Capital Conversations

A New Kind of Voter Education Project

Marcy Murninghan

Since the scandals of Enron, WorldCom, Sprint, Tyco, et al., the power failure in corporate governance has led to a number of reform initiatives. At the federal level, two stand out: one concentrates on corporate truth-telling, the other on the need for financial intermediaries to participate in governance matters. The July 2002 congressional passage of the Sarbanes-Oxley Act required disclosure of corporate information on a current and continuous basis. The January 2003 SEC adoption of rules governing mutual funds and other registered investment intermediaries required (a) mutual fund disclosure of proxy-voting policies and procedures, proxy-voting records, and availability of proxy-voting information to fund shareholders; and (b) investment adviser disclosure of proxy voting policies and procedures, and proxy-voting information to advisory clients.

As with governance reform sparked by corporate malfeasance, the current spotlight on charity governance provides a long-overdue look at the power, accountability, and responsiveness of institutions created to advance the public interest. Throughout 2004 and 2005, the Senate Finance Committee and the independent Panel on the Nonprofit Sector hammered out principles and guidelines for ethical charitable governance and operations. Congressional concerns, erupting every few decades, have stimulated the sector to engage in the complex challenge of self-regulation.

At the state level, a variety of legislative and regulatory initiatives are underway to build strong and ethical public charities. The National Association of State Charity Officials (“NASCO”) continues to examine new challenges facing state regulators, including corporate accountability and self-regulation versus government regulation. Also, new developments in electronic filing of charity IRS forms provide greater opportunities for charitable transparency and accountability, particularly through partnerships with other charity reporting organizations such as GuideStar and The Urban Institute.

While it may be too early to determine if the various proposals, laws, and rules changes have had the desired impact, the fact is that our intergovernmental system features a checkerboard of oversight and accountability with regard to financial services. While important, none of these include provisions for proxy voting. Yet under our system of federalism, the protection of endowment fiduciary assets and responsible equity ownership is a state, not a federal, matter. If endowments do not step forward, you can be sure that eventually state regulators will ask them to do so. The SEC and the Department of Labor currently require financial managers and private pension plans to develop and report on their proxy-voting policies, guidelines, voting records. In the near future, state regulators can be expected to ask that endowments and foundations do the same. You cannot have the federal gov- ernment insisting that one class of institutional investors act a certain way, and state governments insisting that another class of institutional investors act differently.

Endowments, subject to state oversight, are client beneficiaries with an avowedly public purpose mission. If they do not have policies and procedures for directing fund managers to vote proxies in their best interest — or, for directing themselves to do so if they manage fund assets internally – then federal edicts mean little. In order for them to work, there must be a unitary system of engagement, just as there is a unitary system of checks and balances. For these and other reasons, state regulators should seek public disclosure of endowment and foundation proxy policy, guidelines, and voting records, consistent with the federal standard.

Within this context, the time has come to address the governance question as applied to equity owners, particularly institutional equity owners, and especially charitable endowments. The reason is clear: As in public life, under our corporate-governance system of checks and balances, owners have unprecedented power to hold corporate power accountable, aligned not only with financial values but the non-financial values of a better world and our democratic system of self-governance. As in public life, this involves active and informed participation in elections. This also means that managers and directors (just as elected representatives and public officials) need to be accountable to their constituents: the owners (citizens) who put them there in the first place.

Unfortunately, just as in politics and public life, corporate equity owners have neglected their rights and responsibilities, too often leaving the job to those with the most to gain: corporate directors and managers, and financial intermediaries. With the exception of a handful of activist public pension funds, TIAA-CREF, socially responsible mutual funds, and religious investors, most institutional equity owners have remained passive, a reflection of the massive changes in the investor universe that have occurred during the twentieth century. Although shareholder activism is on the rise, missing in action are those investors whose ownership claim to a better world constitutes the core of their existence: the thousands of charitable endowments that dominate the landscape of American public life.

For too long, charitable endowments have failed to insist that their interests as shareowners be served. They have failed to behave as responsible equity owners, as shareholder citizens, who thoughtfully vote their proxies and constructively communicate their concerns to corporate management. They have failed to participate in various shareholder campaigns on a host of governance, environmental, and social issues — many of which directly relate to their charitable mission. They remain unaware of one of the most important developments in corporate-governance history: the current debate over shareholder access to the proxy ballot. This debate has two major implications: opening up the process by which board directors are nominated and elected, and increasing shareholders’ ability to file resolutions on corporate policy and conduct.


Over the past ten years, there has been an explosion in the number of nonprofit institutions. According to The Foundation Center and the Urban Institute’s National Center for Charitable Statistics, the universe of American nonprofits comprises roughly 1.3 million organizations. While information on the total number of endowments is hard to come by, estimates are that there are at least 100,000 in the U.S., with combined assets worth approximately $2 trillion. Among these, roughly sixty-six thousand are foundations, with $476 billion in assets, an amount that has doubled since the 1990s.

So, too, has there been a rapid growth in business enterprises concerned about social and environmental well-being, as well as financial prosperity. Over the past twenty years, a robust corporate-responsibility movement has appeared, led by an array of individuals, institutions, and networks committed to sustainable development. Their efforts have included the filing of numerous resolutions on social, environmental, and governance issues; the development of new codes, compacts, partnerships, and networks devoted to embedding corporate responsibility into business strategy and process; and the creation of global standards, benchmarks, and tools for measuring business performance excellence in social, environmental, and economic realms. These achievements have helped the business community evolve their thinking and practice about social and environmental issues, and have contributed to changes in corporate, social, and environmental policies.

As boundaries blur and responsibilities shift among business, nonprofit groups, and government, new opportunities for power, influence, and accountability are created. To spot these, we need to step back and take a wider view of the interaction among these institutional actors, then zoom in and see where the levers are to make a positive difference. We need to recast our understanding of how these organizations work within the context of mutual aims, commitments, beliefs, and values.

At the same time, we must keep in mind that however blurry the boundaries among the sectors, nonprofit and government organizations, unlike businesses, are created expressly to serve the public interest. They exist as part of a social contract. In exchange for certain privileges (that is, tax exemption, or the power to tax), they hold a franchise on public value. Such value typically is measured along lines of program activity and outcomes, diversity among its ranks, ethical conduct in all its operations, honesty and efficiency in managing financial resources, and so on.

In this world of aggressive fundraising, nonprofit organizations lucky enough to have endowments — such as colleges and universities, foundations, churches, museums and cultural centers, hospitals, and so forth — are a special breed. An endowment is like a dowry, a gift of property, income or source of income that serves as an engine of growth for the nonprofit institution. Rightly understood, an endowment is invested not only in entities generating financial capital, but social and moral capital, too. Endowments, in other words, are in the business of value creation, in all its myriad forms.

Unlike a business organization, which can distribute residual earnings to principals associated with the enterprise (such as managers, investors, employees, board members), an endowment must reinvest its earnings into the continued operation of its primary beneficiary — the nonprofit institution itself. An endowment’s surplus wealth — the interest earned on its investments — helps pay for projects, compensate employees, carry out fund-raising, and underwrite administrative costs.

Responsibility for setting program and investment policy lies with the board. Unfortunately, usually there is a chasm between program and financial oversight; most endowment boards have both investment committees and program committees, which rarely communicate about shared values and commitments. This separation of powers continues deep into the nonprofit organization, with financial officers and treasurers rarely included in decisions about programs, and program staff rarely included in decisions about finances, including investing. There are many excuses given for maintaining the gap between program and finance, and even though all can be rebutted, they serve as powerful deterrents.

This gap needs to be bridged. One way of doing so is for endowments to manage their financial assets more fully to advance both their immediate mission and the wider public interest. There are many ways to harmonize asset management with institutional mission. A primary one is to behave as responsible equity owners, which means exercising the fiduciary franchise to vote on matters of corporate policy, governance, and social responsibility, and making one’s voice heard on matters of critical importance.

Post-Enron, there is growing recognition that knowledgeable and engaged shareholders contribute to better corporate governance while increasing and expanding the rewards of capitalism. Responsible equity ownership – which includes thoughtful proxy voting, constructive dialogue with corporate board members and managers, the formation of owner alliances and networks, continuing education and unfettered flow of information and expertise, periodic reporting on investment policy and practice – is an important part of better corporate governance and economic performance, in addition to remedies such as independent boards, fiscal transparency, and other forms of corporate accountability.

Why is this important? As institutions created to serve the public interest, foundations and endowments have a direct stake in positive stock-price performance, as well as corporate governance and social responsibility. Yet as a group, endowments remain passive investors, lacking the kind of transparency and accountability now demanded of their brethren in the institutional investor universe, such as mutual funds and corporate pension funds. Only a handful of foundations and endowments have used their position as responsible equity owners or shareholder citizens to encourage better corporate governance and social responsibility.

According to 2004 data prepared by the Council on Foundations, of the universe of sixty-six thousand foundations, only twenty-eight have written guidelines for proxy voting. Only 242 report that they do not vote automatically with management on proxy issues. Only 183 foundations report that they directly vote on proxy resolutions. The rest rely on their investment managers (or, in a few cases, a proxy advisory service) to do so, and in most cases do not provide direction or guidance. As a result, the proxy franchise withers and becomes a wasted asset — not a positive for good governance. This is a disturbing situation, particularly for those institutions that are expected to adhere to higher standards and that represent the conscience of American character, the embodiment of duty and service to American ideals.

What we need is a new kind of voter education project, one that concentrates on the fiduciary responsibility of endowments, specifically their proxy-voting authority and their capacity for constructive engagement with public corporations. The goals of this endowment voter education project should be to increase positive acceptance of and action regarding responsible equity ownership. The objectives should be twofold: raise awareness and acceptance of the idea of responsible equity ownership, as well as activism and advocacy regarding its use as a tool to promote sustainable prosperity and well-being. Using a combination of incentives and sanctions (such as state regulatory power and IRS supplemental filings), a project on responsible equity ownership can work with endowments (including boards, treasurers, staff, and donors), intermediaries (financial, legal, policy making, and others), regulators (both formal, such as state and federal, and informal, such as those issuing voluntary standards for compliance), the sector (including national and regional professional associations, research and educational institutions, and so forth), and the media to build knowledge and competence regarding the new fiduciary obligation.

The intended result: a paradigm shift concerning fiduciary duty, affecting both endowments as responsible equity owners, and publicly traded corporations as engines of growth.

Within this current climate and amid calls for more thoughtful and engaged shareholder activism, the time has come to set a responsible equity ownership agenda that reaffirms the fiduciary ethic of duty, loyalty, and care, within the context of our representative form of self-governance and accountability to the public interest. Rather than sitting there passively, endowments should get busy and behave as shareholder citizens. Before state regulators ask them to do so, they should seize the moment to take back the power they already have, learn how to use it well, and give fresh meaning to the idea of wise statecraft.

Marcy Murninghan is a scholar, consultant, writer, and teacher on issues involving civic moral values, corporate governance, responsible equity ownership, and public policy. Dr Murninghan’s latest initiative is CREO, the Center for Responsible Equity Ownership, in Boston, Massachusetts.

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