TCS Daily


Shareholder Values

By James K. Glassman - April 17, 2003 12:00 AM

As the season for annual meetings begins, activists are presenting shareholders with resolutions seeking social change and better corporate governance. A few of the proposals have merit; most are obnoxious but harmless. And nearly all will be rejected - mainly because shareholders who don't trust management have a more efficient means to register their disapproval: they can sell the stock.

The danger, however, is that in their zeal to promote a radical environmental agenda, some activists are pushing resolutions that could severely damage the corporations they're targeting - even if the proposals themselves fail.

That is the case with a measure that tries to shine a spotlight on the costs that businesses face from climate change - and to shame those businesses into doing something about their emissions of greenhouse gases, like carbon dioxide, which can heat the atmosphere.

What the activists really want, of course, is for companies to spend hundreds of billions of dollars to reduce emissions - the prescription of the Kyoto Protocol, which President Bush and the entire U.S. Senate rejected long ago. To embrace Kyoto, or something like it, would be a disaster for the world economy - and it would be particularly foolish right now, when new research is showing that scientists, politicians and environmentalists may have vastly exaggerated the problem.

In an article about the new shareholder resolutions, Jeffrey Ball reported in the Wall Street Journal, "The trend reflects a push by environmental activists to prompt companies to start viewing global warming as a threat to their bottom lines." But the real threat to profits and stock prices is the extreme agenda these same activists are advocating to restrict carbon-dioxide emissions.

Energy costs, for example, would soar. A study by the Clinton administration's own Energy Department estimated the cost to the U.S. economy would be about $400 billion per year. The effect on stocks would be devastating - by conservative reckoning, a loss of about one-third of the market capitalization of a typical company.

It's not hard to see why some misguided environmentalists want businesses to take Kyoto-style action, whatever the price. But the outrage is that the proxy measures are being offered by large financial institutions, including pension plans. The political and religious officials who run these plans are putting their own ideology ahead of the interests of pensioners and shareholders. If the measures are successful - and perhaps even if they simply raise fears in the minds of other investors - they will lead to a significant decline in shareholder value.

The main target this proxy season is American Electric Power Co., the largest generator of electricity in the country and, ironically, an environmentally conscious firm that just won an award from Harvard University for a project to sequester carbon by retiring the logging rights to 2 million acres of Bolivian forest.

AEP, based in Columbus, Ohio, gets two-thirds of its power from coal, the most abundant energy resource in the United States. Burning coal (or any fossil fuel) produces carbon dioxide, a molecule that is harmless to humans and essential to plants but that has been implicated in the one degree Fahrenheit rise in global surface temperatures over the past century.

Two AEP shareholders, the Connecticut Retirement Plans and Trust Funds and the Christian Brothers Investment Services, offered a resolution for the company's shareholders' meeting next Wednesday that would force AEP to disclose the "economic risks associated with the company's past, present and future emissions of carbon dioxide."

The risks are well-known. If the Bush administration, Congress or even state governments cave in to pressure from radical environmentalists, AEP and other utilities might not be allowed to burn coal anymore. The company would have to spend billions of dollars to retrofit its plants, many of its 22,000 employees would have to find other jobs, and its 330,000 shareholders would find the value of their holdings slaughtered.

There's another risk, too, and it was highlighted - in an act of breathtaking irresponsibility - by state treasurer Denise Nappier, the fiduciary for thousands of Connecticut retirees in a plan that owns more than $3 million in AEP stock.

In a press release last week, Nappier cited a report by Institutional Shareholder Services (ISS) that derided AEP's response to the resolution: "The company suggests it should only rely on such sound science for its decision-making processes. It is worthy noting that arguments promoting 'sound science' over otherwise 'junk science' was a tactic first adopted by the tobacco industry.... The tobacco industry is now suffering through a settlement of $246 billion with state and federal governments and still faces countless other lawsuits."

Nappier and her allies at ISS are saying: Look at what happened to Big Tobacco. You folks at Big Energy are next.

Their mockery of sound science is just as disturbing. The claim that humans are heating the globe is far from settled. Just last month, researchers led by Willie Soon of the Harvard-Smithsonian Center for Astrophysics, reviewed more than 200 climate-change studies and found that "the 20th century is likely not the warmest nor a uniquely extreme climatic period of the last millennium." For example, 1,000 years ago, before SUVs and coal-fired generating plants, the Earth was warmer than it is today. The research, funded in part by NASA, casts serious doubt on the contention that human-caused greenhouse gases - rather than, say, solar cycles - are responsible for warming.

In addition, my colleague at the American Enterprise Institute, Steven Hayward, recently wrote that "an Australian statistician and a British economist have blown a huge hole in the methodology by which the Intergovernmental Panel on Climate Change has made its long-term estimates of manmade carbon dioxide emissions for the twenty-first century."

Hayward also cited research, published in Science magazine in March by a French team led by Nicholas Caillon, which suggests that, in a previous period, "warming came first, then carbon dioxide increased." That reverses the cause-and-effect relationship in current climate models.

Sound science demands more research, such as the Global Climate and Energy Project at Stanford University, funded with more than $200 million from ExxonMobil, General Electric, Schlumberger and E.ON AG, the huge European energy generator.

"For too long," says a report by the George C. Marshall Institute, "those who have manipulated the scientific process and misled policymakers, the media and the public have been able to pursue their agenda with impunity. The moral high ground should belong to those who value and promote facts and objectivity."

Unfortunately, the activists who are attacking U.S. businesses this annual-meeting season think otherwise. Shareholders at two other large electric utilities, Dallas-based TXU Corp. and Atlanta-based Southern Co., face resolutions similar to the one at AEP. And, according to a spokesperson at ISS, other climate-change proposals will be on the proxies of automakers, energy companies, General Electric Co. and even Staples, the office-supply chain.

What's particularly dismaying is that the ISS, a firm that analyzes proxy resolutions and advises institutional investors on whether to accept them, has endorsed the climate-change proposals. Cheryl Gustitus, an ISS spokesperson, told me, "The landscape has changed dramatically in terms of global warming... It went from a purely social issue to an issue that has economic impact."

Of course, it's resolutions like the once faced by AEP that are exacerbating the economic impact - not of global warming itself, whose impact so far has been minimal and, in many cases positive, but of the radicals' campaign against the use of abundant and inexpensive energy, which many of them see as evil but which is the key to prosperity, especially in the developing nations of the world.

The real threat to investors is a Kyoto-style regime. Research assembled by the American Council for Capital Formation estimates that Kyoto policies restricting the burning of fossil fuels will reduce GDP in Germany by 5.2 percent and in Britain, by 4.5 percent. Estimates for the U.S. range from 1 percent to 4.2 percent.

Imagine the result of even a 2 percent decline in real U.S. GDP. Growth after inflation would drop from 6 percent (including inflation) to 4 percent. Since corporate profits are directly linked to GDP, growth in earnings would fall by one-third. It's safe to say that stock prices, largely determined by earnings increases, would decline by at least the same proportion.

But the institutions that are pushing the global-warming resolutions are more concerned about their political and social agenda than about the value of pension funds they manage. That's a grotesque distortion of their responsibility, and they should be held accountable.
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