The following are excerpts from the report issued earlier this week by the Advisory Committee on Shareholder Responsibility (ACSR). Part II, which recommends that Harvard divest from all companies doing business in South Africa, was supported by six members of the committee and opposed by five, with one abstention. Part III was supported by 11 members of the committee, with one abstention.

The ACSR--composed of students, faculty and alumni--makes non-binding recommendations to the Harvard Corporation on ethical questions related to the management of the University's endowment. The governing Corporation is now considering the report.

Advisory Committee on Shareholder Responsibility

Report on Harvard's Role as Shareholder Companies Doing Business in South Africa

During the past year Harvard's investment in companies that do business in South Africa have continued to provoke intense concern on the part of many in the Harvard community whose views have been conveyed to the Committee (ACSR) in numerous letters and written statements and in oral statements made at an open hearing held by the Committee in March. Many of these communications express profound dissatisfaction with existing University policies regarding Harvard's ethical responsibilities with respect to such investments.

As the result of initiatives undertaken by the Corporation Committee on Shareholder Responsibility (CCSR) and others suggested by the ACSR, several modifications have recently occurred in the implementation of Harvard's existing policies with respect to such investments. The committee has considered these modifications and other alternatives to existing University policies. This process of study and deliberation has persuaded the Committee that existing policies must be substantially changed. As developed below, however, the Committee is divided on the extent and nature of the changes that are appropriate.

Part I of this report sets forth the recent history and background of Harvard's policies with respect to such investments. Part II concludes that Harvard should divest itself of all shareholdings in companies doing any business in South Africa. Part III recommends major changes in the principles of social responsibility applied by Harvard to portfolio companies with South African operations; specific deadlines for executing those changes; and a regular process of monitoring and reporting on the implementation of Harvard's policies with respect to such companies.

I

In, 1978 the ACSR extensively studied and issued a unanimous report on the shareholder responsibility issues raised by Harvard's investments in companies doing business in South Africa. The Committee first concluded that South Africa presented unique issues of shareholder responsibility and that Harvard should therefore develop special policies for its investments in companies doing business there (hereinafter referred to as portfolio companies).

The Committee concluded that if a company decided to continue to do business in South Africa, it should adopt practices and policies aimed at eliminating all aspects of apartheid in the workplace (including unequal pay and the underrepresentation of non-whites in management and supervisory positions) and improving employees' lives outside the workplace in such areas as housing, schooling, and health facilities; establish an adequate minimum wage; and adopt policies permitting non-white employees to engage in collective bargaining. The Committee also concluded that U.S. banks should not make loans to the South African government or its public corporation.

Finally, the ACSR concluded that divestiture by Harvard might be appropriate in cases where companies have shown "intransigence in adopting policies advocated by Harvard" or where "management policy has demonstrated direct and substantial support of apartheid," as, for example, by making loans to the South African government.

In 1978 the Harvard Corporation adopted many of the ASCR's specific recommendations and enunciated four basic policies which have, since 1978, guided the decisions of the CCSR and formed the basic framework for the ACSR's recommendations to the CCSR:

1. Harvard does not invest in companies that conduct a majority of their business in South Africa.

2. With regard to companies doing less than 50% of their business in South Africa, Harvard will exercise its rights as a shareholder by voting in favor of resolutions that: a) encourage the use of enlightened employment practices and affirmative actions designed to improve the skills, opportunities, and the quality of life for the black majority of South Africa; b) encourage reasonable disclosure of information that is not already available and that is necessary in order for shareholders to exercise judgment with regard to the company's practices; c) call for withdrawal of the company entirely from South Africa, but only in cases where its presence clearly does more to strengthen apartheid than to ameliorate it or where the company is intransigent over a substantial period of time with regard to the implementation of ethical employment practices.

3. With regard to companies doing less that 50% of their business in South Africa, Harvard will consider divestiture for ethical reasons only when the company has substantially failed to implement reasonable ethical standards, defined as the Sullivan Principles or equivalent policies, when "persistent efforts over a substantial period of time to persuade the company to change its policies have demonstrably failed," and where there is clearly no hope for improvement.

4. Harvard does not invest in debt securities of any bank that makes loans to the government of South Africa.

To evaluate the affirmative employment practices of those companies in which Harvard holds stock the CCSR has relied on the annual Sullivan Principle reports prepared by Arthur D. Little, Inc., the Investor Responsibility Research Center South Africa Review Service publications, and correspondence with companies that do business in South Africa. The Sullivan Principles are six principles originally developed to guide American-owned companies operating in South Africa. For a signatory company to be rated by Arthur D. Little, Inc., which monitors implementation of the Sullivan Principles, it must meet nine basic requirements with respect to nonsegregation of facilities, equal and fair employment practices for all employees, and equal pay for equal work (principles one through there). Once a signatory has passed the basic requirements, the rating process evaluates how the company has progressed in the areas of education for non-employees, training and advancement and community development (principles four through six). The Sullivan requirements are periodically tightened to keep pace with economic conditions and to promote changes within and external to South Africa.

This past year the CCSR proposed and, with the support of the ACSR, initiated a program of intensive dialogue with several of the portfolio companies who are not Sullivan signatories in good standing. This dialogue has consisted of correspondence and personal meetings between the Secretary of the CCSR and company representatives. The CCSR has also written to the other portfolio companies who are not Sullivan signatories in good standing, and intends to engage in more intensive dialogue with them in the near future. The CCSF has stated that it will, as a general guideline, recommend divestment of a company that has failed to show, within a year after intensive dialogue is initiated, reasonable signs of progress in demonstrating compliance with Harvard policies. The CCSR has not accepted the ACSR's 1983 recommendation that Harvard not in the future invest in any company that is not a Sullivan signatory in good standing.

II

Six of twelve members of the ACSR join in this part of the Report, which outlines their case for Harvard's careful and responsible divestiture of its holdings in companies doing business in South Africa.

A. The South African Regime's Unique Position

The South African regime is in a unique category: its constitution and laws transgress the basic truth that all people are created equal. To that truth--that veritas--this University has always been dedicated.

There are many issues, e.g. the manufacture of nuclear weapons, on which good people will disagree. Apartheid--to members of this University--is not such an issue. It is unique. Virtually all regard it as an offense against moral truth. Our response to apartheid therefore does not set a precedent. It seems to us unlikely that any other evil in the world could at present rally such uniquely universal abhorrence with in the University or require such a unique response.

B. The Best Response to Apartheid

The issue for Harvard therefore has been--and remains--not whether it will oppose apartheid, but how.

As to the how, there would seem to be only two possible responses by Harvard.

One response is for Harvard to stay invested in American companies in South Africa in the hope that by their implementation of the Sullivan Principles (or something similar) they will help ameliorate the conditions of the oppressed minorities there.

The other response (ours) begins by noting that less than 1% of the black work force of South Africa is employed by American companies. Even if Harvard could get all the companies in which it is invested in South Africa to implement the Sullivan (or similar) principles--something that we have never succeeded in doing--we would still "ameliorate" the lives of less than I percent of the black population. This short-term amelioration for a fractional few must be set against the support which the presence of American companies in South Africa provides to the regime. We know the critical importance which the South African regime attaches to the legitimizing support which the presence of American companies presently provides.

It should also be noted that, while U.S. firms employ less than 1 percent of the black work force in South Africa and account for only 17 percent of foreign investment there, they dominate several strategic sectors: energy, computers, motor vehicles, and mining. In a critical way, then, some of the U.S. firms in which Harvard is invested contribute directly to the support and perpetuation of apartheid.

C. Chances of Success

We do not entertain such high expectations of divestiture. We do not think Harvard's action alone will lead directly or immediately to the elimination of apartheid. Our realism cannot be taken as argument against divestiture, however Public conscience changes very slowly, and only by immense, relentless, cumulative effort. In our moral decision making, either individually or corporately, we cannot expect to "succeed" in a direct cause-and effect way.

If we were to insist on "getting results" from each responsible action of conscience, then who would ever write a letter to a senator.' We act in the faith and in the hope that others will join us, that we can contribute in our own small way to the arousal of the public conscience. We cannot expect--or bargain in advance to see the precise results of our commitments before we make them. We must do what we believe is right and hope that what we do will contribute to the eventual success of what we believe is right.

D. The Cost to Harvard

It almost goes without saying that sometimes "doing the right thing" is costly. It is certainly necessary to ask what the "cost" would be for Harvard were it to undertake divestiture.

We believe that there is now strong evidence that a carefully executed divestiture and reinvestment in a "clean" portfolio would "cost" the University far less than was estimated in the 1978 Advisory Committee Report.

1. Virtually all "one-time" costs could be eliminated by a policy that accorded the Corporation a sufficiently long period to sell the affected stocks it now owns. such a period might be seven years, the average length of a modern business cycle.

2. We do not believe donations to the University would be affected by anything like the $3 million estimated in 1978.

It should be noted that the only donations presently being withheld from the University are those of a large number of people who feel strongly that Harvard should divest in South Africa.

In sum, the financial cost (if any) of "doing the right thing" would not be such as to undermine Harvard's mission.

III

Harvard's policies since 1978 have been principally aimed at encouraging portfolio companies to end apartheid in the workplace and improve conditions and opportunities for the non-white employees and their families.

The record since 1978 indicates that Harvard has failed to enforce its existing policies with sufficient vigor; that the content of these policies should be expanded and strengthened; and that a regular system of monitoring and reporting the implementation of Harvard's policies should be instituted.

A. Past Implementation of Existing Policies

Harvard's efforts to implement existing policies have been inadequate. Not a single divestment has been made despite continued or intermittant Harvard ownership over several years of companies who have not demonstrated compliance with the Sullivan Principles or their equivalent. Efforts at dialogue between Harvard and portfolio companies have until this year generally been limited to written correspondence, and there has been little sustained followup when such correspondence failed to secure compliance.

B. Strengthening Existing Policies

We believe that the following steps are appropriate:

1. Harvard should, in cooperation if possible with sister institutions and the administrators of the Sullivan Principles, expand the scope and strengthen the content of the existing principles defining the ethical responsibilities of companies with South African operations in relation to employment conditions and other opportunities enjoyed by non-white employees and their families. Recently the ACSR and the CCSR endorsed several shareholder proposals calling on U.S. companies with South African operations to embrace goals recently enunciated by Bishop Desmond Tutu. Some of these goals go beyond the Sullivan Principles and the principles of socially responsible behavior adopted by Harvard in 1978. Bishop Tutu has called on U.S. companies to help ensure that workers' families should be allowed to live with them; to permit unionization by black workers; to promote labor mobility by opposing influx controls; and to make "massive" investments in educational and training programs for blacks of a sort that have credibility in the black community.

We believe that Harvard's existing policies should be expanded to include and implement these policies, which have already been endorsed (in the contest of votes on shareholder proxy resolutions) by both the CCSR and ACSR.

We believe that portfolio companies should commit themselves to implement these policies. If a company is unable to achieve compliance within a specific period of time it should withdraw from South Africa or Harvard should divest.

If U.S. companies are unable to implement the Tutu principles because the South African government actively proscribes them as a violation of South African law, then withdrawal is the proper course.

The Tutu principles need further specification and a system for monitoring implementation. We believe that these steps can best be accomplished on a multilateral basis through cooperation with other institutional investors, the IRRC, and the administrators of the Sullivan Principles. These multilateral monitoring practices should be expanded to include the Tutu principles.

We also believe that a deadline should be established to ensure prompt implementation of the Tutu principles. We believe it appropriate to set an outside deadline of three years for substantial compliance by portfolio companies with the Tutu Principles. If such compliance is not achieved within the deadline, divestment should automatically follow.

2. Harvard, in cooperation if possible with other institutional investors, the IRRC, and the administrators of the Sullivan Principles, should develop information on the direct involvement in apartheid of U.S. firms, including those supplying computers and electronic equipment, petroleum, and motor vehicles to the South African police and military. It should, on a multilateral basis if possible, seek through dialogue, publicity, and other means to bring about the elimination of such involvement. Harvard should in cooperation with others if possible, develop specific principles defining the types of direct support for apartheid that should be eliminated. If portfolio companies fail to achieve substantial compliance with such principles within three years. Harvard should call on such companies to withdraw from South Africa. If they refuse to do so, Harvard should divest.

3. To the extent consistent with its role as an independent university. Harvard should support governmental initiatives to end apartheid and seek in its role as investor to persuade portfolio companies to accept such initiatives.

C. Ensuring Future Implementation of Harvard's Policies

1. Harvard should make an annual report to the Harvard community concerning its portfolio companies. The report should (a) identify the current number of such companies; (b) provide information concerning extent of compliance by each company with the Sullivan Principles or their equivalent, the Tutu Principles, and the principle forbidding direct support of the apartheid apparatus; (c) describe the number of portfolio companies with South African operations that have been the subject of dialogue during the past year, the nature of such dialogue, and its results (including divestment).

2. The Management Company should annually report to the CCSR and the ACSR concerning its policies and practices with respect to the acquisition and evaluation of information concerning the South African operations and policies of companies which it is considering for investment.