Fund Practices Good Citizenship

Institutional investors have grown impatient as the Securities and Exchange Commission drags its feet on post-Enron corporate governance issues.

Instead of waiting for regulation to come from above, some are passing shareholder resolutions to force companies to consider the issue.

The latest to do so is the socially responsible Citizens Funds, which last Thursday filed shareholder resolutions regarding auditor conflict of interest for Cisco Systems (CSCO Quote) and Microsoft (MSFT Quote).

Shareholder resolutions rarely, if ever, garner a majority of shareholder votes. Typically, resolutions -- be they for greater workplace diversity or better corporate accountability -- win some 3% to 10% of supporting votes, according to Calvert Group, another family of socially responsible funds. And even if they do win a majority, shareholder resolutions are nonbinding, which means the company doesn't have to follow up in any meaningful way.

The primary goal behind most shareholder resolutions is to raise awareness of an issue among a broader swath of interested parties, often forcing the hand of a management that's otherwise unwilling to address an issue. Even if an issue gains less than 10% support, most companies will in some way heed the concerns of investors.

And that's what spurred Citizens' resolutions for Microsoft and Cisco.

"We've contacted them in the past and have not gotten a lot of cooperation [on this issue]," says John Shields, president of Citizen Funds. "So now we've filed a shareholder resolution."

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Citizens' resolutions call on management at the tech companies to cap the consulting fees paid to auditors at 25% of total fees. In 2001, Deloitte & Touche earned 75.6% of its total fees at Microsoft from nonaudit services -- $4.7 million for audit services and $14.7 million for nonaudit services. At Cisco, PricewaterhouseCoopers earned more than 90% of its fees from nonaudit services -- $1.8 million in audit fees and $16.8 million of other services.

At Enron, Arthur Andersen received $25 million in audit fees and $27.6 million for consulting (primarily tax consulting) in 2001.

"If a firm knows it can get millions more for providing other services, it creates at least an appearance, if not also actual pressure on them to make sure the audit goes smoothly," Shields says. And while tax consulting may seem like a natural outgrowth of an audit relationship, it still falls under the SEC's definition of "nonaudit services."

The enthusiasm for resolutions similar to Citizens' has been groundbreaking, according to a report released on Friday from the Investor Responsibility Research Center, or IRRC, a D.C.-based independent corporate governance research firm.

Similar resolutions have been introduced at 35 companies, says IRRC director of research Carol Bowie. Twelve of those have already been voted on, with the average level of support at 29.8%. The highest vote so far was at PG&E (PCG Quote), where 46.5% of shareholders voted that the company should retain a separate auditor. A similar vote at Walt Disney (DIS Quote) garnered 41.2% of the votes cast, and prompted several companies -- including Apple Computer (AAPL Quote), Bristol-Myers Squibb (BMY Quote) and Johnson & Johnson (JNJ Quote) -- to negotiate with proponents to withdraw their proposals in exchange for the company's commitment to prohibit or severely restrict consulting by auditors.

Other corporate governance issues that have been gaining notoriety through shareholder resolutions include golden parachutes, director independence and takeover defenses such as the so-called poison pill, all of which have all riled investors of late.

While shareholder resolutions are generally submitted by institutional investors -- either fund managers or pension plans -- individuals can get in on the action as well. Individuals who have continuously held at least $2,000 in the company's stock for more than a year can also submit a resolution -- but just one a year.