A Strategic Response to Investor Activism

  • Andrew J. Hoffman
  • January 15, 1996

Social activists have long attempted to redefine corporations’ objectives to include “social responsibility.” Yet most economists would argue that a corporate executive’s primary social responsibility is to make a profit for the corporation’s owners, not to appease social activists’ demands. In Milton Friedman’s words, any manager who would put the activists’ interests ahead of the shareholders’ would be practicing “pure and unadulterated socialism.”1 William Meckling and Michael Jensen wrote, “The term ‘social responsibility’ has the advantage, from the standpoint of its proponents, that it disguises what they really have in mind: namely, that managers should deliberately take actions which adversely affect investors in order to bestow benefits on other individuals.”2 Such blunt comments leave no room for doubt about who the legitimate stakeholder is in directing corporate policy — the corporate investor. But what are executives to do when the social activist and the corporate investor are, in fact, the same?

This quandary has confronted many corporate executives in their annual shareholder meetings. For example, from 1990 to 1992, Amoco faced repeated shareholder resolutions to sign the Valdez Principles, ten environmental principles developed by the Coalition for Environmentally Responsible Economies (CERES). This particular case is intriguing because of Amoco’s strategic response to defend itself from an “undesirable and unwarranted intrusion into corporate affairs.” Equally intriguing is why Amoco, and not one of the many other oil companies that faced identical resolutions, responded as it did. An analysis of the social and political dynamics both before and after Amoco’s actions lends critical insight into the nature of investor activism, helping to explain the corporation’s behavior in this specific context and the dynamics of shareholder resolutions in general.

Roots of the Amoco Case

Since 1970, activists have filed socially oriented shareholder resolutions. In its first implementation, the Project on Corporate Responsibility (PCR) successfully convinced the Securities & Exchange Commission (SEC) that it should force General Motors to include two socially oriented shareholder resolutions in the proxy statement mailed to the corporation’s 1.3 million owners. The first resolution requested that management expand the board of directors to twenty-six to accommodate three additional members who would represent some missing constituencies. To fill the new slots, the PCR nominated a consumer advocate, a black Democratic National Committeeman from the District of Columbia, and a Nobel prize-winning biologist and environmentalist.