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.