Advocacy groups launched petitions and sent letters on Wednesday urging two of the biggest U.S. public pension funds to divest from an investment fund unless it stops paying one of President Donald Trump’s companies to run a New York hotel.<P><P>Reuters reported on April 26 that public pension funds in at least seven U.S. states periodically send millions of dollars to an investment fund that owns the upscale Trump SoHo Hotel and Condominium in New York City and pays a Trump company to run it, according to a Reuters review of public records.
Our favorite expert on CEO pay, As You Sow’s Rosanna Landis Weaver, likes Steven Clifford’s new book, The CEO Pay Machine: How it Trashes America and How to Stop It. We recommend the book and Weaver’s review:
Clifford takes apart all the components with a fresh eye. He is skeptical, for example, of the mantra of pay for performance. He notes that bonuses that don’t change behavior are a waste of money, and that many that do change behavior may change it for the worse. “All pay-for-performance systems cause more harm than good,” he writes. “They generate perverse incentives, undeserved and often absurdly high bonuses, and damage the companies that use them.” … He also speaks with great insight about the role of directors. “It’s impractical, if not impossible,” he notes, “for board members committed to being supportive players on the team to transform themselves into hard-nosed negotiators.”
Corporate America has captured the Trump administration. Public Citizen’s research has found that more than 70% of Trump’s picks for top sub-Cabinet jobs have clear corporate ties.In Trump’s Washington, the populism of the campaign has been overtaken by conventional corporate cronyism on a grand scale. After his famous pledge to “drain the swamp,” Trump issued a weak executive order allowing former lobbyists to immediately join the administration and then granted waivers to top White House staffers that render the ethics rules largely meaningless.
The Washington Post reports that the Chamber of Commerce, Washington’s most powerful pro-corporate lobby, is having its own governance problems as some of its members are uncomfortable with the positions the Chamber is taking and one group is trying to break off.
The board of the U.S.-India Business Council — whose membership includes the chief executives of Pepsi and MasterCard — has voted unanimously to break off from the U.S. Chamber of Commerce, saying that “recent actions taken by the Chamber have left us with no alternative but to take this vote to formally separate.”The vote by 29 USIBC board members was the culmination of a running battle with U.S. Chamber of Commerce President Thomas J. Donohue that dates back to 2010 and which came to a boil during the recent visit to Washington by Indian Prime Minister Narendra Modi…
The fight between the USIBC, which has about 350 members, and the Chamber was largely about turf and independence. A member of the USIBC board said that Donohue was unhappy that the USIBC invited Vice President Pence to a meeting because Donohue wanted to invite Pence to a different event.
A person close to the USIBC board said that Donohue also wanted to oust certain members of the USIBC board and install others, moves that would be unprecedented in the history of the council.
Donahue is arguing that the USIBC cannot be split off from the Chamber.
Steven Mufson asks if this is a sign that the Chamber’s influence is slipping. The very size and power of the Chamber has led to schisms over policies on issues like health care and climate change.
Companies like GE, which long relied on the Chamber to be their guide and advocate in Washington, are now as politically sophisticated and connected as the Chamber — if not more so. And in an era that allows virtually unlimited independent political spending, they can form their own more focused, and perhaps more effective, associations. Many lobbyists who represent companies individually think the Chamber has taken on the lumbering character of its aging building, a 92-year-old limestone edifice lined with Corinthian columns overlooking the White House.
In its annual report, released Tuesday, the Conference Board found that among Standard & Poor’s 500-stock index companies that were in the bottom group of performers — as ranked by their total shareholder return — the CEO succession rate jumped five percentage points, from 12.2 percent in 2015 to 17.1 percent in 2016. That’s well above the 13.9 percent average over the past 16 years, said Matteo Tonello, the Conference Board’s managing director of corporate leadership, and the highest rate since 2002, when 21.2 percent of S&P 500 companies made a change at the top.
Sigh. Another whine about those pesky shareholders from those who insist they are the ultimate capitalists. James R. Copland of the Manhattan Institute, which is funded by right-wing foundations (whose names should be disclosed in published material like this column), writes in the Wall Street Journal that poor McDonald’s should not have to bear the terrible burden of shareholder proposals. He argues that the oxymoronically named CHOICE Act would not go far enough in merely requiring investors to hold one percent of the stock to submit a shareholder proposal; he wants to eliminate all “social” shareholder proposals entirely. Since “ordinary business” proposals are already prohibited, that reminds me of the baseball manager who said that his team couldn’t win home games and couldn’t win away games “so all we have to do is find another place to play.”
According to an SEC survey, it costs more than $100,000 merely to respond to a shareholder proposal and include it on the ballot. The far greater cost comes from the distractions such proposals create for directors and senior executives, as well as the risk that companies will change their policies under pressure.
We are find this self-reported, self-serving number highly suspect. If, as Copland says, the proposals are re-submitted, how expensive can it be to cut and paste the previous year’s rebuttal? How much time can it take for executives and board members to vote to oppose it again?
He also complains that some companies have made changes to respond to shareholder proposals, even if they did not get a majority vote. That’s called a market-based response. Since even a 100 percent vote is advisory only, we have no concerns that the executives and board members who have all of the decision-making power will be unduly persuaded unless the case is effectively made. This is literally why we pay them the big bucks.
I do share some of Copland’s frustration with the shareholder proposal process, however. I wonder if he would be willing to support my suggestion for improvement: no more shareholder proposals, but a strict majority vote standard so that instead of raising issues like the transparency of political contributions and the sustainability of the supply chain through non-binding proposals, a majority of shareholders can simply remove directors who are not satisfactory.
Alex Struc writes perceptively about the reasons behind the growth in ESG funds, from changes in technology to increased regulation.
Shareholder and hedge fund activism has become an influential force in German corporate life over the past 15 years or so, both in terms of corporate governance improvements and value creation, with approximately 400 campaigns launched by 100 (predominantly foreign) activist hedge funds against 200 of the country’s 650 public corporations.
Until recently, it was the threat of hostile takeovers that was deemed the principal corrective for poor management decisions and shareholder value destruction due to performance failures. Today, in Germany it has shifted to active monitoring by engaged or activist value minority investors – characterised by such an alignment of interests with and persuasion of fellow shareholders and institutional investors to generate support in the form of the requisite general shareholders’ meeting (AGM) majorities, if necessary. With 60 to 70 per cent (sometimes an even higher percentage) of the voting stock of leading German corporates owned by foreign institutional investors, this train of thought must be taken seriously.There are two significant factors that help contextualise activist campaigns and market acceptance of shareholder and hedge fund activism in the German corporate governance debate.
Firstly, 60 per cent of all 650 German publicly listed companies are controlled or dominated via share block ownership by families, founders, management teams, investors or holding companies. Thus only 250 German public companies lend themselves to the presumption that activism is dependent on a widely-held, dispersed shareholder ownership/population so that when negotiations with target management break down, the activist may resort to launching a confrontational proxy fight in order to replace some or all members of the supervisory board. They, in turn, may recall the management and replace them with new managers who agree with the activists’ strategic plan.Second, there is a certain consensus-oriented German corporate culture, etiquette and decorum that, over time, has demonstrated how publicity and accusatory campaigns against sitting management or supervisory board, proxy fights or resorting to litigation are by and large unsuccessful strategies, with only 20 per cent of all campaigns ever becoming public knowledge. There has only been one precedent (out of a total of seven attempts) where activists were capable of replacing the chairman of a supervisory board in an adversarial proxy fight – at pharmaceutical company Stada AG in August 2016.
In the view of many, the separation of ownership and control (Berle-Means) and the principal-agent problem (Jensen-Meckling) has recently led to sharp market cap drops and share price value-losses at the expense of shareholders in large DAX 30 German corporations and corporate groups, such as the utilities RWE and E.on, but also TUI, Commerzbank, Volkswagen and Deutsche Bank. It is no secret that concerned institutional investors have initiated discussions with activist hedge funds on these matters (see illustration opposite).
Observers believe that leading activist hedge funds, who acquire usually a minority position in the one to 10 per cent range (seldom more than 15 per cent total, depending on target size), could exert such additional monitoring function on behalf of all shareholders without necessarily destabilising the balance of powers between the AGM (shareholders), supervisory board and management board. First, they are not imposing their views on anybody, least of all management or the supervisory board, but seek to engage and present well-thought out alternative courses of action. Second, they have to win the votes and confidence of fellow shareholders and institutional investors in the first place in order to have any strategic impact.
So, to recap, there have been approximately 400 equity activist campaigns in the past 15 years or so in Germany, attaching to 200 public targets (out of a total of 650 listed companies), mostly hidden from the public.Further, assuming a base line of 400 campaigns, Thamm/Schiereck claim that 75 per cent of these samples have been kept under the lid and were never in the public limelight, on social media or mentioned in the press or legal/economic writings, reflecting the mainly informal approach take in these campaigns….
Interests and strategies of both activist hedge funds and German blockholders defy easy categorisation. Activists aim at creating value expressed in an increased share price of their portfolio companies. They employ intervention and campaigns built around some of the building blocks that we have presented. KUKA demonstrates that hedge funds may align themselves with blockholders to ride a rising stock price. On the other hand, German family blockholders may use activists to attract the interest of international institutional investors following the latter’s recommendations with the ultimate objective of boosting share value and selling their position – displacement through defection. Some activists adapt their strategies to the German context and demonstrate commitment to their portfolio companies, while German blockholders utilise activists to increase the value of their holdings, thus changing their preferences from commitment to liquidity.
Not unlike studies in the US, there are empirical findings in Germany that show there is considerable disciplinary power inhering in activist hedge funds. Virtually all listed companies in Germany (which have shrunk from about 1,000 to 650 in recent years) have an IR department now, monitoring closely their investor base. Many of them anticipate potential investments, interventions and engagements by activists and, in order to thwart campaigns, implement some of the typical activist demands, such as extra dividends, share buybacks or selling non-core divisions.
One of the most appalling provisions of the proposed “CHOICE” legislation is the one that would severely limit shareholder proposals, which, in case anyone needs a reminder, are non-binding, so that even a 100 percent vote would not force a board or executives to make a change. Also, in case anyone needs a reminder, the subject matter of shareholder proposals is already strictly limited (excluding “ordinary business,” for example), and this provision has suddenly become important just as shareholder proposals have been getting majority support. Once again, the same people who love to rhapsodize about the purity of the free market do not want to let “the invisible hand” provide any market-based feedback.
Julie Gorte and Tim Smith write in defense of shareholder proposals at Harvard Law School’s Corporate Governance and Financial Regulation blog:
The voice of shareholders is valuable both to companies and to investors alike. Shareholders file proposals with companies to help them perform better, not to annoy them. The fact that many resolutions now get votes in the 30-50 percent range, and many pass with majority votes, demonstrate that shareholders often see these resolutions as being in their financial interests.
This point is easy to illustrate with examples. In 2016, there were about 1,000 shareholder proposals filed in the United States, of which about 400 were on social and environmental issues. The remainder concerned corporate governance. None of these categories are trivial or peripheral to protecting a company’s reputation or its value, as reams of research demonstrate.
Envonet™ has launched a free online web portal to allow easy comparison of corporate environmental financial disclosures. Envonet is a global tool that enables users to quickly access environmental and climate-related financial disclosures that are often buried deep within lengthy financial filings. Equally important, Envonet reveals where corporations have omitted information relevant to investors.
“Investors are urgently seeking more transparency from corporations about their material risks and risk management practices, particularly those related to climate change, but there are no simple tools to assist investors in collecting and assessing this information,” said Greg Rogers, co-founder of Envonet and a long-time champion of corporate financial transparency. “And, when disclosures are compared side by side, the contrast between many European companies and their U.S. counterparts leaps off the page. For investors, it makes evident which corporations are treating climate change as a material financial risk and which are not.”
Users can select several companies and compare their disclosures, side-by-side, such as the example provided at the end of this news release with data from BP, Chevron, Exxon-Mobil and Shell. And with a single click, users can jump to the specific location of disclosures in a corporation’s financial filings, where the information can be read in context.
Envonet displays climate-related disclosures in the areas of governance, strategy, risk management and performance measurement, found in mainstream financial filings (e.g., Form 10-Ks filed with the U.S. Securities Exchange Commission). It also features environmental-related accounting disclosures for asset impairments and environmental and asset retirement obligations. Envonet employs the framework developed by the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD), a private sector initiative chaired by Michael R. Bloomberg, and presented at last week’s G20 Summit in Hamburg, Germany.
Envonet initially features financial disclosures from 2016 year-end financial filings for 40 listed companies in the electric utility and oil and gas industries across the globe. Utility companies include American Electric Power, CLP Holdings, Dominion Resources, DTE Energy, Edison International, Enel, Entergy, Eversource, Exelon, FirstEnergy, Fortis, Iberdrola, NextEra Energy, PG&E, Power Assets Holdings, PPL, Public Service Enterprise Group, Southern Company, SSE, and Xcel.Oil and gas companies include Anadarko, Apache, BP, Canadian Natural Resources, Chevron, Concho Resources, ConocoPhillips, Devon Energy, Eni, EOG Resources, Exxon Mobil, Marathon, Occidental, Phillips 66, Pioneer Natural Resources, Royal Dutch Shell, Suncor Energy, Total, Valero, and Woodside Petroleum.
There is no cost to use the Envonet portal, but users must register at http://www.envonet.com for access to the database. A companion social media group on LinkedIn (Climate-Related Financial Disclosure) adds opportunity for discussion and collaborative learning.