Charles Elson’s 2018 Proxy Season Predictions

Forbes’ Christopher Skroupa interviewed Charles Elson of the University of Delaware’s John L. Weinberg Center for Corporate Governance about what we can expect in next year’s proxy season:

I think you’re going to see a lot more direct involvement between shareholders and directors than before – whether it’s with a non-executive chair of the board, or head of the governance committee, I think there is a real desire on the shareholder side to directly engage with the party who directly represents them, the director, rather than simply engaging with management.

I believe you’re going to see more calls for discussions, obviously subject to the requirements of Regulation Fair Disclosure, but, ultimately, much more engagement. My suspicion is that, from the board’s perspective, it will be more of a listening and awareness exercise, as opposed to discussions, because the law is very strict on what kind of conversations can take place.

For a director, listening carefully to the concerns of investors saves the directors a lot of trouble down the road. Even more importantly, it helps them better analyze management’s actions at the companies which they oversee…[Boards are] going to have to listen to the concerns that the activists express. It’s not the messenger, it’s the message that’s important here. Companies need to become responsive to the message that the activist is carrying. If everything was going beautifully, the activist would never show up.

Center for Political Accountability: Rise in Mutual Fund Support for Shareholder Resolutions on Political Contributions

The Center for Political Accountability reports that mutual funds are increasing their support for shareholder resolutions calling for companies to disclose information about their political contributions.

Support by mutual funds for the Center for Political Accountability’s corporate political disclosure resolution jumped significantly in 2017, to 48 percent from 43 percent in 2016, according to an analysis by Fund Votes.

The analysis also found that abstentions decreased from five percent to three percent, indicating a shift toward more active support for political
transparency in the first year of Donald Trump’s presidency….Among 20 of the 23 largest asset managers globally, average support for the CPA model
resolution was 37.3 percent, based on 22 resolutions filed. This represents an increase of more than six percentage points from 2016 when average support was 31.1 percent, based on 27 resolutions filed. In addition, more fund groups participated in voting on the resolutions with abstentions decreasing by an average of eight percentage points from 11.5 to 3.4 percent.

As has been the case in previous years, the biggest fund groups remained the biggest laggards. Vanguard, Fidelity, BlackRock and American Funds continued a nearly unbroken record of voting against or abstaining on corporate election spending disclosure resolutions. Average shareholder support also dropped slightly from 33 percent in 2016 to 30 percent in 2017.

FT: Investors pass the buck on governance VEA: No They Don’t

Rana Foroohar’s column on institutional investors and corporate governance is internally inconsistent and factually wrong. She says that institutional investors “outsource” their proxy votes to the proxy advisory firms. But anyone who understands finance and markets has to recognize that (1) institutional investors rely on a wide range of sources for making all investment decisions, including proxy voting, and that they make decisions about the sources they rely on based entirely on their assessment of value, (2) the data show that institutional investors like the analysis of the proxy advisory firms but often depart from their recommendations, especially on complex and controversial votes like proxy contests and business combinations, and (3) the votes she focuses on, regarding CEO pay, are advisory only and can be disregarded by the board

In other words, even if they do “outsource” their fiduciary obligation (no evidence this is the case), the vote is not binding on the company, which can ignore it.

She writes:

Consider the recent saga of Credit Suisse. Over the past couple of years, the company has been trying to orchestrate a turnround, settling a big fine over dicey (pre-financial crisis) mortgage-backed-security deals with the Department of Justice, offloading bad assets and restructuring the business. None of this is good for share price in the short term, but it was necessary. No surprise, then, that the Credit Suisse management team was disappointed when proxy advisers opposed its corporate pay plan, citing 2016 losses, despite the fact that the top brass took a 40 per cent cut in its own compensation as part of the turnaround effort. “It was just totally demotivating for staff and management,” says one insider. “We could have left these decisions for someone else to worry about later and there would have been no issue over pay.”

ISS stands by its recommendation, and adds that it does take into account other performance metrics, like return on invested assets, revenue growth, and so on. But TSR is “what investors want to see,” says Patrick McGurn, special counsel at ISS, and therefore determines a yes-or-no vote on pay. “We’ve talked to our clients about using non-financial performance to judge pay, but they want something quantifiable. You can’t just have some vague judgment about it.”

A couple of points here. First, Foroohar completely undercut her own argument by showing that it is the institutional investors and proxy advisory service clients who tell ISS what to do, not the other way around. Second, if, indeed, the turnaround will provide benefits to investors, that is when the benefits should be realized by the employees as well, and there are pay plans that provide all the right incentives to do so.

Source: Investors pass the buck on governance

Tim Smith on Conflicts and Opportunities in Mutual Fund Proxy Votes: Progress at Vanguard

VEA Vice Chair Nell Minow interviewed Walden’s Tim Smith for the Huffington Post:

I’ve written earlier pieces about the failure of the people who manage our money, especially our retirement savings to provide essential feedback to the companies whose stock they buy on behalf of more than 40 percent of working Americans, charging us as many as 16 undisclosed fees and usually voting against shareholder initiatives on improving board, increasing the link between CEO pay and performance, and making better disclosures on climate change, cybersecurity, diversity, and other issues relating to investment risk and corporate reputation. There’s been a little bit of progress at Vanguard, one of the most powerful and influential money managers, with more than three TRILLION dollars invested, so I asked one of the most thoughtful leaders in this field, Tim Smith of Walden Asset Management, some questions about why that is important and what it means.

 

How much stock in big American companies is controlled by these firms?  How much money is involved?

These are massive investment firms. BlackRock has over $5 trillion dollars in Assets they are managing and Vanguard approximately $3.5 trillion. The raw size of their holdings results in having tremendous power with the companies they own. Most firms that have outreach to their primary investors always make sure to arrange visits with Vanguard and BlackRock as a necessary stop.

 

Why does it matter how they vote on topics like climate change and disclosure of political contributions when even a 100 percent vote is advisory only and does not require the company do  anything?

 

Shareholder resolutions filed on social and environmental issues have a 45 year history as investors raise important environmental , employee relations, human rights, workplace health and safety issues among others. These resolutions and the engagements that accompany them have had a significant long-term impact on company policies and practices. There are literally hundreds and hundreds of examples of companies responding positively to investor input by

* expanding their corporate disclosure for investors and the public

* changing their policies, practices, and behavior

* updating governance policy

*taking forward-looking steps on an issue like climate change

*making sure hazardous products are removed from food or a production process influencing workers.

*adding diverse candidates to the Board

And the list goes on. Whether a shareholder resolution is binding or not seems immaterial . Companies often see these issues as affecting their reputation and their credibility with investors or consumers as well as affecting them financially over time. Thus many companies take action stimulated by the case being made by investors — but also by their own sense of how acting in a responsible way is good for their business and long term shareholder value.

 

So how investors vote is vitally important because it is a clear indicator of how a company’s shareowners feel about an issue. To blindly vote for management in virtually all cases not only distances the investor from important decisions that affect them financially but is far from acting as a “responsible fiduciary.” In short, it definitely matters how they vote your shares!

 

Every mutual fund company files a form NPX each August disclosing how they vote. So there is a public record. In addition Ceres, the environmental organization, summarizes how funds vote on climate related issues, a good indicator of an investment firm’s voting stance. You can see which funds vote for climate resolutions 0 percent of the time or 15 percent or over 50 percent.

 

What have you been doing to try to get Vanguard and Blackrock to be more transparent and engaged in share ownership rights like proxy voting?

 

Over the last several years companies like BlackRock and Vanguard which had a consistent record of voting against all social and environmental resolutions faced growing pressure from clients and investors. In addition, media attention compared them unfavorably to companies like State Street which showed real forward progress in proxy voting. In addition, PRI expects its members to demonstrate seriousness in being an “active owner.”

 

Walden Asset Management, where I serve as Director of ESG Shareowner Engagement, led a shareholder resolution to both companies and was joined by other investors  as cofilers. This prompted both companies to sit down with us to see if we could come to an agreement allowing the resolution to be withdrawn before the vote. As I said, even non-binding shareholder proposals can have an impact.

 

Both discussions were productive, leading to agreements, and both companies disclosed their new thinking about proxy voting on their websites, highlighting their deep concern about climate risk and their strong support for diversity on boards of directors.

 

What does this latest statement from Vanguard signify?  Does it go far enough?

 

These are important steps forward by two of the world’s largest investment managers. Their engagements with companies send a strong message to executives that it is necessary to address and urgently  act on climate change, for example. But their voting record is still at the bottom of the ladder. They voted for two resolutions, at ExxonMobil(62.3 percent shareholder support) and Occidental (67 percent shareholder support) but they voted no on dozens of other climate-related resolutions. It’s a start but still demonstrates a very modest voting record. Pressure will doubtlessly mount on these two giants to match their rhetoric with actual votes pressing companies to move with some sense of urgency on key environmental and social issues.

 

What more would you like money management firms like Vanguard and Blackrock to do?

 

Vote more aggressively, be transparent about what is put on the table in their meetings with companies (no need to mention companies by name), join other investors in speaking out on key environmental/social/governance issues affecting companies financially, meet with shareholder resolution proponents to better understand their positions, speak publicly about the value of the shareholder resolution process, and make sure will not be eradicated by proposals by led by the Business RoundTable or Chamber of Commerce.

Wall Street investors throw their weight in corporate votes – The Globe and Mail

Big investors are losing patience with unresponsive corporate directors, and they’re showing it with their votes.Shareholders have withheld 20 per cent or more of their votes for 102 directors at S&P 500 companies so far this year, the most in seven years, according to ISS Corporate Solutions, a consulting firm specializing in corporate governance. While largely symbolic, the votes at companies such as Wells Fargo & Co. and Exxon Mobil Corp. are recognized as signals of displeasure and put pressure on boards to engage.

“Institutional investors are becoming more actively involved in communicating displeasure through their votes,” said Peter Kimball, head of advisory and client services at the consulting firm, a unit of Institutional Shareholder Services. “Voting against directors at large-cap S&P 500 companies is a way for an institution to send a signal to other, smaller companies about the actions that they don’t like. That feedback trickles down.”

While the Trump administration moves to reduce regulatory pressure on companies, big institutional investors are moving in the opposite direction. State Street Global Advisors and BlackRock Inc., for example, are increasingly taking an activist approach, calling for changes in diversity and corporate responsibility.

“Part of this is really the shift in investors to focus more on board quality,” said Rakhi Kumar, who leads environmental, social and governance investment strategy at State Street. “Board responsiveness is a key reason why shareholders will hold directors responsible. If engagement isn’t working and boards aren’t being responsive to our feedback, then we take action.”

State Street voted against 731 directors in 2016 and expects a similar number this year, after rejecting 538 in 2015, Ms. Kumar said. No longer are investors just “checking a box” to support directors, she said. State Street is encouraging companies to refresh their boards to get new and more diverse members. (emphasis added)

Source: Wall Street investors throw their weight in corporate votes – The Globe and Mail

Norway Sovereign Wealth Fund Is Refusing to Be Silenced – Bloomberg

Norway’s $960 billion sovereign wealth fund, the world’s biggest, is taking a stance against equity indexes including companies that aren’t subject to shareholder control. The move opens a new front in the fund’s efforts to use its considerable—and growing—clout to force companies to improve their ESG act.

Source: Norway Sovereign Wealth Fund Is Refusing to Be Silenced – Bloomberg

Are Fund Managers Pushing Back on CEO Pay?

Financial Times notes:

[T]here are tangible signs that a growing number of investors are taking action to rein in excessive pay for company bosses. The consensus is that pressure from the public, politicians and clients have combined to put pressure on the investment industry to prove it is willing to push back on egregious pay packages.

Graeme Griffiths, a director at Principles for Responsible Investment, a UN­backed organisation whose members oversee a collective $62tn of assets, says: “Society is calling on fund managers to be more engaged. The public is now more aware of [wealth inequalities] than they were before.

“There has been a lot of academic research, news coverage and changes in the political landscape that have increased scrutiny of the differentials between those in well [paid] positions in the corporate arena versus those in more typical jobs. [Asset managers] are certainly partly responsible for this divergence over a long period of time.”

BlackRock, which was urged to toughen its voting approachurged to toughen its voting approach after approving 97 per cent of US pay resolutions in the 12 months to the end of June 2015, this year urged the CEOs of the UK’s largest companies to ensure salary increases for executives did not outpace those for average workers.

The world’s largest asset manager was also slightly less lenient on pay in the US last year, approving 96 per cent of remuneration reports in the 12 months to the end of June 2016, according to figures compiled for the FT by Proxy Insight, the data provider.

BlackRock chief executive Larry Fink additionally wroteLarry Fink additionally wrote to the heads of large global companies this year warning them that BlackRock would not “hesitate to exercise our right to vote against . . . misaligned executive compensation”.

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