonable period of time, the exercise of shareholder rights by the university (together with any action taken by others) will succeed in modifying the company’s activities sufficiently to eliminate at least that aspect of social injury which is grave in character …”
Not all findings of social injury or grave social injury give rise to immediate shareholder engagement and/or divestment. The Guidelines go on to provide:
“Notwithstanding a finding of social injury or grave social injury …
b) If a finding is made that correction of such social injury will impose a serious competitive disadvantage on the company involved (in relation to other companies in the same industry which cause similar social injury), the university will defer taking shareholder action to compel the company to correct the social injury on a unilateral basis until the university has determined that it will not be possible for it or others to induce the management of the company to bring about industrywide corrective action within the constraints, if any, imposed by the antitrust laws.
c) If a finding is made that correction of such social injury cannot reasonably and appropriately be undertaken by company or industrywide action, as compared to government action, the university will not exercise its shareholder rights under the foregoing paragraphs except to communicate with the management of the company to urge it to seek necessary action from the appropriate government agencies.
d) If a finding is made that, because of extraordinary circumstances, university action otherwise indicated under these Guidelines is likely to impair the capacity of the university to carry out its educational mission (for example, by causing adverse action on the part of governmental or other external agencies or groups, or by causing deep divisions within the university community), then the university will not take such action.”
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 doing business 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.
Several times since the early 1990s, the University studied the issue of its tobacco holdings. 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:
- Embody effective controls on the distribution and marketing of tobacco products to minors
- Contain appropriate restrictions on, and regulation of, the distribution and marketing of tobacco products overseas
- 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:
- 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
- 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
- Request tobacco companies to take actions designed to reduce the health risks to minors
- 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 a decision to exercise “voice” with respect to any harmful marketing and distribution practices.
Following the ACIR’s investigation of the risks and negative effects associated with vaping especially affecting minors, the CCIR affirmed in February 2019 that Yale’s established guidelines on the voting of tobacco proxies extend to non-combustible nicotine products.
Private Investments and Ethical Oversight
In 2002, the ACIR and the Yale Investments Office took up the issue of ethical oversight of private investments. Applying existing policies to private holdings posed a challenge, because the shareholder resolution activity of the ACIR had no analog in private investment holdings. In the realm of private assets, where corporate control rests with 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 investments. In particular, ethical investing policies recommended by the CCIR (as advised 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.
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.”
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.
On August 27, 2014, the CCIR issued a public statement on climate change, which incorporated new proxy voting guidelines for implementation by the ACIR. Specifically, the guideline provides:
Yale will generally support reasonable and well-constructed shareholder resolutions seeking company disclosure of greenhouse gas emissions, analyses of the impact of climate change on a company’s business activities, strategies designed to reduce the company’s long-term impact on the global climate, and company support of sound and effective governmental policies on climate change.”
At the same time, the Chief Investment Officer sent a letter to all of Yale’s active Endowment managers encouraging them to account properly for the internal and external costs of greenhouse gas emissions and to avoid companies that refuse to acknowledge the social and financial costs of climate change. In April 2016, the Chief Investment Officer updated the Yale community on the positive influence of his letter, including sales of holdings deemed inconsistent with the economic approach laid out by Yale.
In June 2018, the Yale Corporation adopted the following proxy guidelines for issues relating to private prisons which were drafted by the ACIR and endorsed by the CCIR:
Yale will support reasonable, and well-constructed shareholder resolutions related to improvements in the corporate social responsibility of private prisons. Examples of resolutions that would be supported in the future include those seeking disclosure by private prison companies of their political contributions and lobbying activities and the use of contracts with private prison companies that contain incentives based on objective measures of performance such as lower recidivism rates. Other resolutions that would be supported relate to efforts to reduce prisoner rape and sexual abuse and efforts to reduce the high cost of phone calls made by prisoners at private prisons. The University also would support resolutions that request that the boards of directors of private prison companies obtain independent assessments of their success in reducing violence, use of force incidents, disciplinary and grievance systems, contraband, lockdowns and positive drug tests. These examples are meant to be illustrative and not comprehensive as it is not possible to anticipate precisely the full range of issues that might be presented for shareholder consideration in the future.”