Blackrock’s Larry Fink on What Investors Expect

In his recent annual letter to CEOs, Larry Fink once again put corporate leadership on notice that ownership is watching and will act, particularly in these turbulent times.  

Mr. Fink, the head of BlackRock,the world’s largest asset manager, reminded CEOs that just because investors are thinking long term does not mean that they have infinite patience. Investors are looking for corporate leadership in the boardroom and the C-suite to deploy assets for sustainable value creation, including investments in people, not just to goose short-term stock prices:

He writes,

“Companies have begun to devote greater attention to these issues of long-term sustainability, but despite increased rhetorical commitment, they have continued to engage in buybacks at a furious pace. In fact, for the 12 months ending in the third quarter of 2016, the value of dividends and buybacks by S&P 500 companies exceeded those companies’ operating profit. While we certainly support returning excess capital to shareholders, we believe companies must balance those practices with investment in future growth. Companies should engage in buybacks only when they are confident that the return on those buybacks will ultimately exceed the cost of capital and the long-term returns of investing in future growth.”

In addition to investing in worker training, Mr. Fink called on companies to step forward to provide new solutions to our troubled and inadequate retirement system;

“[A]s major participants in retirement programs in the U.S. and around the world, companies must lend their voice to developing a more secure retirement system for all workers, including the millions of workers at smaller companies who are not covered by employer-provided plans. The retirement crisis is not an intractable problem. We have a wealth of tools at our disposal: auto-enrollment and auto-escalation, pooled plans for small businesses, and potentially even a mandatory contribution model like Canada’s or Australia’s.

“Another essential ingredient will be improving employees’ understanding of how to prepare for retirement. As stewards of their employees’ retirement plans, companies must embrace the responsibility to build financial literacy in their workforce, especially because employees have assumed greater responsibility through the shift from traditional pensions to defined-contribution plans. Asset managers also have an important role in building financial literacy, but as an industry we have done a poor job to date. Now is the time to empower savers with new technologies and the education they need to make smart financial decisions. If we are going to solve the retirement crisis – and help workers adjust to a globalized world – businesses need to hold themselves to a high standard and act with the conviction that retirement security is a matter of shared economic security.”

Push to Get Rid of Another Crucial Shareholder Protection: SOx 404

Business groups want to soften a Sarbanes-Oxley rule that requires companies to have auditors weigh in on their “internal controls”—the policies and procedures intended to prevent errors or fraud on their financial statements.Sarbanes-Oxley requires companies to evaluate whether these controls are effective and to have their auditor pass judgment on that assessment. Shareholder advocates say the rule, known as Section 404(b), helps ensure companies are giving accurate numbers to investors. Groups like the U.S. Chamber of Commerce say the rule is too costly and burdensome for small companies.

Source: Why Stop at Dodd-Frank? Some Want Trump’s Regulatory Overhaul to Go Further – WSJ

Latest Dodd-Frank reversal bill could exempt a third of public companies from giving auditor warning – MarketWatch

ValueEdge Advisors Vice Chair Nell Minow is quoted in this story about a possible proposed change to Dodd-Frank that would make it easier for companies to hide accounting problems from their investors, creditors, and suppliers.

 The sweeping package to reform the Dodd-Frank bank reform law introduced in Congress has a provision that would curtail the reporting of accounting problems from about a third of issuers.

Rep. Jeb Hensarling, the Texas Republican who chairs the House Financial Services Committee, has suggested modifications to his legislation introduced last September, according to a memo leaked last week to journalists, that would uproot Dodd-Frank to raise the limit for companies to comply with the requirement for an outside auditor’s opinion on a company’s internal controls over financial reporting, or ICFR.

That requirement was originally mandated by Section 404(b) of the Sarbanes-Oxley Act of 2002. In the memo, referred to by several new outlets who obtained a copy as Choice 2.0, Hensarling doubles the permanent exemption threshold from the original bill of last September, to $500 million in market capitalization from $250 million. The current exemption is $75 million. In Hensarling’s legislation, the exemption was also extended to depository institutions with less than $1 billion in assets.

Nell Minow, a corporate governance expert and the vice chairwoman of ValueEdge Advisors, told MarketWatch, “This is an outrage. It isn’t just that investors and consumers will not have this information; the more significant problem is that knowing it will not be public, boards will think they do not have to investigate and make corrections.”

The Dodd-Frank exemption threshold of $75 million “is a perfectly acceptable number for establishing materiality,” said Minow. “Raising it allows companies to ignore significant problems until they become too big to fix.”

Source: Latest Dodd-Frank reversal bill would exempt a third of public companies from giving auditor warning – MarketWatch

The 100 Most Overpaid CEOs: Are Fund Managers Asleep at the Wheel? New Webinar and Report from As You Sow

The 100 Most Overpaid CEOs: Are Fund Managers Asleep at The Wheel? from As You Sow on Vimeo.

From the report, which can be downloaded here:

According to the Economic Policy Institute, “CEO pay grew an astounding 943% over the past 37 years, greatly outpacing the growth in the cost of living, the productivity of the economy, and the stock market, disproving the claim that the growth in CEO pay reflects the ‘performance’ of the company, the value of its stock, or the ability of the CEO to do anything but disproportionately raise the amount of his pay.”

For the past two years we have highlighted the 100 most overpaid CEOs of S&P 500 companies, and the votes of large shareholders, including mutual funds and pension funds on their pay packages.

What has changed since the first report? Not much. Executive pay has continued to increase. Although mutual funds and pension funds are doing better at exercising their fiduciary responsibility by more frequently voting their proxies against some of the most outrageous CEO pay packages. Of the mutual funds with the largest changes in voting habits from last year, all of them opposed more of the pay packages than they had the prior year.

As we noted in our prior reports, the system in place to govern corporations has failed in the area of executive compensation. Like all the best governance systems, corporate governance relies on a balance of power. That system envisions directors representing shareholders and guarding the company’s assets from waste. It also envisions shareholders

This governance system comes from a time when it was assumed that unhappy investors would simply sell their stakes if sufficiently dissatisfied with the governance of a company. It reflects a time when there were fewer intermediaries between beneficial holders and corporate executives. However, today more and more investors own shares through mutual funds, often investing in S&P 500 index funds. Individual investors are not in a position to sell their stakes in a specific company. The funds themselves are subject to a number of conflicts of interest and to what economists refer to with the oxymoronic-sounding term “rational apathy,” to reflect the expense of oversight in comparison to a pro rata share of any benefits.

The pay packages analyzed in this report belong to the CEOs of companies that the majority of retirement funds are invested in.

Today, those casting the votes on the behalf of shareholders frequently do not represent the shareholders’ interests.

CEO compensation as it is currently structured does not work; rather than incentivize sustainable company growth, compensation plans increase disproportionately by every measure. Too often CEOs are rewarded for mergers and acquisitions instead of improving company performance. As noted in the Financial Crisis Inquiry Report, “Those [compensation] systems encouraged the big bet – where the payoff on the upside could be huge and the downside [for the individual executive] limited. This was the case up and down the line – from the corporate boardroom to the mortgage broker on the street.”2 We note that the downside, which could include such features as environmental costs, may be limited for the individual, and instead borne by the larger society.

Paying one individual EXCESSIVE amounts of money can lead people to make the false assumption that such compensation is justified and earned. It undermines essential premises of capitalism: the robust ‘invisible hand’ of the market as well as the confidence of those who entrust capital to third parties. Confusing disclosure coupled with inappropriate comparisons are then used to justify similar packages elsewhere. These systems perpetuate and exaggerate the destabilizing effects of income inequality, and may contribute to the stagnating pay of frontline employees.

As the report is now in its third year, we have the ability to look back and see what happened to the companies identified in our report two years ago. We’ve been saying the most overpaid CEOs under-deliver for shareholders. In examining this data from the following two years of our report, we have found dramatic results— not only does the group of 100 most overpaid CEO companies of the S&P 500 underperform the S&P 500 by 2.9 percentage points, but the firms with the 10 most overpaid CEOs underperformed the S&P 500 index by an amazing 10.5 percentage points and actually had a negative return, reducing the actual value of the companies’ shares by 5.7 percent. In summary, the firms with the most overpaid CEO’s devastated shareholder value since our first report published in February 2015.

Identifying the 100 most overpaid CEOs in the S&P 500 was our purpose in writing this report. In undertaking this project we focused not just on absolute dollars, but also on the practices we believe to have contributed to bloated compensation packages.

Shareholders now supposedly have the right, since the enactment of the Dodd-Frank financial reform act, to cast an advisory vote on compensation packages. However, in today’s world, most shareholders have their shares held and voted by a financial intermediary. This means that this critical responsibility is in the hands of a fiduciary at a mutual fund, an ETF, a pension fund, a financial manager, or people whose full time job is to analyze the activities of the companies they invest in and monitor the performance of their boards, their CEOs, and their compensation.

A key element of the report has been to analyze how mutual funds and pension funds voted on these pay packages. This year we vastly expanded the list of funds we looked at. In response to excessive and problematic CEO pay packages, it should be noted that every fund manager has the power to vote against these compensation plans and withhold votes for the members of the board’s compensation committee who created and approved them. In some cases, institutional investors should request meetings with members of the compensation committees to express their concerns. Institutional investors should be prepared to explain their votes on executive pay to their customers, and individuals should hold their mutual funds accountable for such decisions by expressing their displeasure directly to those that are also well compensated to protect and represent them.

 

 

 

Funds ‘Rubber-Stamp’ CEO Pay Slightly Less Often: Report | Bloomberg BNA

Shareholder activism and public pressure around executive compensation may be having an effect on how mutual funds vote on pay packages at companies they invest in.Mutual fund giants such as BlackRock Inc. and Vanguard Group have been called out by shareholder advocates in the past for “rubber-stamping” pay plans, but research from As You Sow shows they are voting against compensation deemed excessive a bit more often.The shareholder advocacy group came up with a list of 100 chief executive officers in the S&P 500 whose pay it considered too high based on financial performance and other factors. It then looked at voting records across 25 mutual fund families and found that average support for “overpaid” CEOs has declined somewhat, from 82 percent to 76 percent, over the past year.

Source: Funds ‘Rubber-Stamp’ CEO Pay Slightly Less Often: Report | Bloomberg BNA

Lazard’s Jim Rossman Studies Shareholding to Help Fight Activists – Bloomberg

[Jim] Rossman, who heads the corporate preparedness group at Lazard, has expanded his team globally to more than a dozen activist-defense bankers over the past three years. Among their tasks is a comprehensive study of every investor reporting holdings in any of 1,000 companies, including all of the S&P 500 constituents. The bankers are calculating how much of each stock is owned by an exchange-traded fund, a mutual fund, a hedge fund, or other asset manager. That way, Rossman says, he can start to predict how influential an activist investor may be.

“If you are the CEO of a very large or midsize company in the United States, you’ll find that 30 to 40 percent of your stock is being managed by no one you can talk to,” Rossman says. “That raises an issue, right?”

The flood of money into ETFs has posed a special problem for CEOs: How do you influence investors who are automated?

Rossman’s thesis is that activists could gain more clout as stock ownership is concentrated among fewer owners, with funds shifting to indexed strategies.

Source: Lazard’s Jim Rossman Studies Shareholding to Help Fight Activists – Bloomberg

ExxonMobil CSR Advisor Resigns, Cites ‘Targeted Attacks’ on NGOs

Citing “targeted attacks” on environmental NGOs under former CEO Rex Tillerson’s leadership, a research scholar on business and human rights says she will no longer serve as an advisor with ExxonMobil.

Sarah Labowitz, who co-founded the New York University Stern Center for Business and Human Rights with Michael Posner in 2013, told the Huffington Post that the company’s response to public criticism pushed her cut to any ties with ExxonMobil.

In a letter sent to Ben Soraci, president of the Exxon Foundation, Labowitz said ExxonMobil’s litigation strategy “undermines the democratic principles of our society and the vital role that civil society plays in it.”

Source: ExxonMobil CSR Advisor Resigns, Cites ‘Targeted Attacks’ on NGOs

Why the Fiduciary Rule is Essential for the Economy

On Feb. 3 Trump also signed a presidential memorandum instructing the Labor secretary to evaluate a specific regulation placed on financial advisers.

Known as the fiduciary rule, it requires brokers in charge of retirement plans to act in their clients’ best interest.

The rule is set to take effect on April 10, but that may not happen now. Financial columnist Terry Savage thinks the average American investor, who puts their faith and money in the hands of investors, will suffer if the safeguard is scrapped.
“This fiduciary standard was so needed,” Savage said. “Doing away with it is like saying, ‘OK, go ahead and cheat little old ladies and little old men if they retire with these rollovers and are wondering what to do with their money.’”

Will Trump kick-start the engine of investment by cutting regulatory red tape or leave Main Street investors vulnerable by ditching consumer protections?

Watch a discussion of the fiduciary standard with two of our favorite experts, Terry Savage and William Birdthistle.

Are Fund Managers Asleep at the Wheel? Which Funds Enable Excessive Pay?

Excessive executive compensation is a core contributor to America’s extreme and growing income inequality. CEOs have come to be grossly overpaid, and that overpayment is bad for the companies, the shareholders, the customers, and the other employees. The 100 Most Overpaid CEOs 2017, the third in a series from As You Sow, is designed to provide investors an overview of companies that overpay their CEOs, and a look at which pension and mutual funds too often vote to approve pay. The webinar, featuring report author Rosanna Landis Weaver of As You Sow and other leading compensation experts, will present the report findings and offer attendees the opportunity to pose questions to the panelists.

Register here.