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.

State Street to Start Voting Against Companies That Don’t Have Women Directors – WSJ

Index-fund giant State Street Global Advisors on Tuesday will begin pushing big companies to put more women on their boards, initially demanding change at those firms without any female directors.The money manager, which is a unit of State Street Corp., says it will vote against board members charged with nominating new directors if they don’t soon make strides at adding women. Firms won’t have an exact quota to be in compliance with State Street’s mandate, but must prove they attempted to improve a lack of diversity. A firm that doesn’t add women, for example, would have to prove to State Street it attempted to cast a wider net and set diversity goals.

Source: State Street to Start Voting Against Companies That Don’t Have Women Directors – WSJ

The 100 Most Overpaid CEOs: Are Fund Managers Asleep at the Wheel? New Webinar and Report from As You Sow

The 100 Most Overpaid CEOs: Are Fund Managers Asleep at The Wheel? from As You Sow on Vimeo.

From the report, which can be downloaded here:

According to the Economic Policy Institute, “CEO pay grew an astounding 943% over the past 37 years, greatly outpacing the growth in the cost of living, the productivity of the economy, and the stock market, disproving the claim that the growth in CEO pay reflects the ‘performance’ of the company, the value of its stock, or the ability of the CEO to do anything but disproportionately raise the amount of his pay.”

For the past two years we have highlighted the 100 most overpaid CEOs of S&P 500 companies, and the votes of large shareholders, including mutual funds and pension funds on their pay packages.

What has changed since the first report? Not much. Executive pay has continued to increase. Although mutual funds and pension funds are doing better at exercising their fiduciary responsibility by more frequently voting their proxies against some of the most outrageous CEO pay packages. Of the mutual funds with the largest changes in voting habits from last year, all of them opposed more of the pay packages than they had the prior year.

As we noted in our prior reports, the system in place to govern corporations has failed in the area of executive compensation. Like all the best governance systems, corporate governance relies on a balance of power. That system envisions directors representing shareholders and guarding the company’s assets from waste. It also envisions shareholders

This governance system comes from a time when it was assumed that unhappy investors would simply sell their stakes if sufficiently dissatisfied with the governance of a company. It reflects a time when there were fewer intermediaries between beneficial holders and corporate executives. However, today more and more investors own shares through mutual funds, often investing in S&P 500 index funds. Individual investors are not in a position to sell their stakes in a specific company. The funds themselves are subject to a number of conflicts of interest and to what economists refer to with the oxymoronic-sounding term “rational apathy,” to reflect the expense of oversight in comparison to a pro rata share of any benefits.

The pay packages analyzed in this report belong to the CEOs of companies that the majority of retirement funds are invested in.

Today, those casting the votes on the behalf of shareholders frequently do not represent the shareholders’ interests.

CEO compensation as it is currently structured does not work; rather than incentivize sustainable company growth, compensation plans increase disproportionately by every measure. Too often CEOs are rewarded for mergers and acquisitions instead of improving company performance. As noted in the Financial Crisis Inquiry Report, “Those [compensation] systems encouraged the big bet – where the payoff on the upside could be huge and the downside [for the individual executive] limited. This was the case up and down the line – from the corporate boardroom to the mortgage broker on the street.”2 We note that the downside, which could include such features as environmental costs, may be limited for the individual, and instead borne by the larger society.

Paying one individual EXCESSIVE amounts of money can lead people to make the false assumption that such compensation is justified and earned. It undermines essential premises of capitalism: the robust ‘invisible hand’ of the market as well as the confidence of those who entrust capital to third parties. Confusing disclosure coupled with inappropriate comparisons are then used to justify similar packages elsewhere. These systems perpetuate and exaggerate the destabilizing effects of income inequality, and may contribute to the stagnating pay of frontline employees.

As the report is now in its third year, we have the ability to look back and see what happened to the companies identified in our report two years ago. We’ve been saying the most overpaid CEOs under-deliver for shareholders. In examining this data from the following two years of our report, we have found dramatic results— not only does the group of 100 most overpaid CEO companies of the S&P 500 underperform the S&P 500 by 2.9 percentage points, but the firms with the 10 most overpaid CEOs underperformed the S&P 500 index by an amazing 10.5 percentage points and actually had a negative return, reducing the actual value of the companies’ shares by 5.7 percent. In summary, the firms with the most overpaid CEO’s devastated shareholder value since our first report published in February 2015.

Identifying the 100 most overpaid CEOs in the S&P 500 was our purpose in writing this report. In undertaking this project we focused not just on absolute dollars, but also on the practices we believe to have contributed to bloated compensation packages.

Shareholders now supposedly have the right, since the enactment of the Dodd-Frank financial reform act, to cast an advisory vote on compensation packages. However, in today’s world, most shareholders have their shares held and voted by a financial intermediary. This means that this critical responsibility is in the hands of a fiduciary at a mutual fund, an ETF, a pension fund, a financial manager, or people whose full time job is to analyze the activities of the companies they invest in and monitor the performance of their boards, their CEOs, and their compensation.

A key element of the report has been to analyze how mutual funds and pension funds voted on these pay packages. This year we vastly expanded the list of funds we looked at. In response to excessive and problematic CEO pay packages, it should be noted that every fund manager has the power to vote against these compensation plans and withhold votes for the members of the board’s compensation committee who created and approved them. In some cases, institutional investors should request meetings with members of the compensation committees to express their concerns. Institutional investors should be prepared to explain their votes on executive pay to their customers, and individuals should hold their mutual funds accountable for such decisions by expressing their displeasure directly to those that are also well compensated to protect and represent them.

 

 

 

Funds ‘Rubber-Stamp’ CEO Pay Slightly Less Often: Report | Bloomberg BNA

Shareholder activism and public pressure around executive compensation may be having an effect on how mutual funds vote on pay packages at companies they invest in.Mutual fund giants such as BlackRock Inc. and Vanguard Group have been called out by shareholder advocates in the past for “rubber-stamping” pay plans, but research from As You Sow shows they are voting against compensation deemed excessive a bit more often.The shareholder advocacy group came up with a list of 100 chief executive officers in the S&P 500 whose pay it considered too high based on financial performance and other factors. It then looked at voting records across 25 mutual fund families and found that average support for “overpaid” CEOs has declined somewhat, from 82 percent to 76 percent, over the past year.

Source: Funds ‘Rubber-Stamp’ CEO Pay Slightly Less Often: Report | Bloomberg BNA

Are Fund Managers Asleep at the Wheel? Which Funds Enable Excessive Pay?

Excessive executive compensation is a core contributor to America’s extreme and growing income inequality. CEOs have come to be grossly overpaid, and that overpayment is bad for the companies, the shareholders, the customers, and the other employees. The 100 Most Overpaid CEOs 2017, the third in a series from As You Sow, is designed to provide investors an overview of companies that overpay their CEOs, and a look at which pension and mutual funds too often vote to approve pay. The webinar, featuring report author Rosanna Landis Weaver of As You Sow and other leading compensation experts, will present the report findings and offer attendees the opportunity to pose questions to the panelists.

Register here.

Your Mutual Fund Has Your Proxy, Like It or Not – The New York Times

From Gretchen Morgenson:

The voting of fund managers is infected by conflicts of interest, said Erik Gordon, a professor at the Ross School of Business at the University of Michigan. That is because these giant mutual fund operators don’t just own shares in many big American companies; they also do business with them.

“Funds often avoid challenging management on executive pay and corporate governance because they want to be included in corporate defined-contribution benefit plans,” he said in an email. “If a fund irritates a C.E.O. and the C.E.O.’s pals on the board, the fund risks losing business at several companies.”

BlackRock and Vanguard dispute this notion, saying they put their customers’ interests first in their voting. “We weigh all factors that could affect the long-term value of our clients’ assets,” Ed Sweeney, a spokesman for BlackRock, said in a statement, “including the hundreds of public pension plans, nonprofits, foundations, endowments, educational institutions and individual investors we serve.”

…On matters involving executive pay, in the most recent 12 months, [Black Rock and Vanguard] overwhelmingly supported compensation practices at the companies in the Standard & Poor’s 500-stock index. BlackRock supported executive pay at 98.3 percent of those companies in the most recent year, and Vanguard voted in favor of pay practices in 98.1 percent of its votes. (Vanguard disputed this, saying it voted yes a mere 96 percent of the time.)

By the way, both companies supported the pay practices at Wells Fargo, whose executives are under fire for overseeing a pervasive program that prompted many employees to set up sham accounts to generate fees and make quotas.

As head of BlackRock’s investment stewardship unit, Michelle Edkins oversees its voting. On executive compensation, she stressed that the firm voted against pay practices or compensation committee members at 10 of the 50 companies with the highest-paid chief executives this year. She also said that BlackRock discussed compensation matters with half of those companies.

Beyond pay, BlackRock and Vanguard both supported management by voting against most proposals requiring that a company’s board be led by an independent chairman. Shareholders in favor of this idea contend that such a move would reduce management’s grip on the board and bring more accountability to corporations.

BlackRock voted nay on 95 percent of such proposals, Proxy Insight found, while Vanguard rejected 100 percent of them.

Source: Your Mutual Fund Has Your Proxy, Like It or Not – The New York Times

Proxy voting disclosure of non-U.S. funds: From accessible to invisible; clear to cumbersome 

As You Sow’s Rosanna Landis Weaver and Dan McCarthy have published a new report on disclosure of proxy votes and policies by non-US investors.

The degree of transparency on proxy voting practices and data accessibility covers a range as vast as the globe. Many funds – including a preponderance of Canadian funds – publish their voting records in searchable databases. Others disclose this information in a more cumbersome way, but it is accessible (though one may need to use Google translate.)Others publish only voting guidelines, or aggregated voting data. Dutch fund ABP discloses the why and how of their voting without getting to company-level specifics. For example, ABP discloses their aggregate voting data for executive compensation, noting that out of 1700 remuneration resolutions, they voted “against’ 54% of the time, and “for” 45% of the time. Further along they shed light on their rationale, “The main reasons for voting against were excessively generous severance packages, inadequate links between payment and performance and opaque schemes.”In our review of websites we found it not uncommon for funds to focus only on voting domestic equities. Foreign equities may then be delegated to a third party, including proxy advisors or money managers. A few international funds take it a step further, declining to even vote on foreign equities at all. Given the disproportionately high pay of CEOs in the U.S. market, we believe that this is an abdication of their responsibility.

Source: Proxy voting disclosure of non-U.S. funds: From accessible to invisible; clear to cumbersome – CEO Pay Updates: 2016 Proxy Season

Nabors Directors Stay on Board After Being Voted Off Four Times – Bloomberg

Shareholders have withheld a majority of votes from director John Yearwood at [Nabors’] last four annual meetings. The responsibility to accept his resignation would normally lie with Nabors’ governance and nominating committee. Who heads up that committee? Yearwood does. Who are the committee’s other members? Mike Linn and Howard Wolf, the other two who were voted out.To avoid having the three decide on their own resignations, Nabors’ board created a specially appointed governance and nominating committee with other directors, and that panel suggested they stay on. The board then voted unanimously to reject the resignations and overrule the tally, according to the filing. It’s the fourth-year in a row that the board has used such a tactic to thwart the will of owners.

Source: Nabors Directors Stay on Board After Being Voted Off Four Times – Bloomberg

Why Passive Investing Increases Corporate Activism

In a new paper, the authors of the award-winning “Passive Investors, Not Passive Owners”

show how passive investing also leads to more aggressive shareholder activism than there would be otherwise, as passive fund firms add their clout to campaigns waged by activist investors. Their paper is titled, “Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism.”“We’re asking whether two recent trends in U.S. stock ownership — the rise of activism and the growth of passive investors — are related,” [co-writer Todd A.] Gormley says. “Might the rise in passive ownership actually, somehow, be facilitating activism?”

In the paper, Gormley and his co-authors, Donald B. Keim, and Ian R. Appel, find that:

the rise in activism and its successes has coincided with the growing influence of passive institutional investors. Passively managed mutual funds now account for more than a third of all mutual fund assets, and the institutions that offer these funds, like Vanguard, State Street, and Blackrock, are now often the largest shareholders of U.S. companies. In this paper, we ask whether the growing importance of passive institutional investors has influenced activists.

We find, over the 2008-2014 period, that activists are more likely to pursue expensive activism campaigns when the target company’s stock has higher ownership by passively managed mutual funds.

Source: Why Passive Investing Increases Corporate Activism

Large Minority of Goldman Shareholders Urge CEO, Chairman Split – TheStreet

Institutional investors will likely be back next year with a new effort to exert more influence on Goldman Sachs (GS) board after a large minority of shareholders voted Friday to separate the role of chairman and CEO at the bank.Roughly 30% of voting shares at the mega-bank voted against CEO Lloyd Blankfein retaining both positions — not enough to convince Goldman to split the role but a substantial enough number to raise serious questions about shareholder relations at the bank in the coming months. In addition, 33% of voting shares opposed the company’s executive compensation plans, including that of Blankfein, also putting a negative spotlight on the company’s executive pay practices.

Source: Large Minority of Goldman Shareholders Urge CEO, Chairman Split – TheStreet