A proposal being floated by a large index firm could force finance chiefs at companies like Alphabet Inc., Facebook Inc. and Ford Motor Co. to choose between keeping their places in broad stock benchmarks or changing their share class structures.FTSE Russell is proposing possible restrictions on the inclusion of companies with unequal voting rights in its indexes, but the firm will weigh input from clients and investors before working out specifics.
Matt Levine writes in Bloomberg:
[C]ross-ownership of many U.S. airlines by the same diversified institutional investors — index funds and “quasi-indexers” — discourages the airlines from competing on price and quality, and encourages them to focus on margins. An airline that cuts fares or spends money on better service to win market share isn’t necessarily doing its shareholders any favors: The increased market share comes at the expense of other airline companies that the shareholders also probably own….I think the “index funds ruin capitalism” story is best read as just one strand of a larger “financial capitalism ruins capitalism” story, and while the index funds story is still pretty niche, the financial capitalism story has become very popular. In this story, managers and investors have stopped thinking of companies as companies, as human networks of employees and customers and investors, and now think of them instead as numbers, as sets of financial factors to be optimized. There are many explanations for this: Developments in graduate business education, or the rise of corporate activism, or the cultural role of Wall Street. But the basic story is that companies used to balance the interests of workers, customers and investors; now they have adopted a fully investor-centric model in which profits are the only goal and customer service and workers’ rights are sacrificed. Sheelah Kolhatkar writes that “the investors-above-all doctrine seems to have triumphed over the more inclusive approach.”
BlackRock, Vanguard and State Street have expanded their corporate governance teams significantly in response to growing pressure from policymakers and clients to demonstrate they are policing the companies they invest in.The move by the world’s three largest asset managers, which together control nearly $11tn of assets, will help address fears that investors are not doing enough to monitor controversial issues around executive pay and board diversity at the companies they invest in.
EU Directive 2017/828 has now been published in the Official Journal and will come into force in mid-June 2017, amending the Shareholders’ Rights Directive (SRD). Changes include:
Member States shall ensure that companies have the right to identify their shareholders, so companies will have the right to collect personal data on their shareholders “in order to enable the company to identify its existing shareholders in order to communicate with them directly with the view to facilitating the exercise of shareholder rights and shareholder engagement with the company.”
Institutional investors and asset managers must comply with two requirements, or publicly disclose a reasoned explanation as to why they have not complied: (i) institutional investors and asset managers shall develop and publicly disclose an engagement policy that describes how they integrate shareholder engagement into their investment strategy, and; (ii) institutional investors and asset managers shall, on an annual basis, publicly disclose how their engagement policy has been implemented.
Institutional investors public disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities, in particular long-term liabilities, and how they contribute to medium to long-term performance of their assets.
Asset managers must disclose annually how their investment strategy and implementation contributes to the medium to long-term performance of the assets of the institutional investor or the fund.
Proxy advisors must have and disclose a code of conduct.
Shareholders have the right to vote on director pay.
Companies must disclose related party transactions.
A new study by Robert Anderson IV finds that choice of law firm plays a significant role in the decision to incorporate in Delaware.
Dr. Anderson examined regulatory filings related to raising private capital, and concluded that it is all about the company’s choice of law firm near the time of founding.He found that some larger, elite law firms may steer businesses toward a Delaware incorporation with their own needs in mind, rather than because of any superior quality of the state’s legal system or the companies’ needs. Perhaps, he speculates, it is easier and less expensive for them to focus on Delaware, rather than having to master the laws of many states.In contrast, other firms—such as smaller, regional firms—are likely inherently focused on their state’s law, and therefore might be expected to disproportionately recommend in-state incorporation, he says.
Because it is difficult for companies to reincorporate, there is little incentive for states to compete for incorporation business and the franchise fees it generates by offering robust alternatives to Delaware law, Dr. Anderson says.
“The consequence is a stagnant menu of relatively homogeneous state corporate law with little innovation, even though innovation might benefit shareholders,” he says.
Dr. Anderson’s research doesn’t take into account various factors that prior research has shown to influence incorporation decisions, such as the antitakeover statutes of a business’s state of headquarters, says Lucian Bebchuk, the James Barr professor of law, economics and finance at Harvard Law School and the director of its program on corporate governance.Delaware manages to snare more than half of the incorporations of U.S. public companies.
A study by Dr. Bebchuk and Alma Cohen, a professor of empirical practice at Harvard Law School, found that companies are more likely to incorporate in Delaware rather than their state of headquarters when they have more employees or sales, when they’re based in the Northeast or South or when their state of headquarters has fewer antitakeover statutes.But Dr. Anderson says he’s confident that weighing states’ antitakeover statutes wouldn’t undermine his results.
David H. Webber, professor at the Boston University School of Law, writes about efforts funded by corporations to reduce the number of shareholder proposals. Note that a very small number of these proposals are filed each year, at a very small percentage of companies, and that even a 100 percent vote in favor is almost never binding on management. And yet, somehow advisory votes by shareholders are so terrifying that the snowflakes in the corporate boardroom get the vapors even thinking about them.
Corporate lobbyists at the Business Roundtable — led by JPMorgan Chase chief executive Jamie Dimon — are heralding an effort to sharply limit the ability of investors to have a say in their companies through shareholder proposals. If successful, it will reduce stockholders’ ability to shape the companies they own and hold corporate managers accountable. As with political voting rights, these corporate voter-suppression efforts demonstrate that even the most basic rights need constant vigilance to protect them.Shareholder proposals — governed by the Securities and Exchange Commission — allow shareholders to suggest ideas to be voted on by their peers at the annual meeting. As with voter-suppression tactics generally, the Business Roundtable would not eliminate shareholder proposal rights. Tactically, that would be too crude. Instead, it would interpose a series of technical requirements that would have the same effect as a ban. Most notably, the Roundtable would drastically raise the ownership threshold needed to file a proposal.But shareholder proposals are effectively tools for significant corporate change, akin to ballot initiatives that have played such an important role in American democracy. In recent years, shareholder proposals have called for better assessment and disclosure of climate change risks and for improved diversity in hiring….A recent SEC study shows that New York City’s efforts [to get companies to adopt proxy access provisions] led to a total increase of $10.6 billion in shareholder value at targeted companies…Even when unsuccessful, shareholder proposals can become important mechanisms for registering discontent and helping companies adjust policy…Shareholder proposals mainstreamed diversity as an investment issue, recently pounced on by State Street — a traditional investment house with $2.5 trillion in assets under management — which adopted a new voting policy favoring women board members, symbolically underscored by the company’s commission of the “Fearless Girl” sculpture on Wall Street….None of this is to say that shareholder proposal rules are perfect. Certain revisions might be worth considering. But nothing justifies the stratospheric threshold that Dimon and the Roundtable are backing. Apparently, they’re not interested in protecting shareholders — only in protecting themselves.
The Investor Stewardship Group, a collective of some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts, today announced the launch of the Framework for U.S. Stewardship and Governance, a historic, sustained initiative to establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct.
The Investor Stewardship Group represents some $17 trillion in assets under management, largely comprising the retirement and long-term savings of millions of individual investors around the world, and is being led by the senior corporate governance practitioners at institutional investor and investment management firms. At launch, the Investor Stewardship Group comprises BlackRock, CalSTRS, Florida State Board of Administration (SBA), GIC Private Limited (Singapore’s Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada (Asset Management), State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, Inc., ValueAct Capital, Vanguard, Washington State Investment Board, and Wellington Management.“
In markets around the world, there are well-established governance and stewardship codes. The Investor Stewardship Group’s goal is to codify the fundamentals of good corporate governance and establish baseline expectations for U.S. corporations and their institutional shareholders,” said Anne Sheehan, Director of Corporate Governance at the California State Teachers’ Retirement System. “The Group brings all types of investors together and enables us to speak with one voice on these fundamental issues.”The initial standards focus on corporate governance principles for listed companies and investment stewardship principles for institutional investors. Taken together, the standards form a framework for promoting long-term value creation for U.S. companies and the broader U.S. economy.
“This initiative reveals the depth and breadth of agreement amongst institutional investors,” said Rakhi Kumar, Managing Director and Head of Asset Stewardship at State Street Global Advisors. “The stewardship principles encourage all investors to take responsibility for owning the stewardship process and being accountable to those whose assets they manage. We encourage all institutional investors to join the Investor Stewardship Group to further these corporate governance and stewardship principles.
”The Framework is the result of a two-year effort by a broad range of investors. As an ongoing, dynamic effort, the Investor Stewardship Group is calling on every institutional investor and asset management firm investing in the U.S. to sign the Framework at http://www.isgframework.org.
Noted Glenn Booraem, Principal & Fund Treasurer at Vanguard, “We believe that the principles detailed in the Framework will further the productive dialogue and, most importantly, continue to drive positive change among institutional investors and the companies in which they invest. By articulating this set of shared behavioral expectations, we seek to promote our common objectives to create sustainable, long-term value for all shareholders.”
The Framework goes into effect January 1, 2018 to give U.S. companies time to adjust to its standards in advance of the 2018 proxy season.
The Framework’s principles are as follows (for additional information on these principles, please visit http://www.isgframework.org):
STEWARDSHIP PRINCIPLES FOR INSTITUTIONAL INVESTORS1:
Principle A: Institutional investors are accountable to those whose money they invest.
Principle B: Institutional investors should demonstrate how they evaluate corporate governance factors with respect to the companies in which they invest.
Principle C: Institutional investors should disclose, in general terms, how they manage potential conflicts of interest that may arise in their proxy voting and engagement activities.
Principle D: Institutional investors are responsible for proxy voting decisions and should monitor the relevant activities and policies of third parties that advise them on those decisions.
Principle E: Institutional investors should address and attempt to resolve differences with companies in a constructive and pragmatic manner.
One of the great statesmen of corporate governance, Ira Millstein, answered questions about boards and the changes likely to come from the new administration in an interview with The American Lawyer, excerpted below:
How would you characterize the state of corporate governance today?
I’m very proud of how far we’ve come. Directors understand they have a job to do. Investors are seeking long term gains. But corporate governance keeps evolving. We happen to be at one of the big [moments of] change. The biggest challenge I think we have is that the country has gone rather short-term. Today we have hedge funds and insurance companies and all the rest who profit by holding stock in corporations. The stock becomes almost a commodity. They go short-term and look for faster gains, rather than invest as if they were in it for the long-term.You can’t pass a law to say don’t do that. Capitalism is capitalism. I believe in the market and I believe in capitalism. What you have to think about is, who can change this? The board is the last resort.
Do you foresee any way the new administration can impact corporate governance?
I don’t think there’s a lot they can do to change how boards operate. There is a big wave of discontent in this country. Trump caught it. The lawyers, media and banks missed it. Trump got elected by people who are not happy, because they’re out of jobs and they can’t find the work they used to be able to get. I’m now thinking that there is something boards can do about this. They should listen to the fact that, unfortunately, only a tiny piece of the American public trusts the corporate sector.I’ve been thinking about what they could do to make it easier for people who are dispossessed. If competition requires them to move out of this country, then do it, but in doing it, why not think about how you can help the people who are dispossessed. Maybe you can start educating people about what’s coming. I don’t think we can, as a private sector, continue to disregard this. It’s too important.I think the private sector has a role to play here. I’m not urging companies to set aside a bundle of money to do good. I’m urging boards to think of this as a matter of reputation. I think that is good business.
Does the market respond unfavorably to generous CEOs? This paper from Thomas Shohfi “suggests that large philanthropists aren’t very good monitors, and that other investors realize it.”
Who would you rather own a business with, Mahatma Ghandi or Ebenezer Scrooge? Behavioral economics research points to considerable benefits of co-ownership with Gandhi, as counterparties (like suppliers, customers, and potential employees) work harder and offer better contracting terms when dealing with philanthropic principals. Understandably, these contracting parties feel better about not driving the hardest possible bargain, as the proceeds to a firm co-owned by Ghandi go at least partially towards noble causes.Corporate governance research based in agency theory, however, points to Scrooge being a major shareholder also having benefits. That is, small shareholders typically rely on the self-interest of large shareholders to monitor their shared investment. For those small shareholders, having Scrooge as a blockholder may be comforting, as he would likely be a very close monitor of managers (for his own benefit). Research in this mold has found that self-interested blockholder monitoring is particularly effective at discouraging wasteful investments in R&D, M&A, and PP&E. In this line of thinking, where the self-interest of large investors (and their associated monitoring of managers and the firm) comforts small investors, the market could view large investors’ philanthropy as troubling. If this philanthropy signals weakening self-interest on behalf of the newly charitable blockholder in question, smaller investors could worry that, as the monitor they rely on is less interested in wealth, this monitor will subsequently provide less monitoring of their shared investment. Sticking with our original analogy, this is akin to Scrooge taking a big step towards being Ghandi (i.e. Scrooge on Christmas morning). If you relied on Christmas Eve Scrooge’s preferences for wealth to keep an eye on an investment you two shared, this display of Scrooge’s new wealth preferences (giving wealth away à la Christmas morning Scrooge) could certainly have you worried! (citations omitted)
VEA Vice Chair Nell Minow spoke at Ralph Nader’s “Breaking Through Power” conference in Washington, D.C.