BOSTON: Socially concerned investors have filed a shareholder proposal asking Dean Foods to report to shareholders how it is responding to widespread concern that industrial-scale organic dairies, supplying milk for its Horizon brand, violate consumer trust, seriously jeopardizing share value.

The shareholder proposal is a by-product of a five-year debate in the organic industry over the introduction of large-scale factory-style dairy farms, milking as many as 5,000 cows each. It is the contention of a growing number of public interest, environmental, and farming groups that some of these farms are violating current USDA regulations by labeling their products as organic.

Last year, The Cornucopia Institute, a Wisconsin-based farm policy group, filed formal complaints with the USDA against three industrial dairies, including allegations that these mega-farms, in the arid West, were violating the law by confining their cattle to feedlots and sheds rather than grazing as the organic regulations require. The dairy farms in question include one owned by Dean Foods in Idaho and another California farm shipping milk for distribution under the Horizon label. Because of inaction by the USDA the Institute is now preparing to seek court intervention in order to compel the agency to investigate the alleged improprieties.

"When consumers pay a premium for organic milk, they generally have the expectation that cows have access to pasture and gain a sizable percentage of their nutrients from grass," said Steven Heim, director of social research with Boston Common Asset Management, representing institutional shareholders in the resolution process. "Besides complying with the law itself, we question whether Dean's procurement of milk from factory farms violates consumer trust and jeopardizes the value of its organic brands," Heim added. Dean Foods, the nation's largest milk marketer, also became the largest U.S. marketer of organic dairy products when it acquired the Horizon Organic, Alta Dena, and Organic Cow of Vermont brands.

The resolution asks the company to appoint an independent committee of the board to review its policies and procedures for sourcing raw milk for its organic dairy products, and whether its policies and procedures promote the spirit as well as the letter of the official rules defining organic dairy products.

The investor groups also want to know how the company intends to respond to increasing consumer and media criticism, and whether a proposed $10 million investment in an additional large-scale dairy farm will mitigate or exacerbate the criticism.

Dean Foods, whose core business has been somewhat stagnant in recent years, has touted its investments in the organic milk labels and the country's leading soy milk brand, Silk, as vehicles to make its stock more attractive on Wall Street.

"We are concerned that Dean Foods' lack of transparency to its shareholders betrays a similar attitude toward its core consumers, particularly consumers of its Horizon brand products. 2000 to 5000 cow industrial dairies are antithetical to the concept of organic farming, which supports family-scale production with sound environmental policies," said Daniel Stranahan of the Needmor Fund, another investor-sponsor of the resolution.

Dean Foods responded to this shareholder proposal by having its lawyers file a formal protest with the U.S. Securities and Exchange Commission (SEC), asking for permission to omit it from Dean's 2006 proxy statement on a series of legal technicalities. Their principle objection is that where the company purchases or produces its milk is within the sole purview of its management, and shareholders have no legal right to raise questions of this nature. A SEC decision on the company's protest is expected soon.

The investors contend that in light of the controversy, the company's milk procurement practices have become a legitimate policy concern of shareholders and could have a significant negative effect on consumer trust in the organic label. The negative press has already led to some retailers dropping the Horizon brand. "It is very unfortunate that instead of addressing the core concerns articulated in this shareholder resolution, that the company has instead decided to invest its resources in legal maneuvers to prevent its investors from voting on this resolution," said Margaret Weber, Coordinator of Corporate Responsibility with the Adrian Dominican Sisters.

Leslie Lowe, director of the environment program at the Interfaith Center for Corporate Responsibility in New York, said, "Dean Foods has an excellent opportunity to return value to its shareholders through its investments in the organic industry. But they must respect the ethical beliefs of their organic customers, a very loyal and sophisticated market segment. Otherwise these investments could end up damaging their brand and costing investors dearly."

Boston Common Asset Management

Boston Common Asset Management

Boston Common Asset Management is an employee-owned investment firm dedicated to the pursuit of financial return and social change. We offer social investors an unrivaled range of customized social investment products. These include U.S. core- or value-oriented equity and balanced accounts, as well as international and small cap options. Our efforts on the social dimension include thorough independent research, tenacious shareholder advocacy, and community development investing.

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