The Intergovernmental Panel on Climate Change (IPCC) will include more information on the impact of climate change on extreme weather risk:
“With flooding, hurricanes and other extreme weather causing devastating impacts on people and ecosystems, an important section of the report will be the science of attributing extreme events to a changing climate. “The reports will look at climate impacts already being felt as well as projections as the climate changes in the future. It is global in scope, covering land and ocean from the equator to the Poles. It importantly recognizes nature including looking impacts of climate change on species, ecosystems and biodiversity.”
Is Equifax the Next Enron? VEA vice chair Nell Minow appears on the Motley Fool Money podcast to talk about Equifax, Hurricane Harvey, corporate leadership on climate change, and the 2017 summer box office.
Gretchen Morgenson writes in the NY Times about efforts to roll back the post-Enron reforms of Sarbanes-Oxley. It is astounding to imagine that the very provisions that restored trust in public companies after the series of accounting frauds of the Enron era are already being described as burdensome and costly.
What is burdensome and costly, of course, is financial fraud. We cannot imagine how executives can argue that neither investors nor insiders need to know whether their internal controls are effective. Morgenson says:
Seismic accounting scandals like the ones that sank Enron and WorldCom in the early 2000s have, happily, been scarce in recent years. But they may well resurface if elements of the Sarbanes-Oxley Act, the law created to curtail accounting fraud, are rolled back as some corporate executives are urging.Tom Farley, president of the NYSE Group, which operates the New York Stock Exchange, is among those leading the charge. In congressional testimony in July, he criticized the law’s provision requiring auditors of publicly held companies to report on and attest to management’s assessment of internal controls on financial reporting. The requirement is costly and burdensome to companies, Mr. Farley said, and helps to explain why the number of public corporations in the United States is declining.He urged lawmakers to review the requirement because markets had evolved since it became law.
On July 26, at the annual shareholder meeting of McKesson, the nation’s largest distributor of pharmaceuticals, including opioid drugs, shareholders refused to approve the company’s generous executive-compensation plan after the International Brotherhood of Teamsters—which holds stock in McKesson—campaigned against it, citing the company’s “role in fueling the prescription opioid epidemic.” McKesson rejected that characterization, and denied that it had any such role. Calling the opioid, heroin, and fentanyl epidemic “complicated,” Jennifer Nelson, a spokesperson for McKesson, told me that “in our view, it is not to be laid at the feet of distributors.” The Teamsters, she charged, were trying to use the addiction crisis to their advantage in their ongoing labor dispute with the company involving the union’s efforts to represent workers at a McKesson distribution center in Florida.<P><P>The shareholder vote, which isn’t binding—McKesson says it’s still reviewing its current compensation plan—may seem like a minor slap over an esoteric bit of corporate governance, but it was a notable exception among public companies. According to the consulting firm Compensation Advisory Partners, of 447 say-on-pay votes among S&P 500 companies this year before early August, only five, including McKesson, suffered rejection. The Teamsters view the outcome as a success, especially at a time when unions’ power has waned. “Unions have been pushing for years for standard good-governance practices” in companies, says Michael Pryce-Jones, the union’s senior governance analyst. “This has importance across political divides.”
As Equifax acknowledges a massive security breach making the names, addresses, social security numbers and more available for fraud and disruption and it appears executives, including the CFO, sold stock before making this information public, it also comes out that Equifax lobbied to make it more difficult for consumers to get damages for exactly this kind of abuse.
Equifax’s lobbying group argued against the prohibition even as it acknowledged that a 2015 government study found “that credit reporting constituted one of the four largest product areas for class action relief” for consumers. Consumer groups countered the claims of CDIA and other rule opponents by saying the ability to file suit is necessary to protect Americans’ legal rights.
I’ve written earlier pieces about the failure of the people who manage our money, especially our retirement savings to provide essential feedback to the companies whose stock they buy on behalf of more than 40 percent of working Americans, charging us as many as 16 undisclosed fees and usually voting against shareholder initiatives on improving board, increasing the link between CEO pay and performance, and making better disclosures on climate change, cybersecurity, diversity, and other issues relating to investment risk and corporate reputation. There’s been a little bit of progress at Vanguard, one of the most powerful and influential money managers, with more than three TRILLION dollars invested, so I asked one of the most thoughtful leaders in this field, Tim Smith of Walden Asset Management, some questions about why that is important and what it means.
How much stock in big American companies is controlled by these firms? How much money is involved?
These are massive investment firms. BlackRock has over $5 trillion dollars in Assets they are managing and Vanguard approximately $3.5 trillion. The raw size of their holdings results in having tremendous power with the companies they own. Most firms that have outreach to their primary investors always make sure to arrange visits with Vanguard and BlackRock as a necessary stop.
Why does it matter how they vote on topics like climate change and disclosure of political contributions when even a 100 percent vote is advisory only and does not require the company do anything?
Shareholder resolutions filed on social and environmental issues have a 45 year history as investors raise important environmental , employee relations, human rights, workplace health and safety issues among others. These resolutions and the engagements that accompany them have had a significant long-term impact on company policies and practices. There are literally hundreds and hundreds of examples of companies responding positively to investor input by
* expanding their corporate disclosure for investors and the public
* changing their policies, practices, and behavior
* updating governance policy
*taking forward-looking steps on an issue like climate change
*making sure hazardous products are removed from food or a production process influencing workers.
*adding diverse candidates to the Board
And the list goes on. Whether a shareholder resolution is binding or not seems immaterial . Companies often see these issues as affecting their reputation and their credibility with investors or consumers as well as affecting them financially over time. Thus many companies take action stimulated by the case being made by investors — but also by their own sense of how acting in a responsible way is good for their business and long term shareholder value.
So how investors vote is vitally important because it is a clear indicator of how a company’s shareowners feel about an issue. To blindly vote for management in virtually all cases not only distances the investor from important decisions that affect them financially but is far from acting as a “responsible fiduciary.” In short, it definitely matters how they vote your shares!
How can people find out whether fund managers oppose climate change initiatives or support outrageous CEO pay?
Every mutual fund company files a form NPX each August disclosing how they vote. So there is a public record. In addition Ceres, the environmental organization, summarizes how funds vote on climate related issues, a good indicator of an investment firm’s voting stance. You can see which funds vote for climate resolutions 0 percent of the time or 15 percent or over 50 percent.
What have you been doing to try to get Vanguard and Blackrock to be more transparent and engaged in share ownership rights like proxy voting?
Over the last several years companies like BlackRock and Vanguard which had a consistent record of voting against all social and environmental resolutions faced growing pressure from clients and investors. In addition, media attention compared them unfavorably to companies like State Street which showed real forward progress in proxy voting. In addition, PRI expects its members to demonstrate seriousness in being an “active owner.”
Walden Asset Management, where I serve as Director of ESG Shareowner Engagement, led a shareholder resolution to both companies and was joined by other investors as cofilers. This prompted both companies to sit down with us to see if we could come to an agreement allowing the resolution to be withdrawn before the vote. As I said, even non-binding shareholder proposals can have an impact.
Both discussions were productive, leading to agreements, and both companies disclosed their new thinking about proxy voting on their websites, highlighting their deep concern about climate risk and their strong support for diversity on boards of directors.
What does this latest statement from Vanguard signify? Does it go far enough?
These are important steps forward by two of the world’s largest investment managers. Their engagements with companies send a strong message to executives that it is necessary to address and urgently act on climate change, for example. But their voting record is still at the bottom of the ladder. They voted for two resolutions, at ExxonMobil(62.3 percent shareholder support) and Occidental (67 percent shareholder support) but they voted no on dozens of other climate-related resolutions. It’s a start but still demonstrates a very modest voting record. Pressure will doubtlessly mount on these two giants to match their rhetoric with actual votes pressing companies to move with some sense of urgency on key environmental and social issues.
What more would you like money management firms like Vanguard and Blackrock to do?
Vote more aggressively, be transparent about what is put on the table in their meetings with companies (no need to mention companies by name), join other investors in speaking out on key environmental/social/governance issues affecting companies financially, meet with shareholder resolution proponents to better understand their positions, speak publicly about the value of the shareholder resolution process, and make sure will not be eradicated by proposals by led by the Business RoundTable or Chamber of Commerce.
“What exactly are the shareholders getting out of this arrangement?” asked Nell Minow, a governance expert and vice chairwoman at ValueEdge Advisors, a firm that guides institutional shareholders on how to reduce risk in their portfolios. “And what disclosures about this are being made to shareholders?”I asked Wells Fargo those questions and whether the lobbying expenditures were covered by directors’ and officers’ insurance or by shareholders. Ms. Dunn, the spokeswoman, declined to comment.Ms. Minow said the practices were particularly notable because of Wells Fargo’s record.“It might be different if this was a different company,” she said. “But this board, even somewhat reconstituted, has lost so much credibility with investors that this expenditure for lobbyists looks like another in a series of very bad decisions.”
Does a company still deserve a good governance grade if shareholder-friendly reforms also help the chairman cement his power and drive out rivals? South Korea’s fifth-largest family-owned conglomerate, which has $100 billion of assets, won approval from shareholders Tuesday to restructure most of its sprawling business under one holding company….Governance proponents are probably cheering Lotte’s moves, which take the candy-to-chemicals conglomerate’s cross shareholdings to 18 from 67. (Lotte’s chemical and hotel operations remain excluded from the holding company).
But Shelly Banjo argues that this is the right move for the wrong reasons, and it will consolidate the power of the insiders, the family who controls the company with 42.7 percent of the stock.
Though congressional Republicans and the White House rarely see eye-to-eye these days, they are united on the idea that cutting corporate taxes will spur an hiring boom that will reach down to the ordinary worker.
A new report from the Institute for Policy Studies shows this isn’t true. US companies are already paying minimal amounts in corporate taxes, and the ones most likely under Republican theory to pour tax savings into job creation have instead been more likely to cut their workforce over the past nine years. The data shows that low corporate tax rates more often lead to increases in CEO pay and boosts for shareholders.
Before breaking down the report, it’s important to recognize that the 35 percent US corporate tax rate doesn’t reflect what corporations actually pay. The average effective corporate tax rate in the United States, once deductions are factored in, is around 27 percent, putting it below the global average. If you limit the review to profitable corporations, the number drops to 19.4 percent. Corporate taxes as a share of GDP have fallen threefold since 1952, from 6 percent to 2 percent. Far from being overtaxed, corporations have carried an increasingly lighter burden.Corporations avoid the full rate because of loopholes. There are deductions for domestic manufacturing and “bonus depreciation,” which allows immediate write-offs for half the cost of long-term investments. And corporations benefit tremendously from stashing profits overseas, thereby avoiding taxation entirely. These trillions of dollars in “offshore” profits aren’t sitting in a locker in Zurich; they’re invested in instruments like US Treasury bonds. In other words, the government pays corporations for their own tax avoidance.
The IPS report identifies 92 corporations that reported a profit every year from 2008 to 2015, and that also paid less than 20 percent in corporate income tax. These corporate winners include the usual suspects—banks, defense contractors, telecom firms, and energy companies. Because they were profitable, and paid taxes at or below the Republicans’ optimal rate, they offer an excellent test case. “If claims about the job creation benefits of lower tax rates had any validity,” report author Sarah Anderson writes, “the 92 consistently profitable tax-dodging firms we identified would be among the nation’s strongest job creators.”
But the lower rates didn’t correspond to job creation. Collectively, the 92 profitable corporations cut jobs by 0.74 percent over the period studied, from 2008–16. During that same time, the private sector added jobs at a 6 percent clip. So low-tax corporations did far worse on hiring than their counterparts.
Activism drives down director ages. Dissident nominees and directors appointed via settlements (hereinafter Dissident Directors) were younger, on average, than directors appointed unilaterally by boards (hereinafter Board Appointees) in connection with shareholder activism. Study Directors (the combination of Dissident Directors and Board Appointees), regardless of who recruited them, were generally younger than their counterparts across the broader S&P 1500 index. While Dissident Directors generally reflected a wider range of ages, insurgent investors and incumbent boards both favored individuals in their fifties when picking candidates. This preference for nominees in their fifties aligns with practices in the broader S&P 1500 index over the same period.
Activism does not promote gender diversity. Less than ten percent of Study Directors were women. While the rate at which females were selected as dissident nominees or Board Appointees in contested situations increased over the course of the study, it trailed the rising tide of female board representation in the broader S&P 1500 universe. There were zero female Dissident Directors in 2011, two in 2012, and three in 2013. Similarly, there were two female Board Appointees in 2011, but zero in both 2012 and 2013.
Activism does not promote racial/ethnic diversity. Less than five percent of Study Directors were ethnically or racially diverse. While minority representation across the entire S&P 1500 board universe slowly increased over the course of the study, from 9.3 percent in 2011 to 10.1 percent in 2015, the rate at which individuals with diverse ethnic and racial backgrounds were selected as Dissident Directors and Board Appointees was relatively uniform and trailed that of the broader index by more than five percentage points.
Activism boosts boardroom independence. Study Directors were generally more independent than their counterparts across the broader S&P 1500. Not surprisingly, dissident nominees and directors appointed to boards via settlements were more likely to be “independent” than directors appointed unilaterally by boards in connection with shareholder activism. It is worth pointing out that the measure of “independence” focused on a nominee’s degree of separation from management rather than from the dissident. Indeed, as the examination of prior boardroom experience suggests, there may be questions of independence from activist sponsors for a subset of Study Directors.
Prior boardroom experience is not required. Boardroom experience does not appear to be a prerequisite for contest candidates. More than half of Study Directors held outside board seats. While most of these directors sat on either one or two outside boards, a sizable minority pushed the over-boarded envelope. Six Study Directors served on four outside boards, four on five outside boards, and one on six outside boards. Many of these “busy” directors appear to be “goto” nominees for individual activists. The serial nomination of favorite candidates raises questions about the “independence” of these individuals from their activist sponsors.
Investment professionals and sitting executives dominate the candidate pool for contested elections. Occupational data for the Study Directors demonstrates experience, qualifications, attributes, and skills (EQAS) preferences for nominees in contested situations. “Corporate executives” and “financial services professionals” were in a dead heat at the front of the pack. These favored occupations were not evenly distributed, as activists tended to select investors and incumbents tended to select executives. In fact, Dissident Directors were nearly three times more likely to be “financial services professionals” than Board Appointees, while Board Appointees were nearly twice as likely to be “executives” than Dissident Directors.
