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Weekly Governance Alert
Editor: Rosemary Lally | Sept. 24, 2020 | Vol 25, Issue 36
In This Issue
  • SEC Muzzles the Voice of Investors by Raising the Bar on Shareholder Proposals
  • CII Urges DOL to Withdraw Proposed Rules on Proxy Voting
  • CII Expresses Concerns About SEC Plan to Raise Reporting Threshold for Form 13F
  • ISS Continues to Pursue Suit Challenging SEC’s Interpretation of Proxy Solicitation
  • Major Players Signal Streamlined ESG Disclosure
  • ESG Disclosure, Diversity at Asset Managers Discussed During SEC’s AMAC Meeting
  • Coverage of CII's Fall Conference
FYI
  • Ceres Seeks Manager, NYS Comptroller’s Office Looking for Corporate Governance Officer
SEC Muzzles the Voice of Investors by Raising the Bar on Shareholder Proposals
In a 3-2 vote the SEC September 23 approved amendments to the shareholder proposals rules that CII believes will muzzle the voice of small investors and shield many CEOs from accountability to shareholders.

The final amendments will, among other things, replace the current ownership threshold, which requires holding at least $2,000 or 1% of a company’s securities for at least one year, with three alternative thresholds that will require shareholders to demonstrate continuous ownership of at least:

  • $2,000 of the company’s securities for at least three years;
  • $15,000 of the company’s securities for at least two years; or
  • $25,000 of the company’s securities for at least one year.
 
The SEC also changed the levels of shareholder approval required to resubmit shareholder proposals at the same company’s future meetings. Those new minimum prior support levels to avoid eligibility for exclusion are:

  • 5% approval for proposals previously voted on once in the past five years;
  • 15% approval for proposals voted on twice in the past five years; and
  • 25% approval for those considered three or more times in the past five years.
 
The SEC changed those thresholds from 3%, 6% and 10%, respectively. For example, a proposal will need to achieve support by at least 5% of the voting shareholders in its first submission to be eligible for resubmission in the following three years. Proposals submitted two and three times in the prior five years will need to achieve at least 15% and 25% support, respectively, to be eligible for resubmission in the following three years.
 
The rule changes also will prohibit shareholders from aggregating their holdings to satisfy the new ownership thresholds. In addition, shareholders who use representatives to file shareholder proposals will be required to provide documentation to clarify that the representatives are authorized to act on their behalf. They also will be required to provide additional documentation to provide assurance as to their identity, role and interest in the proposal being filed.
Shareholders submitting proposals to companies will be required to indicate that they are able to meet with the companies, either in person or via teleconference, between 10 and 30 days after filing their proposals. They also must provide contact information and specific business days and times when they are available to discuss their proposals with the companies.

The SEC also changed the rules to specify that a shareholder-proponent will not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, a representative will not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.
 
“The amendments weaken the voice of investors and jeopardize faith in the fairness of U.S. public capital markets by making the filing process more complicated, constricting and costly,” CII Executive Director Amy Borrus said in a statement. She noted that the rule changes will result in fewer shareholder proposals, which she said was the goal of the business lobby that pressed the SEC to make them. “Simply put, CEOs and corporate directors do not like being second-guessed by shareholders on environmental, social and governance matters,” Borrus added. CII has sent multiple letters to the SEC strongly opposing the rule changes and showing, with the use of research, how they would negatively affect shareholder proponents.

SEC Chair Jay Clayton called the rules changes “carefully tailored and modest refinements” that “will better ensure that the interests of those who submit, and re-submit, shareholder proposals are appropriately aligned with the interests of their fellow shareholders who must take the time to review, consider and vote on those proposals.” 

The two SEC commissioners who voted against the amendments, Caroline Crenshaw and Allison Herren Lee, were highly critical of the rule changes. “Shareholder proposals provide a proven, effective pathway for sending good ideas to management, while allowing bad ideas to fall away. After today, fewer of those ideas will surface and those conversations will not occur,” said Crenshaw. She also noted that the SEC release on the amendments claims that the changes will save nearly $70 million per year across the companies in the Russell 3000 index, which she calculated would average savings of about $23,000 per company. Crenshaw also noted that data shows that in most years, companies do not receive even one proposal. “We are raising the bar for retail shareholder proposals to save corporate costs that the commission’s own analysis acknowledges are minimal,” she said.

Lee said the commission chose to adopt the rule changes despite the fact that the number of comment letters opposing the proposed amendments vastly outnumbered those supporting them. She said the new rules “universally reject the comments and data submitted by shareholders, failing in the process to reckon with very real costs of reducing shareholder oversight.” The commissioner also accused the SEC of moving to restrain ESG proposals just as they were being filed in greater numbers and receiving higher levels of support. In particular she noted that last year average support for proposals related to climate change rose to 31% and four proposals passed. “Shareholders are beginning to accomplish on climate change what they have accomplished on numerous other significant issues crucial to good governance and long-term value—focus management attention and drive valuable and needed change. The commission should be encouraging this kind of engagement, not stifling it,” she asserted.   

Commissioner Hester Peirce called the rules changes “reasonable and limited in nature” and went on to blast the SEC’s no-action process, which companies use to obtain permission from the SEC staff to omit shareholder proposals from their proxy statements. In particular, she took issue with Rule 14a-8(i)(7), which allows companies to omit proposals related to their ordinary business, but requires those proposals that transcend day-to-day matters to be included. “So essentially the rule drops a whole host of very divisive issues on the desks of commission staffers to sort through,” she said. If the commission continues to adjudicate the excludability of shareholder proposals, it should relieve the staff of the “unreasonable” task of making the final determination of which matters rise to the level of a sufficiently significant social policy issues, Peirce asserted. “At the very least, the commission should provide fresh interpretive guidance to the staff and the markets on how this exclusion should be analyzed,” she added.

Commissioner Elad Roisman said the rules needed to be updated because they had enabled some shareholders to get up on soapboxes that other shareholders paid for. “The commission has the responsibility to reassess Rule 14a-8 to ensure that shareholder-proponents demonstrate a sufficient economic stake or investment interest in a company before they are able to submit proposals,” he said. 
CII Urges DOL to Withdraw Proposed Rules on Proxy Voting
CII sent a strongly worded letter to the Department of Labor (DOL) September 24 opposing rules proposed by DOL August 31 and asking the agency to withdraw them. The rules would require fiduciaries to cast proxy votes only on issues that have an “economic impact” on their pension plans governed by the Employee Income Retirement Security Act (ERISA).
 
The proposed rules also say the Avon Letter (1988 DOL guidance that established that votes were considered plan assets) and subsequent guidance from DOL on proxy voting “has resulted in a misplaced belief among some stakeholders that fiduciaries must always vote proxies, subject to limited exceptions, in order to fulfill their obligations under ERISA.” They emphasize that “there is no fiduciary mandate under ERISA always to vote proxies.”

CII’s letter says DOL has not provided a persuasive rationale for the proposed rules and makes the following arguments disputing a need for them:

  • Research indicates that shareholder proxy voting can, in fact, enhance shareholder value.
  • Plan fiduciaries do not need clarification about whether they are required to vote all proxies—they generally understand that voting proxies is a fiduciary obligation that must be carried out taking into consideration the costs and benefits to the plan.
  • The changes in the financial markets that DOL uses to justify the rules do not demonstrate a need for them.

Overall, the letter says the provisions in the proposed rules requiring a fiduciary to not only analyze the importance of every single vote to the economics of the investment, but also to conduct a second layer of detailed analysis to determine how the vote impacts the plan as a whole are complex, difficult to conduct, and would often have to be based on indeterminable facts. “The practical impact of the proposed rule’s strong prejudice against proxy voting would be to effectively silence and disenfranchise ERISA plans,” CII argues.
CII Expresses Concerns About SEC Plan to Raise Reporting Threshold for Form 13F
CII sent a letter September 17 to the SEC stating that it cannot support a proposed amendment that would raise the reporting threshold for Form 13F reports by institutional investment managers from $100 million to $3.5 billion.

The letter cites the following three reasons:

  1. The amendment could reduce, rather than increase, the transparency of market information that may be useful to long-term investors. Commissioner Allison Herren Lee has stated that the proposed rule would reduce transparency by eliminating “access to information about discretionary accounts managed by more than 4,500 institutional investment managers representing approximately $2.3 trillion in assets.” CII membership-approved policies support disclosure by institutional investors of fund holdings.
  2. The commission may not have the legal authority to raise the rule 13f-1 threshold-- Congress set a statutory reporting threshold at $100 million, and the commission has the authority to lower it.
  3. Raising the threshold may negatively impact investor confidence in the integrity of the U.S. markets. CII’s policies reflect the view that transparency, including public reporting, and the vigilance and oversight of regulators, including the SEC, are critical factors to creating and maintaining investor confidence in the markets.
ISS Continues to Pursue Suit Challenging SEC’s Interpretation of Proxy Solicitation
ISS September 18 filed an amended complaint and motion for summary judgment asking the U.S. District Court for the District of Columbia to invalidate and enjoin rules issued by the SEC on July 22 that codify the commission’s belief that the provision of proxy advice constitutes a solicitation.

The complaint, which updates and amends the lawsuit ISS initially filed on Oct. 31, 2019, also seeks to invalidate and enjoin “guidance” issued by the commission in August 2019 that similarly reclassifies the work of proxy advisers to be that of soliciting votes on corporate ballots.

ISS’ amended complaint and motion for summary judgment argues that the new rules:

  • exceed the agency’s statutory authority because they unlawfully regulate proxy advice as proxy solicitation;
  • are arbitrary and capricious under the Administrative Procedure Act; and
  • violate the First Amendment to the extent they compel proxy advisers to share their recommendations with companies and disseminate companies’ responses.

For these reasons, ISS is asking the court to declare the new rules and the guidance unlawful and to vacate them and halt their enforcement. The case will be briefed over the next several months and ISS says it is optimistic that the court will rule by early 2021.

CII plans to file an amicus brief in support of ISS’s lawsuit and will circulate a draft On September 30 to those investor members who have expressed an interest in potentially co-signing the brief. Please contact CII General Counsel Jeff Mahoney at jeff@cii.org with any questions.
Major Players Signal Streamlined ESG Disclosure
The International Federation of Accountants (IFAC) recommended the creation of a new global Sustainability Standards Board to be run by the International Financial Reporting Standards (IFRS) Foundation alongside the International Accounting Standards Board (IASB). The proposed International Sustainability Standards Board (ISSB) would “develop global standards and rationalize the current fragmented ecosystem”, following an approach that would build upon existing non-financial reporting frameworks, including the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI).

This recommendation came the same day as five leading sustainability standards organizations, SASB, GRI, the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB) and the International Integrated Reporting Council (IIRC), issued a statement saying that they intend to work together toward a more comprehensive system of non-financial disclosure reporting. Their organizations, which focus on different definitions of materiality, the statement says, serve as a “natural starting point” for a “comprehensive, globally accepted, corporate reporting system.”

Both the recommendation and the statement cite growing momentum from investors, regulators and other stakeholders for a cohesive system of corporate disclosure on ESG issues. IFAC also emphasized the need for accompanying corporate governance reforms to provide effective oversight of what would be expanded reporting requirements, as well as support from market participants including global institutions, accountants and ESG ratings providers.

CII September 22 adopted a new statement on sustainability performance disclosure that supports a prominent role for independent third-party standard setting. See story below for more details.
ESG Disclosure, Diversity at Asset Managers Discussed During SEC’s AMAC Meeting
The SEC’s Asset Management Advisory Committee (AMAC) covered a lot of ground when it met September 16, discussing ESG disclosure, steps needed to improve diversity and inclusion at asset managers, and exchange traded products and operations during the pandemic. The AMAC task force on the pandemic offered recommendations while the groups examining ESG disclosure and diversity and inclusion presented the committee with a framework for discussion, but promised to come back in December with recommendations.

The AMAC task force on ESG disclosure looked at five areas:

  • Are ESG funds expressing their investors’ values, or creating value for the investor? This discussion included an examination of whether the SEC’s Names Rule, which requires 80% of assets by value to be consistent with certain attributes included in a fund’s name, should apply to ESG funds. It also looked at how funds claiming ESG in their names should provide adequate disclosure to allow prospective investors to confirm certain relevant details.
  • Should ESG funds should be required to provide additional performance disclosure? The group provided a spectrum of different potential recommendations ranging from making no changes to mandating performance attribution of E, S, and G, as well as ESG factors.
  • What requirements should govern ESG funds’ proxy voting practices? The task force said that the guidance on proxy voting that the SEC issued in July “improved investors ethical outcomes and in combination with rule 13F provide an adequate level of transparency with respect to proxy voting whether a fund is designed to include ESG considerations or not.”
  • What role can ESG rating systems and benchmarks play? This discussion centered around providing recommendations to address “truth in labelling” and concerns about the potential for “greenwashing” in ESG funds, including how and whether to suggest or require the use of third party ESG ratings systems and/or benchmarks for those investment portfolios that brand themselves as ESG. The spectrum of potential recommendations on this issue ranged from little or no change in disclosure requirements for ESG funds to requiring funds claiming ESG to have higher ESG scores than benchmarks from a nationally recognized statistical rating organization for ESG.
  • How can the quality of ESG disclosure by companies be improved to make it comprehensive, meaningful and comparative? The spectrum of potential recommendations on this issue ranged from making minimal changes to company disclosure requirements to codifying a comprehensive set of disclosure rules through regulation.

Cheryl Alston, executive director of the Employees’ Retirement Fund of the City of Dallas; Illinois State Treasurer Michael Frerichs; and Anyori Hernandez head of the New York State Common Retirement Fund’s emerging manager program were among the meeting participants who discussed improving diversity and inclusion at asset managers. Alston said her fund asks for diversity statistics on executives and the entire firm when issuing RFPs for asset managers. She also emphasized making diversity a key component of the communications plan, using quantitative and qualitative data and providing a scorecard to assess progress. “The North star is fair and equitable markets in which all members of society can compete,” she said.

Hernandez said the SEC could help increase diversity at asset managers by hiring more diverse candidates itself, especially in decision making roles, and requiring that statistics on diversity be included in companies’ audits. He said the recent instability in the economy as a result of the pandemic has highlighted the need to emphasize improvement in this area.

Frerichs urged the SEC to take the following steps to help improve diversity and inclusion at asset managers:

  1. Require financial institutions and publicly traded companies to consider firms led by women and people of color when selecting broker-dealers and asset managers and to consider at least one woman and person of color when nominating directors or selecting executive officers. They also should be required to explain why women and people of color were not chosen, if that is the case, and the steps needed to improve future applications.
  2. Mandate every two years the disclosure of diversity data within the workforce, including race, gender, ethnicity, religion, nationality, disability, veteran status and sexual orientation.
  3. Require financial institutions and publicly traded companies to publicly disclose the race and gender of directors, nominees and executive officers annually.
  4. Commission a study to evaluate the practices of investment consultants and the systemic and structural barriers to diverse investment firms.

The treasurer explained that data collection would not be burdensome since all private employers with 100 or more employees already are required to report diversity data to the Equal Employment Opportunity Commission. He noted that his office requires diversity data when seeking government business.

The AMAC also unanimously approved a recommendation on ways the SEC and the Financial Industry Regulatory Authority (FINRA) can improve the ecosystem of exchange-traded products (ETPs) in light of Covid-19. The recommendation asks the regulators to pursue mainly fact-finding actions including holding roundtables and conducting thorough reviews on six issues surrounding trading characteristics, equity market structure and fixed income market structure.

The advisory council is also working towards a recommendation on operational issues stemming from Covid-19, which will ask the SEC to make permanent some of the temporary relief it gave at the onset of the pandemic. Namely, the operations subcommittee thinks the SEC should focus on continued digital delivery and authorization availability, relief for remote work including for board meetings and remote testing, elimination of physical certificates of ownership and a “best practices” review for future crisis scenarios.
Coverage of CII's Fall Conference
CII’s First Virtual Meeting Declared a Success! – Almost 500 CII members registered to participate in CII’s first virtual meeting, which took place online September 17-22 and covered dynamic and timely topics ranging from diversity and inclusion in asset management to CIO’s perspectives on navigating today’s challenging markets. In addition to the lively discussions, members also welcomed a new board member and approved a statement on sustainability as well as four amendments to its existing corporate governance policies.

New Board Member – CII board members warmly welcomed back Prudential Chief Governance Officer, VP and Corporate Secretary Peggy Foran, who previously served as a CII director from 2003 to 2007. Foran takes the board seat vacated by Hope Mehlman who recently moved from Regions Financial, where she served as EVP and chief governance officer, to the Bank of the West, where she serves as general counsel and corporate secretary. Foran will also serve as corporate co-chair of the board.

Sustainability Statement and Amendments to CII Policies Approved – CII’s U.S. asset owners September 22 adopted a statement urging companies to report on their sustainability performance using standardized metrics established by independent private sector standard-setters. CII’s Statement on Disclosure of Sustainability Performance reflects CII’s belief that that standards that focus on materiality to investment and proxy voting decisions, and that take into account appropriate sector and industry considerations, are most likely to meet investors’ needs for useful and comparable sustainability information. The statement also supports momentum toward third-party assurance that such disclosures are reliable.
Lessons from the experience with standardized financial reporting are important to consider as standardized “non-financial” reporting takes shape. While recognizing the obligation to comply with reporting mandated by securities regulators, CII’s statement emphasizes the importance of a prominent role for independent standard setting, leveraging deep expertise while at arm’s length from both the companies that comply with those standards and the regulators that may endorse them.
The CII statement comes at a pivotal time for the future of sustainability reporting, with five leading sustainability standard setters recently releasing a document declaring intent to work together toward comprehensive reporting, and the International Federation of Accountants recently proposing the creation of a sustainability standards board that would exist alongside the International Accounting Standards Board. While CII does not endorse any particular framework or independent standard setter, these developments clearly indicate momentum toward the broad objectives described in the statement.
U.S. asset owners also adopted amendments to CII’s existing corporate governance policies to: signal flexibility for virtual-only shareholder meetings during Covid; encourage electronic means for shareholders to correspond with boards; provide guidance for boards navigating meaningful opposition to their choice of auditor; and support the transparency of enforcement actions stemming from audit regulators.

Urgent Call to Prioritize Banking Reform Neel Kashkari, Federal Reserve Bank of Minneapolis president and former head of Treasury Department’s Troubled Asset Relief Plan (TARP), issued a call to arms, urging CII members to elevate meaningful banking and financial system reform to the forefront of their agendas. “Your members and all Americans deserve better than the financial system we have today,” he asserted.

The 2008 financial crisis revealed that a fragile capital market and banking system can inflict enormous damage on the broader economy and on everyday Americans. To try to prevent that from happening again, Congress passed the Dodd-Frank Act. That legislation, said Kashkari, left the basic architecture of the U.S. financial system unchanged and just strengthened the existing structure. Although large banks were forced to increase their capital levels modestly and fund themselves with longer-term liabilities and stress tests were introduced, the overall structure and main players did not change, he explained.

As a result of Dodd-Frank, the largest U.S. banks have higher capital levels than they had before the crisis and they fund themselves with less short-term borrowing, but they also have grown to the point that they are once again too big to fail, Kashkari said. In addition, despite the higher funding levels, they do not hold in reserve enough funds to balance the benefits society gains from their scale with the risks they pose to the economy, he added.

Looking at the current financial crisis brought on by the pandemic, Kashkari noted that the Paycheck Protection Act also was a bank bailout because it allowed millions of Americans to continue to pay their loans and mortgages. He wondered why the government allows firms, financial or otherwise, to fund themselves overnight. “The primary value I see is that it allows firms to eke out a few extra basis points of earnings in good times and then requires the central bank to backstop it when risks emerge,” he said. Kashkari labeled this dynamic “privatized profits and socialized losses.”

He said CII members are in a unique position to push for bank regulation reform as shareholders in the largest banks and as customers of these banks. “If the largest pension plans in America got together and said we aren’t going to trade with banks that do not have at least 24 percent equity, they would increase their capital levels,” said Kashkari.

He mused on whether the nation would have the political will for another economic bailout and said that even if it does, a financial system that requires such relief every decade or so is unsustainable.

Steps Needed to Promote Diversity in Capital Markets SEC Commissioner Allison Herren Lee told CII members that an increasing body of research shows that diversity correlates with enhanced performance and there is a growing recognition that a lack of diversity represents a significant reputational risk for companies.

“We are not where we need to be when diversity levels fall so far short of representation in the population, when too often women and minority executives and board members are the only ones of their type in the room,” said Lee. To correct that situation, the commissioner recommended that the SEC act. Even though the most obvious tool in the commission’s toolkit is disclosure, the SEC has “largely declined to require diversity-related disclosure,” she said. Currently 72% percent of companies in the Russell 1000 do not disclose any racial or ethnic data about their employees, only 4% disclose the complete information they are required to collect under EEOC rules and less than half of all Fortune 100 companies disclose data on the ethnic and gender compositions of their boards, Lee explained.

She suggested that the SEC consider taking the following actions to promote diversity and equality of opportunity in the economy:
  • re-visit its amendments to Regulation S-K to require disclosure of workforce diversity data at all levels of seniority;
  • strengthen its 2018 guidance on disclosure of board candidate diversity characteristics;
  • work to open opportunities in financial regulation;
  • have its Division of Economic and Risk Analysis analyze whether and how proposed rules address the particular challenges faced by minority- and women-owned business, or otherwise affect underrepresented communities;
  • utilize the commission’s Office of Minority and Women Inclusion in an expanded or more formal role in its rulemaking process, ensuring that the office has an opportunity to review and comment on draft rulemakings; and
  • coordinate with other agencies, such as the Consumer Financial Protection Bureau and the Small Business Administration, in their efforts to combat discrimination and support women and minority-owned small businesses.

“I do not purport to have all the answers here on what specific measures we could or should take. I ask for your help in thinking through these issues,” Lee concluded.

A New Deal to Protect Stakeholders – The pandemic has revealed many failures in the corporate governance at companies, including a dearth of cash reserves and human capital management problems, former Delaware Supreme Court Justice Leo Strine said during a September 17 interview with CII Executive Director Amy Borrus.

To help correct this situation, Strine proposed a “21st Century New Deal” to ensure that the economic system serves the many workers who were revealed as being essential during the pandemic. To do this, he suggested an international movement toward instituting a living wage, giving workers more of a voice on boards--either through board seats or a board committee--and addressing anti-trust issues where power has become too concentrated. “The systems intended to protect workers and other stakeholders have not been updated,” he explained.

To help address the racial inequities that were highlighted by the pandemic, Strine suggested that corporate management be aware of what their companies pay workers and how they treat them. Executives also should know what the level of minority representation is in the employee ranks and what types of recruitment programs are in place to attract more diverse workers. Strine chastised businesses for seeking relief from local property taxes, which are used to fund public schools. “The business community’s contribution has fallen seismically. They need to pay their fair share,” he asserted.

Strine, who recently has strongly advocated for companies converting to Public Benefit Corporations under Delaware law, said the model is a useful move in the right direction. He said these types of companies change the dynamic incrementally, but still allow shareholders to influence firms’ governance by electing the board and being able to file derivative suits, among other things. To ensure that companies do not convert to Benefit Corps for greenwashing purposes, they must submit a real plan that includes accountability and metrics, he explained.

The former chief justice reacted to two recent moves by the Department of Labor. One, proposed June 23, codifies a requirement that plans must select investments and courses of action based solely on financial considerations relevant to risk-adjusted economic value. The other, issued August 31, would require fiduciaries to cast proxy votes only on issues that have an “economic impact” on their pension or 401(k) plans. Strine called the actions “the opposite of enlightened” and suggested that they be reversed.

Capital Allocation at an Energy Company – Chevron CFO Pierre Breber discussed his perspective on capital allocation with Amy McGarrity, CIO of the Colorado Public Employees’ Retirement Association during a September 18 conference session. He said he inherited a capital allocation system that included regular dividend payouts, profitable capital investments, a strong balance sheet and share buybacks. He said Chevron would consider eliminating dividends only if economic activity were low for three to four years. Breber said the company has taken its capital reserves down from $20 billion to $14 billion since energy use has declined precipitously since the pandemic. “Many other companies in our sector are greatly leveraged, he added.

Breber explained that while demand for oil is down 10%, 90% of Chevron’s products are still essential to the economy. He said the company anticipates longer term growth in the developing world and is confident that the U.S. economy will rebound. He emphasized that the company supports the Paris Agreement, employs carbon capture and is evaluating the potential of hydrogen. “We’re not diversifying away from our business, but incorporating lower carbon into it,” he explained.

At Chevron's May 27 annual meeting, 53.5% of the votes cast supported BNP Paribas's proposal asking the company to issue a report describing if and how its lobbying activities align with the goal of limiting average global warming to well below 2 degrees Celsius (the Paris Climate Agreement's goal). Breber explained that Chevron’s board, public policy committee, management and government affairs group all weigh in on decisions to finance lobbying activities with corporate funds. He said the company is working on a response to the proposal.

Fostering Long-Termism on an Exchange – Eric Ries, founder and CEO of the Long-Term Stock Exchange (LTSE), discussed fostering long-termism with PJT Camberview Senior Advisor Anne Sheehan. He said while the other two major stock exchanges concentrate on liquidity and price fixing, the LTSE, which just launched September 9, focuses on corporate governance. “Our primary incentive is not increased trading volume. If listed companies prosper, we prosper,” Ries explained.

He said to be listed on the exchange, a company must publish a policy that is responsive to one of these five LTSE policies:
  • Consider a broader group of stakeholders and the critical role they play.
  • Measure success in years and decades and prioritize long-term decision-making.
  • Align executive compensation and board compensation with long-term performance.
  • Boards of directors should have explicit oversight of long-term strategy.
  • Engage with long-term shareholders.

“We hope to spawn a race to the top instead of a race to the bottom,” the LTSE CEO said.

Ries also warned that the one-share, one-vote stock structure has lost favor among the next generation of companies, so investors are going to have to be open to negotiations on this issue. To foster better governance at startups, he recommended that investors engage with founders well before IPOs and stop railing against certain governance practices but then investing in firms that employ those practices.

CIOs Discuss Strategies in Tough Times – CalPERS Interim CEO Dan Bienvenue, LACERA CIO Jonathan Grabel and UAW Retiree Medical Benefits Trust CIO Hershel Harper shared their ideas for navigating challenging markets during a discussion moderated by Mary Callahan Erdoes, CEO of asset and wealth management for JPMorgan Chase.

All of the investment chiefs agreed that they are not making major changes to their portfolios as a result of the pandemic. Bienvenue did, however, say CalPERS is considering strategically taking on more leverage in its portfolio to boost its rate of return. Grabel said his fund is focusing more on fees and taking a closer look at how it implements each asset class. Harper explained the Trust’s portfolio is not required to meet steep return assumptions, but it must be able to fund increasing health care inflation in the future.

All three CIOs said they are staying in close contact with employees as well as outside asset managers during the pandemic despite not being able to meet with them in-person. “We have communicated with asset managers to make sure they are taking a defensive approach to make sure we have enough liquidity to ride this through, but also taking an offensive approach to make sure that we take advantage of any opportunities created by this dislocation,” said Bienvenue. Grabel said his fund uses a manager scorecard with five factors when assessing asset managers. He said all of the managers that have communicated more during the pandemic had better scores. Hershel said the Trust is making more calls to make sure everyone understands their responsibilities.

Increasing Diversity at Asset Managers A panel of asset managers and a psychology professor discussed diversity and inclusion in asset management during a September 17 conference session moderated by June Kim, director of global equity for CalSTRS.

“Our nation is in a racial reckoning. We are now seeing things that have been right in front of our eyes,” said Stanford University Psychology Professor Jennifer Eberhardt. She said she has been studying how racial bias affects peoples’ choices and actions without them knowing it and has found that race influences how asset allocation decisions are made. Part of the reason for that influence is a lack of diversity in the financial services industry, reported Eberhardt. Reducing bias in the workplace requires systems of accountability, reflection and constant vigilance, she said.

Birgit Boykin, acting head of diversity for BlackRock, said although her firm has made progress in adding women to its ranks, it still falls short in minority representation. To turn this situation around, BlackRock has built a behavioral finance team that focuses on cognitive biases that affect financial decisions. Boykin said her firm also is training hiring managers to help mitigate bias, trying to hire diverse candidates and talking to employees about when they felt included or excluded.

Like Boykin, Kathryn Koch, managing director at Goldman Sachs Asset Management, said her firm has made great strides in female representation, but lags in inclusion of minorities. In 2019, Goldman started voting against directors on boards with no women, and in 2020 took that voting policy global. “It is important to do this on race too, but we need better data first,” she said.

Daryn Dodson, managing director at Illumen Capital, said there is a paucity of diversity in the investment management world. He noted that he and Eberhardt have identified biases and interventions that can be used to reverse them. “Key, sustainable, long-term, urgent change needs to be put in place with commitments,” he said.

The Cult of We – CII Executive Director Amy Borrus interviewed Wall Street Journal Reporter Maureen Farrell about a forthcoming book that she co-authored, The Cult of We, which delves into the story of WeWork, the workspace company that experienced a high-profile implosion.

WeWork CEO Adam Neumann’s unflinching confidence and perfect timing combined to help grow the company into a firm that was estimated to be worth $47 million at one point, Farrell said. Neumann bought up a lot of prime real estate after the 2008 financial crisis when many landlords were desperate, she explained. In addition, there was a great deal of capital chasing a limited number of companies, making investors especially eager. The charismatic WeWork CEO capitalized on these circumstances and began selling his company to investors and tenants as something much bigger than just a real estate firm.

Many bad decisions and governance practices led to the collapse of WeWork, said Farrell. Chief among those were a stock structure that gave Neumann 20 votes per share and public shareholders one vote per share, and a provision in the bylaws allowing Neumann’s wife to name his successor should he die. In addition, said Farrell, the CEO rarely attended board meetings and he had taken out many loans using the company’s stock as collateral. In a famous move, Neuman also bought the ‘We’ trademark and then sold it back to the company for $6 million. As a result of all of this, he was forced to resign, but still walked away with a pay package worth $1.8 billion. Farrell said it is still unclear if lessons have been learned from WeWork’s collapse, but she does believe it has led investors to more closely scrutinize super voting shares and executives’ hedging activities.

Virtual Meetings Abroad – Global Head of Research for ISS Georgina Marshall and Executive Director of Eumideon Rients Abma provided an assessment of virtual annual meetings held by non-U.S. companies this past proxy season. Marshall said how well the process went depended upon what type of legislation countries had passed to allow for virtual meetings. She said the situation varied greatly with companies in Canada experiencing few problems while those in Singapore had major disruptions and firms in China had no legal means to conduct meetings virtually. Many companies in Europe adjourned or delayed their meetings, but proxy voting remained steady, she added. Marshall noted that ISS, which previously had a best practice policy favoring hybrid meetings, in April changed that policy to allow for virtual meetings during the pandemic. She noted that it was a temporary change, but anticipated that it will be extended.

Abma said despite challenges most companies in the Netherlands were able to hold their virtual annual meetings within six months of when they originally were scheduled and more shareholders than usual cast their proxy ballots. He also noted that the virtual meetings helped reduce carbon emissions since participants did not have to travel to attend. On the downside, he said many of the meetings shielded directors and management from shareholders’ questions. He praised Royal Dutch Shell for holding a virtual question-and-answer session with shareholders before the deadline for them to cast their proxy ballots. He said other companies should think about adopting this type of session as a best practice.

Best Pandemic Practices Max Dulberger, director of corporate governance and sustainable investment for the Illinois State Treasurer’s Office and co-chair of CII’s Shareholder Advocacy Committee, interviewed Chair, President and CEO of First United Bank & Trust Carissa Rodeheaver about the response that the bank had to the pandemic and to the nation’s reckoning with racial justice. Rodeheaver explained that in addition to providing paycheck protection and small business loans, the bank made moderations to customer loans and waived fees. First United also shifted to allow half of its employees to work from home and provided flexible hours to allow them to help their children with online learning. Those employees who did have to go into the branches to process loans received ‘financial first responder bonuses.’ “When we look back on the pandemic, we are not going to be talking about just what we learned about liquidity, we will be looking at how we treated our stakeholders,” said Rodeheaver.

She said 40% of the directors on the bank’s board are women and First United is now focused on improving racial diversity in its ranks. To help achieve that, the bank incorporated the Rooney Rule into its board refreshment policy and created a diversity and inclusion committee. She said disclosure about diversity is only one objective, the most important aspect is execution and that starts with the tone at the top.

Following the interview with Rodeheaver, 16 CII members shared their plans for the 2021 proxy season during the committee’s “lightning round.” These members’ speaking notes are posted here (login required) on the Shareholder Advocacy Committee website.

Corporate Governance Advisory Council’s Meeting The Corporate Governance Advisory Council covered a lot of ground when it met virtually September 1. To kick off the meeting, CII Executive Director Amy Borrus offered updates on:
  • the SEC’s new proxy advice rules;
  • the SEC’s forthcoming shareholder proposal rules;
  • recommendations by the President’s Working Group to the SEC on audits at Chinese companies listed on U.S. exchanges; and
  • a Senate bill on disclosure of corporate diversity.

During a discussion about how the pandemic is reshaping dialogues with companies, advisory council members noted that:
  • companies are eager to discuss all of the positive steps they have taken, but less forthcoming about Covid’s impact on executive compensation;
  • more companies are talking about corporate purpose and focusing on stakeholders; and
  • smaller and midcap companies seem to be struggling with ESG disclosure.

When asked how they were successfully participating in collaborative engagement with companies while avoiding concerns related to 13D, advisory council members said they are careful to keep these types of discussions with companies at a high level. They also said that when they are dealing with a clear, systematic risk like climate change, they believe it is important that everyone pursues the same goals.
Advisory council members said they learned the following from virtual shareholder meetings held this past proxy season:
  • there was no uniformity in how they were conducted--procedural differences were vast.
  • on the upside, the virtual format allowed them to attend more meetings than they would have normally; and
  • it is important to follow up with companies that did not do a good job with their meetings.

Advisory council members identified as new, emerging policy issues in the 2021 proxy season:
  • a sharpened focus on disclosure about diversity and inclusion;
  • increased disclosure about the risks that climate change presents
  • more emphasis on incorporating disclosure of political spending and lobbying into proxy voting policies; and
  • more requests for companies to incorporate ESG metrics into executive compensation plans.
 
Markets Advisory Council Meeting CII General Counsel Jeff Mahoney and Executive Assistant Connor Garvey kicked off the September 1 CII Markets Advisory Council (MAC) by responding to member questions on a range of issues, including CII’s proposed policy asking companies to provide an email address for shareholder communications, a forthcoming update to CII’s 2017 guide to annual shareholder meetings and the President’s Working Group on Financial Markets report on Chinese company audits.

MAC members discussed current market trends resulting from the pandemic that affect institutional investors, including the following:
  • Although M&A activity was down 10% in the first half of the year, it rebounded in the second half.
  • Activist campaigns were down 15% and proxy fights down 20% in first half of the year, but activist positions are up 10% for the second half.
  • Interest in ESG has rebounded with a focus on the S – especially diversity, but companies are struggling with reporting diversity data.
  • Executive compensation will be scrutinized in the 2021 proxy season, in part, because of the increased focus on human capital.
  • Investors are unlikely to support companies taking what investors may perceive to be disproportionate actions to protect executives and not share in the pain that employees or shareholders are experiencing.
  • Companies are likely to make mid-year adjustments to incentive programs and the use of discretion or one-time awards in 2020 reported in 2021.
  • For 2021, companies will have lower performance goals; more relative performance awards; more strategic/milestone objectives; more time-based awards with longer vesting or holding periods; flatter incentive plans with more upside and less downside; and fewer cumulative three-year performance goals. Also, more comp plans will have ESG targets, although companies are proceeding cautiously on incorporating these.

The MAC meeting also included presentations by Managing Director of Deloitte LLP’s Center for Board Effectiveness Maureen Bujno, discussing the new emphasis on ESG and corporate purpose during the pandemic; Rock Creek Managing Director and General Counsel Krishnan Devidoss explaining the SEC’s plans to raise the reporting threshold for Form 13F reports by institutional investment managers from $100 million to $3.5 billion; and ISS Governance Solutions Head Lorraine Kelly talking about ISS’s lawsuit challenging the SEC’s July 22 rules that codify the SEC’s belief that proxy advice constitutes a solicitation.
FYI
Ceres Seeks Manager, NYS Comptroller’s Office Looking for Corporate Governance Officer
Ceres is looking for a manager of investment engagement and the New York State Comptroller’s Office is seeking a junior corporate governance officer. Descriptions of the positions and information about how to apply can be found on CII’s Member Job Board.
News Clips for September 17-24
CII is a nonprofit, nonpartisan association of U.S. asset owners, primarily pension funds, state and local entities charged with investing public assets and endowments and foundations, with combined assets of $4 trillion. Our associate members include non-U.S. asset owners with more than $4 trillion in assets, and a range of asset managers with more than $35 trillion in assets under management. CII members share a commitment to healthy public capital markets and strong corporate governance.