Danone can stomach new activist investor – Breakingviews

Carol Ryan writes approvingly about a small stake by an activist investor in a previously entrenched French company:

Danone can stomach a new activist investor. A stake reportedly taken by U.S. hedge fund Corvex Management in the French yoghurt maker may be small, but would bring welcome pressure on management to meet its new margin target. Danone was once shielded from a Pepsi bid by the French state. If new investors bring good ideas and discipline, such defences won’t be necessary.

Keith Meister, the founder of Corvex and previous right-hand man of activist Carl Icahn, owns approximately 0.8 percent of Danone’s share capital, according to Bloomberg. The bite-size holding means Corvex is in no position to make aggressive demands, such as its ongoing attempt to derail a merger between chemicals groups Clariant and Huntsman.

Still, Meister’s arrival steps up pressure on Danone Chief Executive Emmanuel Faber to make the $53 billion dairy group more efficient….Some needling might be useful at a company that has previously disappointed investors with poor execution.

Danone has become emblematic of impregnable French companies ever since the French government scuppered reported interest from Pepsi back in 2005, making the yoghurt maker appear takeover-proof….

Were Corvex to bring useful ideas and discipline, it would make Danone more efficient, more profitable and more expensive to a would-be buyer. That’s a far more reliable form of takeover defence.

Source: Danone can stomach new activist investor – Breakingviews

Activism in Germany | Ethical Boardroom

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.

Source: Activism in Germany | Ethical Boardroom

Nell Minow on Daniel Loeb and Activism

VEA Vice Chair Nell Minow commented on Daniel Loeb’s new position at Nestle on NPR’s “Marketplace.”

Activist investor Daniel Loeb announced over the weekend that his hedge fund, Third Point, has taken a $3.5 billion stake in the Swiss food conglomerate Nestle, and he wants some changes at the company. That may sound like a lot of money, but the investment represents just over a 1 percent stake in the company. It’s enough though to get the company’s attention. That’s because activist investors are looking to drive change, unlike a lot of “passive” investors, who just sell their stock if they don’t like how a company is run. How do activist investors work? Experts say if activists have a reputation for adding value and getting good returns, and if they have appealing ideas, they can win over other shareholders who will help them push for change.

Pension Funds Vote “No” on Mylan Directors

Frank Glassner’s Compensation in Context newsletter reports:

Four large pension funds have asked shareholders of the drug company Mylan NV to vote against six directors, including the company’s chairman, who have been nominated for re-election at the company’s annual meeting June 22.
“We believe the time has come to hold Mylan’s board accountable for its costly record of compensation, risk and compliance failures,” said the letter to shareholders, a copy of which was filed recently with the Securities and Exchange Commission.


The letter was signed by Scott Stringer, the New York City comptroller, on behalf of the $170.6 billion New York City Retirement Systems for which he is fiduciary to the five funds within the system; Thomas DiNapoli, the New York state comptroller and sole trustee of the $192 billion New York State Common Retirement Fund, Albany; Anne Sheehan, director of corporate governance for the $206.5 billion California State Teachers’ Retirement System, West Sacramento; and Margriet Stavast-Groothuis, adviser, responsible investment, for the €205.8 billion ($230 billion) Dutch pension provider PGGM, which manages the assets of the €185 billion Pensioenfonds Zorg en Welzijn, Zeist, Netherlands.


Collectively, the pension funds own approximately 4.3 million shares of Mylan stock, worth about $170 million, said the letter to shareholders.

For the First Time, A Climate Proposal Gets Majority Support: Occidental Petroleum

Emily Chasen writes in Bloomberg:

Occidental Petroleum Corp.’s shareholders approved a proposal Friday to require the oil and gas exploration company to report on the business impacts of climate change, marking the first time such a proposal has passed over the board’s objections.

The resolution, initiated by a group of investors including the California Public Employees’ Retirement System, received more than 50 percent of the votes at Occidental’s shareholder meeting in Houston on Friday, according to spokesmen for the company and Calpers. Occidental didn’t provide the tally, but said the exact figures will be submitted to the Securities and Exchange Commission in coming days.

“The board acknowledges the shareholders support for this proposal,” Eugene L. Batchelder, chairman of the board for Occidental, said in an e-mailed statement Friday after the vote. “We look forward to continuing our shareholder engagement on the topic and providing additional disclosure about the company’s assessment and management of climate-related risks and opportunities.”

The resolution came close to majority support last year. A crucial factor in exceeding the 50 percent mark was Blackrock, a major shareholder, who switched from voting against the proposal last year to voting for it. One reason might be the concerns that the new administration’s opposition to environmental regulation may mean that investors can no longer rely on the government to take care of the problem.

“The passing of this resolution is a sign of progress. It is a first in the United States. The vote at Occidental demonstrates an understanding among shareowners that climate change reporting is an essential element to corporate governance. I believe that we will see many more companies move in this direction. This vote shows that investors are serious about understanding climate risk.” – Anne Simpson, CalPERS Investment Director, Sustainability

Tough Questions for Ford’s Virtual Annual Meeting

On Thursday May 11, the National Center for Public Policy Research’s Free Enterprise Project (FEP) will seek to ask Ford Motor Company executives if they believe there is a reputational risk and potential consumer backlash from advertising on television news programs hostile to the Trump Administration. FEP representatives are hoping for the opportunity to pose this tough question during Ford’s first online-only shareholder meeting.

“Ford executives will be tested to see if they are willing to tackle hard questions at a virtual shareholder meeting where they control access,” said National Center Vice President David W. Almasi. “When liberal politicians wanted to avoid angry constituents during the Tea Party movement, they held virtual meetings to avoid uncomfortable interaction. We are hoping Ford executives will not employ the same strategy. Annual meetings are the one time a year when shareholders can question corporate leadership. To restrict that opportunity would be a disservice to the investment community.”

The Ford shareholder meeting will be held on May 11 at 8:30AM eastern in an audio-only format accessible through the Ford website.

Vote NO Campaign at Southern Company: Filing by  Nathan Cummings Foundation

April 24, 2017 Dear fellow Southern Company shareholder,

Top executive pay at The Southern Company (“Southern”) has become increasingly decoupled from performance due to the Compensation and Management Succession Committee’s (the “Compensation Committee’s”) decision to shield top executives from the financial impact of poorly executed key projects. Directors Steven R. Specker and Dale E. Klein serve on both the Compensation Committee and the Nuclear/Operations Committee, which has oversight responsibility for the projects that have been plagued by problems.

Accordingly, we urge shareholders to vote AGAINST Item 3, to approve executive compensation (Say on Pay), and to hold Messrs. Specker and Klein accountable for the committees’ oversight failures by voting AGAINST their re-election at Southern’s annual meeting on May 24, 2017. Botched Execution of Energy Diversification Strategy In the 2010 Southern Annual Report, Thomas Fanning, then the newly-appointed CEO, described how the company would “satisfy the increasing demand for electricity while providing the best reliability and economic value with minimal environmental impact.”

Mr. Fanning identified as top priorities the construction of two major projects: the expansion of Vogtle, a nuclear facility; and the Kemper IGCC1 plant, whose technology aimed to generate electricity from coal with less pollution.2

Originally, the Kemper plant had a 2014 completion date. However, the plant – more than $4 billion over its original $2.4 billion budget – still is not in service.3 Southern has taken pretax charges against earnings related to Kemper in 15 of the last 16 quarters (1Q13 to 4Q16) totaling $2.76 billion.4 Southern recently submitted an updated economic viability analysis showing that the Kemper plant is not currently cost-effective to run using coal.5

Wells Fargo analyst Neil Kalton identified ongoing “execution risk,” including additional problems with Kemper, as a factor in his skepticism about Southern’s strategy.6

Reporting last year by The New York Times using audio recordings of employees, internal company documents and interviews with engineers and others involved with the Kemper plant found evidence consistent not only with mismanagement of the project but also with deliberate concealment of cost overruns and delays from the public. Ed Holland, who took over as CEO of Mississippi Power (the subsidiary responsible for Kemper) in 2013, told regulators that his predecessor “had directed or allowed employees to withhold from regulators documents about cost overruns.”7

1 IGCC is the abbreviation Southern uses for “Integrated Coal Gasification Combined Cycle Facility.” Southern Company Proxy Statement filed on Apr. 7, 2017 (“2017 Proxy Statement”), at 43, n.*.2 Southern Company 2010 Annual Report, at 4.3 The company recently disclosed that it would miss a deadline to place the Kemper plant in service by mid-March 2017, estimating that each month of further delay would “result in additional base costs of approximately $25 million to $35 million per month.” Management disclosed that the “ultimate outcome of this matter cannot be determined at this time.” (8-K filed on Mar. 16, 2017)4 Southern Company 2016 10-K filed on Feb. 22, 2017, at I-30.5 Transcript of Southern Company Earnings Call on Feb. 22, 2017.6

Russell Grantham, “Risky Projects a Cloud Over Southern Company,” The Atlanta Journal-Constitution, Feb. 10, 2017.7 Ian Urbina, “Piles of Dirty Secrets Behind a Model ‘Clean Coal’ Project,” The New York Times, July 5, 2016.

Southern disclosed to investors last year that the Securities and Exchange Commission is formally investigating the company and Mississippi Power “concerning the estimated costs and expected in-service date” of the Kemper plant.8 Shareholder litigation has been filed, claiming that Southern failed to disclose in a timely manner delays and cost overruns to investors.9 In 2009, Southern received approval to build the Plant Vogtle Units 3 and 4 nuclear units, designed and constructed by Toshiba-Westinghouse.10 Based on a novel and untested design,11 the reactors were scheduled to be in service by 2017. Last year, Mr. Fanning told analysts that “we are doing beautifully in the new nuclear that we are building at Vogtle.”12 However, the project is $3 billion over budget and at least three years behind schedule, and the future of the Vogtle units is now uncertain.13 On March 29, Westinghouse filed for bankruptcy protection due to mounting costs at Vogtle and other nuclear projects. At a minimum, the bankruptcy will lead to additional delay and costs for the Vogtle project. Georgia regulators are contemplating whether the project should continue at all, given the bankruptcy. Stan Wise, chairman of the Georgia Public

Service Commission, told The New York Times “[i]t’s a very serious issue for us and for the companies involved. If, in fact, the company comes back to the commission asking for recertification, and at what cost, clearly the commission evaluates that versus natural gas or renewables.”14

The Nuclear/Operations Committee of Southern’s Board is responsible for overseeing both the Kemper and Vogtle projects. According to its charter, the Nuclear/Operations Committee is charged with, among other things, oversight of “construction and licensing of new facilities, including review of cost estimates.”15 It also provides input to the Compensation Committee about key operational goals and metrics for the annual cash incentive program.16

Messrs. Specker and Klein have served on the Nuclear/Operations Committee since 2010, and Mr. Specker has served as its chair since 2014. The problems plaguing Kemper and Vogtle, Southern’s two largest construction projects, suggest that the Nuclear/Operations Committee has fallen short in its oversight responsibilities. As discussed more fully below, we believe that inaccurate evaluations have been made on operational metrics related to those projects used for senior executive compensation and that financial metrics have been inappropriately adjusted by the Compensation Committee, on which Messrs. Specker and Klein serve. We urge shareholders to hold Messrs. Specker and Klein accountable by voting AGAINST their re-election.

 

Pay and Performance Misalignment

 

Incentive compensation at Southern, which comprises a substantial portion of total compensation, consists of an annual cash incentive award (or bonus) and a long-term equity incentive award. Each year, the Compensation Committee selects the metrics to be used to determine the annual bonus for the coming year and the long-term equity incentive payout for the three-year cycle then getting under way.17

 

8 Southern Company 10-Q filed on May 5, 2016.

9 See https://www.rgrdlaw.com/cases-southerncompany.html; https://www.robbinsarroyo.com/shareholders-rights-blog/the-southern-company-march-17/.

10 Through its subsidiary Georgia Power, Southern owns 45.7% of the new units.

11 Diane Cardwell, “The Murky Future of Nuclear Power in the United States,” The New York Times, Feb. 18, 2017.

12 Q3 2016 Southern Co Earnings Call and Analyst Day, Thomson StreetEvents, Oct. 31, 2016.

13 Russell Grantham, “Plant Vogtle: More Delays Likely, Says One Partner,” The Atlanta Journal Constitution, Mar. 27, 2017.

14 Diane Cardwell & Jonathan Soble, “Westinghouse Files for Bankruptcy, in Blow to Nuclear Power,” The New York Times, Mar. 29, 2017.

15 https://s2.q4cdn.com/471677839/files/doc_downloads/list/nuclearcommittee.pdf

16 2017 Proxy Statement, at 36.

17 2017 Proxy Statement, at 40.

 Southern claims that it links pay and performance in order to align executives with both shareholder and customer interests.18 But top executive pay has increased over the past several years, while total return to shareholders (“TSR”) has lagged returns to the peer index (Philadelphia Utilities Index) and the S&P 500.19

A driver for higher executive compensation levels in both the 2015 and 2016 fiscal years was the Compensation Committee’s decision to use an earnings per share (EPS) figure “adjusted” to exclude the negative earnings impact of the Kemper project and certain other items. In 2013, Southern recorded pre-tax charges of $1.14 billion20 related to Kemper and no adjustment was made for compensation metric purposes. As a result, incentive compensation payouts were “reduced significantly” for 2013. In 2014, when problems at Kemper led to a pre-tax charge of $868 million, the Compensation Committee adjusted EPS to eliminate the impact of Kemper for general incentive pay purposes; however, it exercised negative discretion to reduce, by 10-30%, the bonuses payable to several senior executives who it said should be held “accountable for high-level strategic decisions concerning the Kemper” plant.21

In 2015 and 2016, the Compensation Committee simply used adjusted EPS for all employees, including top executives, insulating them from Kemper’s negative impact on earnings. These adjustments meant the difference between executives not even achieving the threshold EPS level for payout and comfortably exceeding the target level:

2015:
EPS w/o adjustment $2.61
Threshold for payout $2.68
EPS with adjustment for Kemper $2.8222
2016:
EPS w/o adjustment $2.61
Threshold for payout $2.68
EPS with adjustment for Kemper and certain acquisition/integration costs $2.8923

 

18 2017 Proxy Statement, at 41.

19 TSR data appears in the 2017 Proxy Statement, at 40, while total compensation figures for Mr. Fanning are found in the Summary Compensation Tables of Southern’s last three proxy statements.

20 Southern Company Proxy Statement filed on Apr. 11, 2014, at 36.

21 Southern Company Proxy Statement filed on Apr. 10, 2015, at 34-35.

22 Southern Company Proxy Statement filed on Apr. 8, 2016 at 53-54 (“2016 Proxy Statement”).

23 2017 Proxy Statement, at 52.

Source: Form PX14A6G SOUTHERN CO Filed by: NATHAN CUMMINGS FOUNDATION, INC.

Climate Shareholder Resolution at Royal Dutch Shell

Resolution at 2017 AGM of Royal Dutch Shell plc (“Shell”), coordinated by Follow This

Shareholders support Shell to take leadership in the energy transition to a net-zero-emission energy system. Therefore, shareholders request Shell to set and publish targets for reducing greenhouse gas (GHG) emissions that are aligned with the goal of the Paris Climate Agreement to limit global warming to well below 2°C.

These GHG emission reduction targets need to cover Shell’s operations as well as the usage of its products (scope 1, 2, and 3), they need to include medium-term (2030) and long-term (2050) deadlines, and they need to be company-wide, quantitative, and reviewed regularly.

Shareholders request that annual reporting include further information about plans and progress to achieve these targets.

This shareholder resolution is intended to express shareholder support for a course towards a net-zero-emission energy system. The why of a course towards a net-zero-emission energy system is clear: increasing costs of the extraction of fossil fuels, decreasing costs of generating renewable energy, and the global political pledge to stop global warming. The how and the what are up to the management of Shell. It is up to them to set GHG emission reduction targets and to develop activities to attain these targets.This supporting statement serves to offer rationale, elaborate on transparency, and recommend metrics to align these targets with the Paris Climate Agreement.

In Paris, in December 2015, during the twenty-first Conference of the Parties (COP21), representatives of 195 countries reaffirmed the goal of limiting global temperature increase to well below 2°C above pre-industrial levels and agreed to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels. COP21 also agreed to aim for a global net-zero-emission energy system.In May 2015, by means of a shareholder resolution submitted by the Aiming for A investor coalition, shareholders directed that annual reporting will include information relating to climate change, such as emissions management, asset portfolio resilience, and investment strategies. Setting further targets on scopes 1, 2, and 3 is the next step.Major institutional investors have announced that they will drastically cut the carbon footprint of their investment portfolios with the aim of reducing the climate risks in them.

We the shareholders request that the company publish company-wide greenhouse gas (GHG) emission reduction targets according to the following 3 scopes:

Scope 1: direct emissions from the facilities under Shell’s operational control or the equity boundary,

Scope 2: indirect emissions from the facilities of others that provide electricity or heat and steam to Shell’s operations,

Scope 3: emissions that Shell estimates come from the use of Shell’s refinery products and natural gas products.

In order to align its emission reduction targets with a well-below-2°C pathway, we request the company to base these targets on tangible metrics such as the Intended Nationally Determined Contributions (INDCs), or to use any other metrics the company finds practical to align its targets with a well-below-2°C pathway. For example, the INDC of Europe calls for 40% emission reduction by 2030 and 80-95% by 2050, relative to 1990 levels. While the combined INDCs are not enough to get on a well-below-2°C pathway, these commitments may be ratcheted up. The company could use metrics of the Intergovernmental Panel on Climate Change (IPCC) as well. For example, to limit global warming to well below 2°C, the IPCC estimates that 40-70% reduction in GHG emissions globally is needed by 2050, relative to 2010 levels. In the light of changing technological drive, scientific progress, and incrementally rising policy commitments, Shell should review its GHG emission reduction targets regularly.

Risks: If actions to get on a well-below-2°C pathway are taken too slowly, this may lead to abrupt adjustments, resulting in costly shocks. An orderly transition should start with the expression of clear medium- and long-term targets. We fully realize that these targets will be just dots on the horizon and that the road leading there has to be discovered, but the longer the company waits, the harder it will be to attain the well-below-2°C pathway and the more disruptive the transition will be.

The political pledge to limit climate change to well below 2°C, the resulting future legislation, and the decreasing costs of renewable energy add to the risk that capital expenditures in fossil fuel projects will become stranded assets.Opportunities: Taking leadership in the global energy transition could increase the brand value of Shell. The company could distinguish itself from its competitors if customers knew that part of the profits from fossil fuels would be invested in energy sources that limit global warming.

Shell is accustomed to exploring for oil and gas resources. We encourage the company to explore new business models. Some investments will turn out to be profitable; some not, as is the case in the exploration for oil and gas.

Shell’s financial results greatly depend on the price of oil. Diversification of the energy system could turn out to be an opportunity to decrease risks and create the cash engines of the future.

Support: We encourage Shell to show leadership by enhancing its capability to innovate and make use of potential opportunities in a transforming energy landscape over the coming decades. We would welcome further alignment between the company’s strategic positions vis-à-vis emerging energy technologies that stand to benefit from the energy transition. With its decades of experience and expertise as an innovator, its global reach, its financial capital, and its human capital, Shell is excellently positioned to make use of these developments by applying new technologies and setting up related business models. We encourage Shell to set targets that are inspirational for society, employees, and shareholders, allowing Shell to meet increasing demand for energy while reducing GHG emissions.

Source: Shareholder resolution 2017 – Follow this

Brazil: Vale minority shareholders nominate candidate to board | Reuters

Brazil’s mining company Vale SA on Wednesday said Aberdeen Asset Management PLC, on behalf of minority shareholders, nominated Isabella Saboya to join the company’s board.

Vale said in a securities filing that Sandra Guerra was also nominated by the minority shareholders as a substitute board member for Saboya in the election scheduled for April 20, 2017.

Source: Vale minority shareholders nominate candidate to board | Reuters

Investors fight RBS snub to shareholder committee move

About 160 individual investors are pushing RBS to form a shareholders’ committee, which would allow retail investors to have a formal say on RBS proposals, such as executive pay, company strategy and director appointments.

The shareholders say this would improve corporate governance at the state-backed bank, which nearly collapsed in 2008 and was bailed out by the UK government.

Last month, however, RBS told investors it had sought legal advice on the resolution and would not put it before its annual general meeting. This week, RBS declined to show its legal advice to the 160 shareholders, arguing that it is legally privileged and can remain confidential.

Source: Investors fight RBS snub to shareholder committee move