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

50/50 Climate Project Shows Conflicts Skew Proxy Voting Decisions

Ross Kerber reports at Reuters:

Several big fund firms supported challenges on executive pay or climate disclosures less frequently where they had business ties to energy companies and utilities, according to a new study released on Tuesday.

The scrutiny of firms including Vanguard Group and Invesco Ltd is the latest research to raise questions about how well they manage potential conflicts of interest when casting proxy votes at the same time they are trying to win work like running corporate retirement plans….For its study 50/50 reviewed how fund firms voted on 27 proxy questions last year at oil and gas companies and utilities, tracking how often they voted against management recommendations.

At Vanguard, for instance, 50/50 found the $4 trillion Pennsylvania index fund manager broke from management 22 percent of the time. But at four companies where Vanguard serviced retirement plans, its funds did not support any challenges….Another fund firm, Invesco, broke with management 12 percent of the time, and at none of seven companies where it had business ties.

Kerber’s article includes more information and responses from the managers included, denying that the votes are influenced by conflicts. The full report is on the 50/50 website.

[T]he 50/50 Climate Project found that the managers who tended to vote in favor of management received more in fees and stewarded more assets than all other managers combined, and that their voting practices were even more management friendly at companies with which they had business relationships.

GE CEO Immelt knocks Trump on climate – POLITICO

General Electric CEO Jeff Immelt says President Donald Trump’s imagination is at work if he doesn’t believe in climate change science or the Paris agreement that President Barack Obama signed onto before leaving office.And Immelt is calling on other companies to step up to fill the void that the administration is leaving behind.

“Companies must be resilient and learn to adjust to political volatility all over the world,” Immelt wrote Wednesday in an internal company blog post obtained by POLITICO. “Companies must have their own ‘foreign policy’ and create technology and solutions that address local needs for our customers and society.”

Source: GE CEO Immelt knocks Trump on climate – POLITICO

Report from the CII Winter meeting: ESG

ESG stands for what used to be termed “non-financial” metrics: environment, social concerns like diversity and treatment of employees, and corporate governance issues like CEO pay and board independence. Institutional investors, skeptical of traditional financial measures following the Enron/WorldCom era scandals, the dot.com bubble, and the financial meltdown, are increasingly relying on non-traditional measures to help them evaluate risk and return in their portfolio investments. Wall Street securities analysts may fixate on quarterly returns, but large institutional investors investing pension money are concerned about the long term, and they understand how misleading the traditional metrics, based on accounting principles developed in the 19th century, can be.

One of the opening sessions featured an interview with Hiromichi Mizuno, head of Japan’s $1.3 trillion government pension fund, who supervised the transition of the fund from all-Japanese investments to deployment of half of its capital in stocks around the world. “Through that process, I came to realize that the best way to improve our performance was to focus on stewardship in investing,” he said. He was inspired by a meeting with former UN Secretary General Kofi Annan, who asked him “why Japan was so indifferent on environment and social issues. I thought Japan was the most environmentally friendly and inclusive country, but we had never stepped up internationally.”

Mizuno told the group that they have a 100-year sustainable investment scheme with a 25-year investment horizon. They are “the textbook definition of a universal owner” with near-permanent holdings in just about every publicly traded company. Investment restrictions and transaction costs make selling out of any individual stock impossible, so the only alternative is engagement with corporate managers to make sure their strategy is sustainable over the long term.

Mizuno “expects best in class stewardship from our asset managers,” which means they will reduce their business with those who fall short and are willing to pay more for managers who can show they effective exercise of ownership rights like proxy voting and communication with executives and directors. Regardless of any short-term adjustments a particular government may make to the rules around climate change, Mizuno’s fund will ask whether the business model is sustainable, not over the course of one administration but over the next 25 years.

The panel on “Next Generation Investing” echoed this focus on sustainability. State Street Global Advisors’ Chris McKnett told the group that “there are risks and opportunities that can be overlooked by confining yourself to traditional analysis.” And one of those opportunities is appealing to the millennials who will control as much as $7 trillion in investable capital in the next five years. The “client careabouts” they have identified for that group include a strong interest in sustainability. As Morgan Stanley’s Thomas Kamei put it, “I’m already voting my dollars as a consumer. Why wouldn’t I want to invest that way as well?” The information he wants to see on sustainability will connect it to tax consequences and free cash flow.

Another panel examined the push for better financial disclosures on climate impact and sustainability, including guidelines and proposals from GRI, IFRS, SASB, and TCFD, which are filling in the gaps left by GAAP. “Climate has become a systemic risk,” said Paul Lee of Aberdeen Asset Management. The panel agreed that they want to see climate risk reflected in financial statements, whether the business is direct, as with fossil fuels and beachfront property, or indirect, as with the banks and insurance companies that do business with the enterprises with a more central connection to climate issues. Fortunately, the sustainability reports are less often being written by the marketing department, and becoming the province of the same people who are responsible for other financial reports.

Anne Simpson, the highly influential representative of CalPERS, said, “The financial case around risk is powerful….And this is what the economy needs. Sustainable businesses create jobs and growth.” She noted that Exxon responded to her fund’s shareholder initiative by adding an atmospheric scientist to its board for the first time. Simpson appreciates the Paris accords as a roadmap for investors and companies, no matter what happens in the US. “We’re not changing course because one country is doing certain things,” said Neil Hawkins, Dow Chemical’s Chief Sustainability Officer. Like the CFA Institute’s Rebecca Fender, who called this movement “a slow-moving but unstoppable train,” the CII members consider climate change a material investment risk and opportunity that they must understand and respond to.

Large institutional investors are permanent owners of stock, many of them through index funds that track the market as a whole. That means their only opportunity for protecting and enhancing returns is by pushing the management and boards of those companies to do better over the long term. “We own the best stock and the worst stock,” said McKnett. “Why wouldn’t we want to make the worst stock a little less worst?”

Investors with $2.8 trillion in assets unite against Donald Trump’s climate change denial | The Independent

The world’s biggest investors are joining forces to unite against Donald Trump in the fight against climate change.The US President has repeatedly denounced climate change as a hoax peddled by China and has pledged to relax environmental regulations, spur investment in fracking and sack half of the staff at the US Environmental Protection Agency.

But as G20 foreign ministers meet on Thursday to prepare for a climate change summit in Hamburg in July, managers of funds with assets totalling more than $2.8 trillion – more than the entire annual GDP of the UK – called for leading economies to phase out fossil fuel subsidies within the next three years to avert a catastrophe.  The world must accelerate green investment and set a clear timeline “for the full and equitable phase-out by all G20 members of all fossil fuel subsidies by 2020,” the 16 signatories wrote.

Source: Investors with $2.8 trillion in assets unite against Donald Trump’s climate change denial | The Independent

Climate Change Risk in Sovereign Bond Investments 

Despite US threats to withdraw from the historic Paris climate agreement, momentum continues to build globally for carbon risk disclosure and management in the investment community. According to Moody’s, widespread adoption of the agreement and the coordinated actions of governments to reduce carbon emissions over time has “the potential to become a significant ratings driver in a broad set of industries.” While carbon disclosure on the part of investors has been focused almost entirely on equities, and to lesser extent corporate bonds, investors with sovereign bond holdings are coming to realize they also face carbon risk exposure.The sovereign bond market is one of the largest asset classes, representing a remarkable $21 trillion in outstanding debt by national governments. Further, sovereign bonds typically represent a significant percentage of diversified investment portfolios, especially among institutional investors. But the lack of clarity on methodological approaches has been a major obstacle for assessing climate risk in sovereign bonds.To address this gap, Global Footprint Network and South Pole Group convened a group of nine asset owners and managers* to examine the methodological issues involved and develop a set of recommendations, which are laid out in a new report: Carbon Disclosure and Climate Risk in Sovereign Bonds.As described in the report, climate risk at the country level is multi-faceted, but a comprehensive dashboard to manage investment risk can be organized as part of three key elements: • Carbon exposure or “transition risk”, including dependence on fossil fuel reserves and the carbon intensity of the economy;• Physical climate change risk, including a country’s exposure to extreme weather events, water scarcity, and food price shocks; and• A country’s policy response including its adherence to climate agreement pledges (Nationally Determined Contributions, or NDCs)

Source: Topic of the month February 2017: Climate Change Risk in Sovereign Bond Investments — yourSRI – Socially Responsible Investments

New York City pension system to analyze carbon footprint | Reuters

New York City’s $170.6 billion pension system will analyze its carbon footprint for the first time amid concerns of potential investment risks from companies that fail to adapt to climate change, its custodian said in a statement on Thursday.<P

Trustees for the five funds that make up the system selected Mercer Investment Consulting LLC to determine how to incorporate “the realities of global warming” into asset allocation, manager selection and risk management, said New York City Comptroller Scott Stringer, custodian for the system.

Four of the funds – including for police and firefighters – also chose Trucost plc to perform a carbon footprint analysis of public equity investments.That study involves measuring actual and estimated greenhouse gas emissions that can be attributed to an investment portfolio and, proportionally, to its holdings.

Mercer will conduct a carbon footprint analysis for the remaining fund, the Teachers Retirement System. The reviews are expected to be completed by the end of 2017.The city’s funds have previously taken other measures to address concerns about climate change and related investment risks, as have public pensions and other institutional investors around the world.

The $184.5 billion New York State Common Retirement Fund, the third largest in the country, last month became the first major U.S. public pension to join the Portfolio Decarbonization Coalition.

Source: New York City pension system to analyze carbon footprint | Reuters

PRI 50/50 Climate Project Webinar on Climate-Competent Boards

The PRI-50/50 Climate Project Webinar on Climate Competent Boards, moderated by VEA Vice Chair Nell Minow, is now available for replay.  It features:

  • Anne Simpson, Investment Director, Sustainability, California Public Employees’ Retirement System (CalPERS)
  • Kirsty Jenkinson, Managing Director and Sustainable Investment Strategist, Wespath Investment Management
  • Rakhi Kumar, Managing Director, Head of Corporate Governance, State Street Global Advisors
  • Michelle Edkins, Managing Director, Global Head of Investment Stewardship, BlackRock
  • Edward Kamonjoh, Executive Director, 50/50 Climate Project

 

The growing need for boardroom climate competency – Pensions & Investments

Richard Ferlauto has an excellent article about the vital importance of climate expertise on boards of directors.

Despite the anticipated rollback of climate related governmental policies such as the Environmental Protection Agency’s Clean Power Plan and limits on methane emissions by the Trump administration, investors still need to understand the risks that climate change poses to their portfolios. Unequivocal disclosures and boards equipped to manage and govern climate risk will be more important than ever. Now, however, it appears investors will not able to rely on federal regulatory standards or policy interventions to manage climate risk related to greenhouse gas emissions and the emphasis on fossil fuel production. They will be left to their devices to understand the very real financial impacts that climate issues could have on their portfolios.Regime change in Washington does nothing to affect the science and reality of increased climate risk and the need for long-term strategic planning that accounts for potentially crippling financial, ecological and technological disruptions at the companies most susceptible to climate risks.

Source: The growing need for boardroom climate competency – Pensions & Investments