Activist investor Daniel Loeb announced over the weekend that his hedge fund, Third Point, has taken a $3.5 billion stake in the Swiss food conglomerate Nestle, and he wants some changes at the company. That may sound like a lot of money, but the investment represents just over a 1 percent stake in the company. It’s enough though to get the company’s attention. That’s because activist investors are looking to drive change, unlike a lot of “passive” investors, who just sell their stock if they don’t like how a company is run. How do activist investors work? Experts say if activists have a reputation for adding value and getting good returns, and if they have appealing ideas, they can win over other shareholders who will help them push for change.
[S]hareholder activists can help improve long-term value, even when following the activists’ proposals would not. That is just as true today and these proposals may well prime the pump for future board or shareholder actions. That is, GM has conceded that its stock is undervalued and that change is needed. GM argues those changes are underway, and for now, most voting shareholder agree. But we’ll see how this looks if the stock price has not noticeably improved next year. An alternative path forward on some key issues has been shared, and that puts pressure on this board to deliver. They can do it their own way, but they are on notice that there are alternatives. And shareholders now know that, too.
This knowledge underscores the value of shareholder proposals as a process. They can and should create accountability, and that is a good thing. I agree with GM that the board should keep control of how it structures the GM leadership team. But I agree with the shareholders that if this board doesn’t perform, it may well be time for a change.
Source: Business Law Prof Blog
Four large pension funds have asked shareholders of the drug company Mylan NV to vote against six directors, including the company’s chairman, who have been nominated for re-election at the company’s annual meeting June 22.
“We believe the time has come to hold Mylan’s board accountable for its costly record of compensation, risk and compliance failures,” said the letter to shareholders, a copy of which was filed recently with the Securities and Exchange Commission.
The letter was signed by Scott Stringer, the New York City comptroller, on behalf of the $170.6 billion New York City Retirement Systems for which he is fiduciary to the five funds within the system; Thomas DiNapoli, the New York state comptroller and sole trustee of the $192 billion New York State Common Retirement Fund, Albany; Anne Sheehan, director of corporate governance for the $206.5 billion California State Teachers’ Retirement System, West Sacramento; and Margriet Stavast-Groothuis, adviser, responsible investment, for the €205.8 billion ($230 billion) Dutch pension provider PGGM, which manages the assets of the €185 billion Pensioenfonds Zorg en Welzijn, Zeist, Netherlands.
Collectively, the pension funds own approximately 4.3 million shares of Mylan stock, worth about $170 million, said the letter to shareholders.
Asset manager BlackRock Inc on Friday said it voted in favor of a shareholder proposal calling on Occidental Petroleum to report on the impact climate change could have on the energy company’s business, helping it to pass.The comments by BlackRock, the world’s largest asset manager, also marked a more detailed level of explanation than it has traditionally offered for its proxy votes, which could make it even more influential.
BlackRock, a major Occidental investor, last year had opposed a similar shareholder resolution, which failed to get a majority of support from investors.In a statement sent by a BlackRock spokesman explaining the switch, the fund firm said that despite talks with Occidental, “we remain concerned about the lack of discernable improvements to the company’s reporting practices” on climate issues.
An Occidental spokesman said via e-mail the shareholder resolution passed at the company’s annual meeting, held in Houston, Texas on Friday.”The board acknowledges the shareholders’ support for this proposal,” Occidental Chairman Eugene Batchelder said in a statement e-mailed by a company spokesman. “We look forward to continuing our shareholder engagement on the topic and providing additional disclosure about the Company’s assessment and management of climate-related risks and opportunities.”
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.
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.
16 2017 Proxy Statement, at 36.
17 2017 Proxy Statement, at 40.
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:
|○||EPS w/o adjustment $2.61|
|○||Threshold for payout $2.68|
|○||EPS with adjustment for Kemper $2.8222|
|○||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.
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.
VEA Vice Chair Nell Minow spoke at Ralph Nader’s “Breaking Through Power” conference in Washington, D.C.
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.
1. In 2016, we expect to see the companies make substantive commitments to developing a holistic
strategy for emissions reductions that gives weighting to the total lifecycle, in a way that is
consistent with limiting rises in global temperatures to 1.5 – 2°C.
2. Going forward, this strategy and its accompanying benchmarking and reduction targets should be
clearly communicated to shareholders to allow for evaluation.
To ensure portfolio resilience under scenarios that limit global temperature rises to the recently established global target of staying ‘well below’ 2°C, with an ambition for 1.5, there is a need for radical portfolio transformation. Shareholders have an interest in understanding how companies are preparing for resilience under these scenarios; both in terms of identifying risk through portfolio stress-testing, and describing how they would adapt under such carbon-constrained conditions.
It may have a staff of 10—and only two of those are investors—but a small public pension in a quiet corner of the UK is officially one of the most influential environmental, social, and governance (ESG) investors in the world.
The £2.7 billion ($4 billion) Environment Agency Pension Fund has ranked among some of the biggest asset owners in the world for its contribution to ESG issues by a new survey.
Respondents to a survey of asset managers, analysts, and asset owners by Extel and SRI-Connect named the $295.8 billion California Public Employees’ Retirement System as having contributed the most to the “SRI [socially responsible investing] debate”.
Also in the top 10 influencers, according to the survey, was the $829.5 billion Norway Government Pension Fund Global, the world’s biggest sovereign wealth fund, and ABP, the Dutch pension for government and education workers and the biggest pension fund in Europe.