Tag Archives | institutional investors

Investor Stewardship Group: 1 Share, 1 Vote

Investor Stewardship Group logoInvestor Stewardship Group Launches Stewardship Framework for 2018

The Investor Stewardship Group (link), a collective of some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts, announced the launch of the Framework for U.S. Stewardship and Governance, a historic, sustained initiative to establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct.one share one vote

My own impression is that this group has been carefully constructed, probably stemming from many discussions at ICGN and CII. They have certainly started with an impressive group. Although most of the principles are relatively ‘safe,’ I am delighted to see their position that “shareholders should be entitled to voting rights in proportion to their economic interest.” That one recommendation alone is huge. I hope they continue to build on their initial consensus items.

Internet Roadblock

Of course, the internet changes everything. Companies used to go public to raise money for factories, staff, etc. Now, they raise funds from private equity funds and scale all the way because they can build out through the internet with coding and algorithms. They go public only when founders and initial supporters want to cash out a portion of their investment. Continue Reading →

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Last Day for Early Registration: Directors Forum 2015, San Diego

Directors ForumSign up today for the 10th anniversary, Directors Forum: Directors, Management & Shareholders in Dialogue, which brings together a unique blend of institutional investors, directors, management, regulators, consultants and contractors in an intimate setting designed for genuine access and interaction between speakers and attendees. January 25 – 27, 2015 in beautiful San Diego.

I attend several events each year that attempt to bring members of the corporate governance industrial complex together. This is definitely one of the best. I hope to see you there to discuss some of the most important issues in corporate governance.
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Robert Monks: Obtaining Proxy Vote Information on 401(k) Plans Often Difficult

Robert Monks has just begun a series of articles at CSRwire on his most recent book, Citizens DisUnited: Passive Investors, Drone CEOs, and the Corporate Capture of the American Dream (my review). Part one of the CSRwire is A Simple Solution to Runaway Corporate Power. See also, Robert A.G. Monks, Crusading Against Corporate Excess, NYTimes, July 6th. His main message is simple, “Corporations must have involved owners and ownership is both a right and a responsibility.” I took his advice on my own 401(k) plan and got an eye-opener.  Continue Reading →

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Institutional Investor Ownerhip Up at Larger Firms

Institutional investors came back to the securities markets in droves in 2009 after fleeing during the financial crisis of 2007-2008, according to The 2010 Institutional Investment Report released by The Conference Board earlier last month.

The report showed that institutional investors owned 73 percent of the top 1,000 companies in 2009 compared to 69 percent in 2008. However, at the 50 largest companies their  average ownership concentration was reduced from 64.5 percent to 63.7 percent.

Overall, total institutional investment assets rose 14 percent to $25.35 trillion, a level that hadn’t been reached since the end of 2007, when it was $28.27 trillion. [See press release] via Report: Institutional Investors Owning More of Larger Companies | Governance Center Blog, 11/23/2010.

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Do Independent Directors Cave to Shareowner Pressure, Creating Higher Risk?

Interesting article in The Economist (Corporate Constitutions, 10/28/2010) on the recent revolution in corporate governance.

in 2009 less than 12% of incoming CEOs were also made chairmen, compared with 48% in 2002. CEOs are held accountable for their performance—and turfed out if they fail to perform, with the average length of tenure dropping from 8.1 years in 2000 to 6.3 years today. Companies have turned to a new class of professional directors, and would-be directors sign up for bespoke courses at business schools because Sarbanes-Oxley makes them personally liable for the accounts that they sign.

While Nell Minow and other corporate governance activist point to the recent financial crisis as evidence more reforms are needed in this direction, The Economist cites research by David Erkens, Mingyi Hung and Pedro Matos, of the University of Southern California (Corporate Governance in the 2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide), which found “the proportion of independent directors on the boards was inversely related to companies’ stock returns.” Institutional owners pushed firms to take more risks and independent directors appear to be more subject to their pressure.

However, the same authors also point out that the evidence from Asia suggests that greater external monitoring has produced better performance. The Economist concludes,

Good corporate governance on its own cannot make up for a toxic corporate culture. Reformers should continue to experiment with systems of checks and balances. But they would also profit from spending less time drawing up ideal constitutions and more time thinking about intangible things such as firms’ values and traditions.

In my opinion, this provides further evidence for the value of the UK’s newly introduced Stewardship Code… something the US would do well to study and modify for our own use.

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Comply or Explain: Good for Institutional Shareowners Too

South Africa’s Business Reports (Draft code requires institutions to disclose voting, 9/2/10) says “a draft copy of the institutional shareholder code for responsible investing was released for discussion yesterday. The code, which requires public disclosure of voting records and policies, is set to have a significant impact on the way in which the country’s R1.5 trillion investment fund industry is managed. The only other country that has an institutional shareholder code is the UK.”

Their current code, King 3 is based on an “apply or explain” approach, which has been criticized as “pointless in an environment in which there is limited shareholder activism.”  The new code aims to generate shareholder activism based on more disclosure to and involvement from the ultimate beneficiaries.

Government Employees Pension Fund chief executive John Oliphant, who chairs the committee that drew up the code, said:

Without disclosure we’re wasting our time, the investment managers will merely say ‘yes, we’re having discussions with our clients about it’; disclosure is key if this code is to be effective.

Under the draft code, institutional investor would publicly disclose through the Internet and elsewhere, at least quarterly, how they have applied the code.

Good to see a code applicable to institutional investors seeking to involve the ultimate beneficiaries but not something as onerous as proposed by Lynn Stout in Fiduciary Duties for Activist Shareholders (with Iman Anabtawi), 60 Stanford Law Review 1255 (2008).

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Parallel Universes Undercuts its Own Arguments

In his article The Parallel Universes of Institutional Investing and Institutional Voting, Charles M. Nathan appears to pine for the days when institutional investors took the “Wall Street Walk” if they disagreed with management on governance issues. T. Boone Pickens Jr’s response to that perspective:

That’s like the gardener telling the estate owner, “If you don’t like the way I take care of your property, sell it and move out.” That’s not the way the real world works.

Nathan’s major point is that institutional voting, for the most part, is no longer done by money managers, and is, instead, often handled by a separate internal voting function or is essentially outsourced to third-party proxy advisory firms. Because of the economies of scale, most resort to largely one-size-fits-all voting policies based on perceived corporate governance best practices, without reference to the particulars of each company’s situation. Therefore, firms should develop parallel systems to communicate with the two very different constituencies.

On the other hand, he also advises corporate governance specialists on the investor side to move to a more nuanced approach, recognizing the legitimate need for variation in corporate governance specifics in the context of more than 10,000 public companies in the US that exist in different sectors and different stages of development. That’s constructive advice. Unfortunately, Nathan also includes some very bad advice, such as the following:

The corporate governance community should recognize that it does not need and should not want to talk to the operating and financial management of a company because the voting decision makers are, by design, not involved with measuring the company’s operating and financial performance.

That advice is absurd. Many in the “parallel universe” of corporate governance are actually housed within the investment framework of their organizations. This is certainly true of CalSTRS and CalPERS. The CalPERS Corporate Governance team executes an annual process that identifies approximately 15 to 20 companies in the domestic internal equity portfolio that exhibit poor economic performance and corporate governance.

Nathan grasps the drive by shareowners to move the board from a “trustee model of a effectively self-perpetuating board” to “an assembly of annually elected representatives who are directly accountable to their electorate.” Yet, he believes “proxy access doesn’t involve investment decision makers but rather is the province of voting decision makers.”

While it may be helpful to recognize these functions governance and investment functions are often somewhat specialized, there certainly is frequent communication between the two functions on the investment side. Proxy access isn’t just “good governance.” For many, like myself, proxy access is one more mechanism to correct the “self-perpetuating board” that Nathan mentions. Many object to the ever increasing share of profits doled out to executives, up from 5% to 10% of the total.  Directors that are directly accountable to shareowners may work harder for investors than the CEO. That would be a plus.

Nathan cries that any attempt at accommodation to the demands of the corporate governance community becomes “merely a prelude to another round of demands.” Yet, he must recognize how far we are from that goal of “directly accountable” directors. Even if the SEC’s proxy access rule is finalized, it only facilitates direct accountability for 25% of the directors at companies; the other 75% can remain “self-perpetuating.”

He also loses credibility with retail investors when, in a footnote, he describes the “groundswell” to develop “client directed voting” as one that would allow a default voting pattern of “for or against management’s recommendations or to vote in proportion to all other shareowners.” Any client directed voting that doesn’t include allowing investors to build their own systems of default, based on the votes of institutional investors announced on sites like ProxyDemocracy.org or by advocates on sites like MoxyVote.com, should be flatly rejected.

Although the thrust of the article is to encourage companies to constructively engage in dialogue with what Nathan sees as separate corporate governance constituency, he frequently undermines his own arguments. That’s too bad because flexibility and dialogue are certainly needed on both sides.

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UK Institutions to Reveal Votes Under Labor

UK institutional shareholders will be forced to declare how they vote at company annual general meetings (AGMs) if the current governing Labor Party wins the general election on May 6. In addition, it wants a higher threshold of investor support for takeovers: two-thirds of shareholders.  (UK shareholders to be forced to reveal votes if Labour wins May 6 UK general election, Responsible Investor, 4/13/2010)

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Impacts of Long-Term Investors on Over-Investment

Cristina Cella investigates whether institutional investors influence firms’ investment policies. By virtue of their significant ownership stakes and investment horizons, long-term institutional investors should closely monitor management and thus reduce agency costs.

Using a panel dataset of 2,511 U.S. manufacturing firms that went public in 1980-2003 and using several econometric specifications, she find that firms with long-term institutional investors tend to have lower capital expenditure relative to widely-held firms. Further, investment is reduced precisely in those firms that suffer mostly from over-investment. In fact, the presence of a large blockholder is associated with a reduction of capital expenditure in firms that (a) invest too much with respect to their growth opportunities, financing constraints and industry affiliation, (b) have few investment opportunities but large availability of cash-flows.

Most importantly, she finds that reduction in capital expenditure in these firms leads to improvements in firms’ profitability in subsequent years, confirming that institutional investors’ actions aimed at removing over-investment are value-enhancing. Cella concludes that an important area of further research would be to explore the circumstances of when investors prefer to use their voice, and comparing the effectiveness of voice versus exit. (Institutional Investors and Corporate Investment, 2/15/ 2010,  available at SSRN)

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CorpGov Bites

Check out the CorpGov Blog, a work in progress. After years of demands that we have indexed articles, an RSS feed and other advantages of blogs, we’re finally beginning to adapt. With our 15th anniversary coming up in 2010, maybe it is time to join the 21st century. Your feedback is appreciated, either via e-mail or through your comments on the blog. I’m still not sure about the look, how it should be organized, how to maintain the number one search status we’ve had on the term “corporate governance” since before google, how to change the URL’s, how to add an e-mail subscribe function, etc., etc. Your suggestions, especially when accompanied with instructions, are more than welcome.

WorldBlu discusses How to Democratize Corporate Ownership, using Equal Exchange as an example of a for-profit Fair Trade company in the US that owned and governed by employees on a one-person/one-share/one-vote basis.

Faith and finance: Of greed and creed (FT, 12/23/09) explores the morals of the financial sector. Was it a “greedy focus on the short term?” Others cite a diminished a sense of responsibility, allowing personal and institutional self-interest to overshadow customer service and risk management. “The root problem, Lord Turner, free-thinking chairman of the Financial Services Authority, the UK industry regulator, famously said this summer, is that too much business over the past decade has been ‘socially useless.'” The article reports mixed responses as to lessons learned.

I would ask, just how useful is the entire financial sector? As Simon Johnson discussed in The Quiet Coup (theAtlantic, May 2009) “From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.”

A new report from Ceres and Mercer, Energy efficiency and real estate: Opportunities for investors, identifies efficiency as a significant front in mitigating climate change, and recommends that investors focus on efficiency measures in their real estate holdings. The report recommends that as a first step, investors launch energy efficiency initiatives by developing benchmarks and then create achievable targets in the implementation of projects. (Investing in Energy-Efficient Buildings Can Reduce Emissions While Strengthening Portfolios, Sustainability Investment News, 12/24/09)

A study by Pascual Berrone and Russell Reynolds Associates of Spainish companies found 60% of board chairs said institutional investors exercised little or no involvement in corporate governance. (The Need for Investors to Wield More Board Influence, IESE Insight) How different is it elsewhere?

“Everybody who works with retirement plans should presume that they will owe a fiduciary duty or they will owe a duty for loyalty to those who they service,” says Matthew Hutcheson, an independent pension fiduciary quoted in Coming soon: Broader definition of fiduciary under ERISA (InvestmentNews, 12/23/09). “Brokers who haven’t viewed themselves as fiduciaries need to ask what they might need to do differently.”

The common statement that the world was becoming flat was questioned at the Global Ethics Forum held at the UNOG-United Nations Office at Geneva. In our many problems of poverty, environment, Ponzi schemes, growing income gaps – speakers emphasized how civil society had lost confidence in business and in its leaders.

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Book Review – Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value

Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value by Carolyn Kay Brancato. Viewing your stock as you would the products you sell, and trying to woo shareholders as you would potential customers offers the ultimate offers “win-win” situation, but only if the shareholders so selected continue as passive consumers. Continue Reading →

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Review – Investor Capitalism: How Money Managers Are Rewriting The Rules Of Corporate America

Investor Capitalism: How Money Managers Are Changing the Face of Corporate America. Managerial capitalism ascended during the century’s middle decades. “The decisions they made often affected the lives of thousands of people, yet they were seemingly accountable to no one.” The large holdings of institutional investors and the growth of indexing as a major investment strategy have  prevented the ready selling of underperforming companies; investors are now more likely to “speak out than to cash out.” Whereas managerial capitalism tolerated a host of company objectives, Useem argues that under investor capitalism enhancing shareholder value has become paramount. Continue Reading →

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