Franklin Resources, Inc. (BEN) is a publicly owned asset management holding company, which includes Franklin Templeton Investments, and is one of the stocks in my portfolio. Their annual meeting is on February 17, 2016. ProxyDemocracy.org had collected the votes of two funds when I checked. I voted against three directors and for the proposal for a report on voting incongruities regarding climate change voting. I voted with the Board’s recommendations 58% of the time. View Proxy Statement.
Franklin Resources: Special Note
This is one of the most important votes of the year because of the vitally important proxy proposal submitted by Zevin Asset Management, along with First Affirmative Financial and Friends Fiduciary Corporate. The proposal asks our company to report on incongruences between the proxy voting practices of Franklin Resources and its stated policy positions on climate change. If they are essentially ‘green-washing,’ this proposal should lead to a change in how they vote. If their proxy votes are already aligned with their policies and public statements, a report will provide an opportunity for good publicity.
Look up the owners of almost any large-cap company in America and you will Vanguard, Fidelity, SSgA, BlackRock, Franklin and several other large funds at the top. While these funds battle each other for investors, those which are not private (like Fidelity) increasingly own a significant stake in each other’s business as well. The Japanese name for this horizontal web of joint partnerships is keiretsu. While American funds have sought to dismantle the keiretsu system in Japan, in order to enter that potentially lucrative market, they have helped to create a virtual democracy-free zone in corporate America by adopting proxy voting policies that result in voting with management and against shareholder initiatives on almost every issue. They all have a fiduciary duty to ensure proxies are voted in the best interest of their clients but no one has ever enforced that law. Your vote on this issue could lead the way toward improvement.
Read Warnings below. What follows are my recommendations on how to vote the proxy in order to enhance corporate governance and long-term value.
Franklin Resources: ISS Rating
From Yahoo! Finance: Franklin Resources, Inc.’s ISS Governance QuickScore as of Jan 1, 2016 is 8. The pillar scores are Audit: 2; Board: 9; Shareholder Rights: 1; Compensation: 9. Brought to us by Institutional Shareholder Services (ISS). Scores range from “1” (low governance risk) to “10” (higher governance risk). Each of the pillar scores for Audit, Board, Shareholder Rights and Compensation, are based on specific company disclosures. That gives us a quick idea of where to focus: Board and Compensation.
Franklin Resources: Compensation
Franklin Resources’ Summary Compensation Table shows the highest paid named executive officer (NEO) was Chairman of the Board and CEO Gregory E. Johnson at $15.1M. I’m using Yahoo! Finance to determine market cap ($20.4B) and Wikipedia’s rule of thumb regarding classification. Franklin Resources is a large-cap company. According to the Equilar Top 25 Executive Compensation Survey 2015, the median CEO compensation at large-cap corporations was $10.3 million in 2014, so pay is well above that. Franklin Resources shares underperformed the S&P 500 over the most recent one, two, five, and ten year time periods.
The MSCI GMIAnalyst report I reviewed gave Franklin Resources an overall grade of ‘C.’ According to the report:
- Unvested equity awards partially or fully accelerate upon the CEO’s termination. Accelerated equity vesting allows executives to realize pay opportunities without necessarily having earned them through strong performance.
- The company has not disclosed specific, quantifiable performance target objectives for the CEO. Disclosure of performance metrics is essential for investors to assess the rigor of incentive programs.
- The company pays long-term incentives to executives without requiring the company to perform above the median of its peer group.
- The CEO’s total summary pay for the last reported period was more than three times the median pay for the company’s other named executive officers. Such disparity in pay raises concerns regarding the company’s succession planning process and the distribution of responsibilities among the executive management team.
Because of these issues and underperformance, I would have voted against the pay package if provided an opportunity. However, shareholders at Franklin Resources only get that opportunity every three years, so I voted against members of the compensation committee: Peter K. Barker (Chairman), Mark C. Pigott and Seth H. Waugh.
Franklin Resources: Accounting
More than 25 percent of total audit fees paid to the auditor were attributable to non-audit work and Franklin Resources has relied on the same auditor for 45 years. That’s too much for other fees and too long to not be a warning sign on bias.
Franklin Resources: Board Proposals
None.
Franklin Resources: Shareholder Proposals
There is only one shareholder proposal, the asking our company to report on incongruences between the proxy voting practices of Franklin Resources and its stated policy positions on climate change. I strongly urge readers to vote FOR.
Franklin Resources states ESG issues may affect the value of an investment and it reports and mitigates greenhouse gas emissions associated with its own operations. In its response to a survey by the Carbon Disclosure Project, FR states:
The ESG team partners with Investment Managers to enhance the integration of ESG considerations in the investment process in order to manage risk and increase returns, as ESG issues like … climate change… can impact the performance of securities.
Climate change has been incorporated into the FR’s enterprise and investment risk assessment processes as part of its ESG integration. The Company notes that it
…assesses current ESG integration practices, and works to improve the company’s framework for consistently incorporating the consideration of material ESG risks… These processes are being incorporated into the overall evaluation process of investment portfolios…
However, nothing in the existing disclosures provides investors with sufficient information to permit meaningful assessment of the congruency of proxy voting with Franklin Resource’s statements. In fact, their proxy voting record with regard to resolutions on the topic of climate change is abysmal. According to public fund voting records, Franklin Resources voted against the vast majority of these resolutions, in contrast to funds managed by investment firms such as DWS, Oppenheimer, and AllianceBernstein who supported the majority of them. (see graphic to the right)
The proposal requests that the Board of Directors issue a climate change report to shareholders at reasonable cost and omitting proprietary information. The report should assess any incongruities between the proxy voting practices of the company and its subsidiaries within the last year, and any of the company’s policy positions regarding climate change.
Franklin Resources argues its interests are different than its advisers who vote the proxies. Franklin Resources owns its fiduciary duty to its shareholders, while the advisers owe their fiduciary duty to those investing in each individual fund, Managers, “understand that their proxy voting decisions may affect the value of shareholdings. Each Investment Manager is committed to fulfilling their fiduciary duty to vote proxies in the best interest of their shareholders.” The company argues,
The stockholder proposal would involve the Company to a much greater extent in these proxy votes and potentially subject investment personnel at the FTI Advisers to inappropriate influence. We are also concerned that the stockholder proposal, if implemented, would elevate the social objectives of an owner of the Company’s shares over the FTI Advisers’ fiduciary duty to vote proxies solely in their clients’ best interests.
However, there already appears to be substantial coordination. Franklin Resources’ Proxy Voting Policies & Procedures webpage has a link to each of the 19 Investment Manager’s current proxy voting policies. They are all the same! If each adviser is strictly operating independently, what would the chance be of them all adopting the same language? Obviously, they are all coordinating to some extent. The proposal simply asks for a bit more coordination and certainly doe not mandate that each adviser vote the same.
Te real problem here is that Franklin Resources doesn’t want to expose what is essentially greenwashing. Unlike consumer products, which have at least some weak labeling standard (although thousands of hazardous chemicals are hidden in ‘fragrances’), mutual funds and ETF’s can tout their environmentalism even when any objective observer can see their statements and behavior are inconsistent.
As I wrote at the top of the post, this resolution is one of the most important resolutions you can vote on this year. I don’t expect it to pass because other fund families will vote against it. They wouldn’t very easily be able to favor disclosure of incongruities at Franklin Resources and then oppose any such proposal when filed at their own fund. However, some funds will vote in favor and the movement toward greater integrity can then spread. Some funds have much better records than others. They might even be encouraged to announce their proxy votes in advance of annual meetings.
As seas rise, salinity increases, as plastics in the oceans outweigh fish, as the weather and Earth’s inhabitants go crazy… more investors will look for funds that at least appear to do what they say. Let’s give Franklin Resources the incentive to get out ahead of others. Vote “FOR” item #3 to ask the board to report on inconsistencies between their policies and their proxy votes on climate change.
See also Give Thanks: SEC Allows Shareholders to Hold Mutual Funds to Account.
Franklin Resources: CorpGov Recommendations Below – Votes Against Board Position in Bold
I also checked Proxy Insight. They had no votes registered at the time I checked. I found the TRS votes on their site and used only one column for CBIS and Calvert, since they voted the same on all items.
| # | PROPOSAL TEXT | CorpGov | CBIS / CALVERT | TRS |
|---|---|---|---|---|
| 1a | Elect Director Peter K. Barker | Against | For | For |
| 1b | Elect Director Mariann Byerwalter | For | For | For |
| 1c | Elect Director Charles E. Johnson | For | For | For |
| 1d | Elect Director Gregory E. Johnson | For | For | For |
| 1e | Elect Director Rupert H. Johnson, Jr. | For | For | For |
| 1f | Elect Director Mark C. Pigott | Against | For | For |
| 1g | Elect Director Chutta Ratnathicam | For | For | For |
| 1h | Elect Director Laura Stein | For | For | For |
| 1i | Elect Director Seth H. Waugh | Against | For | For |
| 1j | Elect Director Geoffrey Y. Yang | For | For | For |
| 2 | Ratify PricewaterhouseCoopers LLP as Auditors | Against | Against | For |
| 3 | Report: Voting Policy Inconsistency with Climate Change Votes | For | For | Against |
Franklin Resources: Issues for Future Proposals
Looking at SharkRepellent.net for provisions unfriendly to shareowners:
- Shareholders cannot call special meetings.
- No proxy access for shareholder nominees.
Franklin Resources: Mark Your Calendar
If a stockholder intends to present any proposal for inclusion in the Company’s proxy statement in accordance with Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended, for consideration at the Company’s 2017 annual meeting of stockholders, the proposal must be received by the Secretary of the Company by September 10, 2016. Such proposal must also meet the other requirements of the rules of the SEC relating to stockholder proposals.
Maria Gray
Franklin Resources, Inc.
Vice President and Secretary
One Franklin Parkway
San Mateo, CA 94403-1906
Warnings
Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime).I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003.
Few firms admit to having average executives. They generally set compensation at above average for their “peer group,” which is often chosen aspirationally. While the “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average,” it doesn’t work well for society to have all CEOs considered above average, with their collective pay spiraling out of control. We need to slow the pace of money going to the 1% if our economy is not to become third world. The rationale for peer group benchmarking is a mythological market for CEOs.
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