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

CtW Wants Caterpillar To Make Audit and Comp Changes

The CtW Investment Group has asked Caterpillar’s board to make changes to its auditing and executive pay structures in wake of the unfolding tax fraud scandal. The CtW Investment Group, who works with union pension funds with $250B in assets, sent a letter to CAT’s incoming board chair David L. Calhoun today calling for the company to:

 Establish a special committee of independent directors to investigate, evaluate, and disclose changes to reduce risks related to the Caterpillar’s tax scheme. If the Company is unable to establish a special committee, it should reconstitute the Audit Committee.

Replace PricewaterhouseCoopers—the firm that both developed the tax avoidance scheme and is currently responsible for CAT’s external auditing.

Amend the Company’s clawback policy to enable the board to recoup executive compensation in the event of conduct that results in reputational or financial harm—like what is happening now. The Investment Group submitted a clawback resolution in December, and we believe it will be voted on at the company’s AGM this year.

 The funds the Investment Group works with have 1.6 million shares in CAT, and they plan to seek the support of other significant investors in the company on these issues as well. 

 

IR Magazine | Shareholder activism outside of US increases fivefold since 2010

A strong US dollar, undervalued asset prices and increased global scrutiny of corporate governance practices are contributing to an uptick in shareholder activism incidents around the world.According to the Global Shareholder Activism map from FTI Consulting, there were 342 activism campaigns outside the US in 2016, compared with only 70 in 2010. Over the same period in the US, the number of campaigns increased from 135 to 645.Speaking to IR Magazine, Steven Balet, managing director and head of corporate governance & activist engagement at FTI Consulting, says: ‘We have seen some of the larger US activists going overseas with US-style activism. But we’re increasingly seeing a great deal of home-grown shareholder activism in Australia, the UK and the Nordic countries.’

Source: IR Magazine | Shareholder activism outside of US increases fivefold since 2010

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

Shareholder Advocacy on Climate Change Won’t Let Up | Bloomberg BNA

Pressure by pension funds, endowments and other large investors for corporate action on climate change is expected to become even more prevalent this proxy season.

“We can assume we’re not going to see government leadership on climate change” under the next administration, Edward Kamonjoh, former head of U.S. strategic research and analysis at Institutional Shareholder Services Inc., told Bloomberg BNA.

Given President-elect Donald Trump’s skepticism of established climate science, it will be up to shareholders to push companies such as Chevron Corp. and Exxon Mobil Corp. to assess and address business risks from climate change, he said.

Source: Shareholder Advocacy on Climate Change Won’t Let Up | Bloomberg BNA

Comments on Marty Lipton’s “New Paradigm” of Corporate Governance

The leading lawyer representing corporate insiders is Martin Lipton of Wachtell, Lipton, Rosen & Katz. On Harvard Law School’s Corporate Governance blog, he has written an article with his thoughts for corporate directors in 2017. He begins by acknowledging the “evolution” in corporate governance with some respect, though not acknowledging those responsible, either the corporate managers who behaved badly or the institutional investors who objected. And then he creates a straw man of some imagined disconnect between creation of shareholder value and providing competitive and societally worthwhile goods and services.

The evolution of corporate governance over the last three decades has produced meaningful changes in the expectations of shareholders and the business policies adopted to meet those expectations. Decision-making power has shifted away from industrialists, entrepreneurs and builders of businesses, toward greater empowerment of institutional investors, hedge funds and other financial managers. As part of this shift, there has been an overriding emphasis on measures of shareholder value, with the success or failure of businesses judged based on earnings per share, total shareholder return and similar financial metrics. Only secondary importance is given to factors such as customer satisfaction, technological innovations and whether the business has cultivated a skilled and loyal workforce.

He says that long-term institutional investors, with other stakeholders can be a stabilizing force to shield corporate executives from attacks by activists, and he acknowledges that the best protection from activists is a record of performance and credible commitment to long-term shareholder value. The most significant “evolution” here may be his admission that activists can be an essential market response to failing strategies.

To be clear, the new paradigm does not foreclose activism or prevent institutional investors from supporting an activist initiative where warranted. Underperforming companies may be able to benefit from better board oversight, fresh perspectives in the boardroom, new management expertise and/or a change in strategic direction. Responsible and selective activism can be a useful tool to hold such companies accountable and propel changes to enhance firm value, and institutional investors can benefit from the budget and appetite of activists who drive such reforms. However, the new paradigm seeks to restore a balanced playing field, so that activism is focused on improving companies that are truly mismanaged and underperforming, rather than on using financial engineering indiscriminately against all companies in an effort to boost short-term stock prices.

NOTE: Lipton’s New Paradigm is explained in detail in a document prepared for the World Economic Forum

Why C.E.O.s Are Getting Fired More – The New Yorker

James Surowiecki writes in the New Yorker:

Business professors once talked about “the imperial C.E.O.,” but, increasingly, we’re in the era of what Marcel Kahan, a law professor at N.Y.U., calls “the embattled C.E.O.” He told me, “Big shareholders and boards of directors have more power, and are more willing to use it. And C.E.O.s have been the net losers.” The breakdown of the old order began more than thirty years ago, but things have accelerated since the turn of the century. The Sarbanes-Oxley Act, passed in 2002, required greater disclosure to investors, and increased the independence of corporate boards. “In the old days, boards were often loyal to the C.E.O.,” Charles Elson, a corporate-governance expert at the University of Delaware, told me. “Today, they’re more loyal to the company.” The rise of activist investors—who campaign aggressively for change when they’re not satisfied with performance—has exacerbated the trend. One study found that when activist investors succeed in winning seats on the board of directors the probability that the C.E.O. will be gone within a year doubles.

Source: Why C.E.O.s Are Getting Fired More – The New Yorker