Tag Archives | IRRC Institute

IRRCi Joins Weinberg Center for Corporate Governance

IRRCi has a new home! The Investor Responsibility Research Center Institute (IRRCi) announced that it has selected the John L. Weinberg Center for Corporate Governance (Weinberg Center) at the University of Delaware as its successor organization. The Weinberg Center will receive a grant from IRRCi in excess of $1 million as part of the successor transition.
With these funds, the Weinberg Center will materially expand its environmental, social, corporate governance and capital market research, and also maintain the full IRRCi research library so that more than 75 research reports remain publicly available at no cost. The Weinberg Center also will continue to fund and manage the annual IRRCi Investor Research Award that recognizes outstanding practitioner and academic research.

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Video Friday: Jon Lukomnik on Executive Compensation and Short-termism

LukomnikTK Kerstetter, Chairman, NYSE Governance Services / Corporate Board Member interviews one of the brightest minds in corporate governance, Jon Lukomnik, who serves as the executive director of the IRRC Institute. A columnist for Compliance Week, Mr. Lukomnik previously chaired the executive committee of the Council of Institutional Investors, co-founded and served as a governor of the International Corporate Governance Network and is co-author of the award-winning The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda (Harvard Business School Press, 2006). Download Creating Responsible Financial Markets. Continue Reading →

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2013 Millstein Forum: Dual-Class Structures, Pro and Con

Sorry to be late and abbreviated in getting out my coverage of this great forum. Be sure to check out the Forum’s photo gallery, which contains many more and much better shots than what I took between notes and conversations.

The second panel discussed the growing issue of dual-class stock structures. While there was considerable debate, my sense is that most in the room see the advantages of such structures do not outweigh the disadvantages. I would like to see more discussion in the broader press about these issues when dual-class companies are going public. Maybe the discount would be even steeper. Continue Reading →

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Director Elections: Shareowners Still Relatively Powerless

In theory, throwing out current directors and/or electing new candidates through their proxy votes is the most important function of shareowners with respect to corporate governance. That’s how we hold our agents accountable. In practice, shareowners look like powerless wimps, even at companies with majority or plurality plus resignation election standards. At least that is my conclusion after reading the excellent report by Kimberly Gladman, Agnes Grunfeld and Michelle Lamb of GMI Ratings, sponsored by IRRC Institute and its Executive Director, Jon Lukomnik. Continue Reading →

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ESG Investing at University Endowments: Next Steps

A new report, Environmental, Social and Governance Investing by College and University Endowments in the United States, finds environmental, social and corporate governance (ESG) efforts by endowments are less prevalent than often believed, particularly given their history as pioneers dating back to 1970s anti-apartheid campaigns. These findings are particularly surprising at a time when ESG factors are increasingly factored into investment the decisions of mainstream investors. Continue Reading →

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Research on Post-Modern Portfolio Theory Awarded by IRRC Institute

The Investor Responsibility Research Center (IRRC) Institute today announced the first recipients of a new annual research competition that examines the interaction of the real economy with investment theory. A blue-ribbon panel of judges selected two papers – one practitioner and one academic – for the new IRRC Institute Research Award.  The authors of each research paper received a $10,000 award.

Steve Lydenberg received the practitioner award for research entitled, Reason, Rationality and Fiduciary Duty. A 30-year veteran of the asset management Continue Reading →

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Two Opportunities to Shape the Future

First, the IRRC Deadline of November 18 for Research Entries approaches. This is your chance to change the predominant paradigm of Modern Portfolio Theory.

Second, Institutional Shareholder Services Inc. (ISS) extended the comment period on their 2012 proxy voting policies until November 7th.  Institutional investors, individual investors, corporate issuers, and governance market participants are invited to provide feedback on ISS’ policy updates.  ISS did a specific outreach to CorpGov.net readers, so I Continue Reading →

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IRRC Deadline Upcoming for Research Entries

Friday, November 18, 2011 is the deadline to enter the IRRC Institute’s competition for research that examines the interaction of the real economy with investment theory.  Two papers – one academic and one practitioner – will receive the new “IRRC Institute Research Award” along with a $10,000 award.

Maybe it is just me, but I’ve got a feeling if you win this award you won’t have to go through the usual gauntlet to get your paper published in a respectable journal. (see cartoon at left by Nearing Zero)

The following panel of renowned judges with broad finance and investment experience will carefully review submissions and select two Continue Reading →

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Don't Be the Next JinkoSolar – Ceres Offers Aqua Gauge For Risk Management

JinkoSolar Holding Co., Ltd. got sued on 10/11/2011. The plaintiff firm is Sianni & Straite LLP. According to a press release dated October 11, 2011, the Plaintiffs allege violations of the federal securities laws in connection with false statements released surrounding its IPO.

Based in the People’s Republic of China, the Company launched an IPO in the United States on May 13, 2010 issuing 5,835,000 ADSs to trade  on Continue Reading →

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Increased Investor Engagement

The first comprehensive analysis of the engagement between investors and public U.S. corporate issuers finds a notably high and increasing trend of engagement.  Yet, there is a disconnect between investors and issuers in basic areas such as the time frame of engagement, the definition of a successful engagement and, by implication, what engagement itself means.

“The State of Engagement Between U.S. Corporations and Shareholders,” commissioned by the IRRC Institute and conducted by Institutional Shareholder Services Inc., reveals that engagement is either a priority or a non-event for investors:  asset owners and asset managers were most likely to report either that they had engaged with more than ten companies in the previous year, or that they had not engaged at all.

A power shift is underway and issuers are now more willing to engage.  Nearly nine out of ten public companies report having had at least one engagement with its investors during the prior year. Previously, routine engagement referred to quarterly discussions about earnings and corporate strategy that occurred in company-designed forums such as conference calls and analyst meetings.  Today, engagement has become a year-round exercise involving dialogue on topics such as executive compensation, boardroom independence, and sustainability through a variety of channels including conference calls, meetings, e-mails, public announcements, telephone calls, and regulatory filings. The report’s key findings are as follows:

  • The level of engagement between issuers and investors is high. Approximately 87% of issuers, 70% of asset managers and 62% of asset owners reported at least one engagement in the past year.
  • The level of engagement is increasing. Some 53% of asset owners, 64% of asset managers, and 50% of issuers said they are engaging more.  Virtually none of the investors and only 6% of issuers responded that engagement is decreasing.
  • Amongst investors, engagement is either a priority or a non-event.  A bimodal, or “barbell,” distribution was evident, with 28% of asset owners and 34% of asset managers reporting engagements with more than ten companies. On the other hand, about 45% of asset owners and 43% of asset managers indicated they did not initiate any engagement activity whatsoever.
  • Despite the headlines that result from high-profile conflicts between issuers and investors, the vast majority of engagements between issuers and investors are never made public. About 80% of issuers said most engagements remain private, as did 72% of asset owners and 62% of asset managers.
  • Asset owners, asset investors, and issuers do not always agree on what constitutes “successful” engagement. While all three groups believed constructive dialogue on a specific issue was a success, issuers were materially more likely than investors to think that establishment of a contentious dialogue was a success. An even more dramatic difference was that about three quarters of both asset managers and asset owners defined either additional corporate disclosures and/or changes in policies as a “success” while only about a third of issuers agreed.
  • Engagement is most likely to lead to concrete change by issuers in areas where shareholders are broadly in agreement, such as declassification of the board of directors or the elimination of poor pay practices, than in areas where shareholders’ views diverge, such as the need for an independent board chair.

The study was conducted as an online survey of approximately 161 institutional investors and 335 issuers based in the United States from March to May 2010, followed by in-depth follow-up telephone interviews with 21 investors and 22 issuers in August and September 2010. For each respondent, the level of engagement was assessed in terms of subject matter, frequency, participants, measurements of success, and impediments. The study also evaluated how the volume and the success of engagement have changed over time and are likely to change in the future. The survey defined engagement broadly – as direct contact between a shareowner and an issuer allowing each respondent some flexibility to define the term. Interview participants were provided anonymity to encourage candor. The full report is available at irrcinstitute.org and issgovernance.com.

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Disclosure & Board Oversight of Political Spending Weak: Contributions Negatively Correlated with Firm Value

A new study finds that while nearly 80 percent of S&P 500 companies have disclosed direct political campaign spending policies, 86 percent have no disclosed policies regarding indirect political expenditures. Additionally, only 20 percent of corporations disclose how much is actually spent and which organizations or causes receive the funds.

Key research findings include:

  • Nearly 80 percent of the S&P 500 companies have disclosed political campaign spending policies. However, only a distinct minority has stand-alone policies that are easily accessible and with clear descriptions of spending decision making and oversight. The publicly available language that companies use to describe their political spending is usually not precise, and rarely includes all types of political spending.
  • 86 percent of the S&P 500 does not have stated policies on indirect political spending via contributions to trade associations and non-profit interest groups that have become a key area of concern. Financials firms are notably less likely than other sectors to have any policies on indirect spending.
  • Less than one-quarter of S&P 500 companies require their boards to oversee political spending. Nearly all of those are the largest companies in America. Least likely to have oversight are smaller companies and companies in the Consumer Discretionary sector. Board oversight is more prevalent in the Health Care sector, which has been in the spotlight in recent elections and the subject of sweeping and controversial reform enacted in March 2010.
  • More than 80 percent of the S&P 500 companies do not provide information on actual contributions, as opposed to the policies that ostensibly control that spending. Almost all companies that do report are at the top end of the revenue scale. One-third of Health Care companies disclose spending but only about 10 percent do in three other sectors—Financials, Telecoms and Consumer Discretionary.
  • Only 52 companies indicated they do not use “independent expenditures” to advocate for or against the election of candidates.
  • About half of all S&P 500 companies provide some information on which company officers make spending decisions. This management transparency is most common among Consumer Staples companies. In contrast, Financial sector companies provide the least amount of information, even though Congress enacted significant and contentious reforms for the industry in July 2010.
  • Nearly 60 percent of S&P 500 companies spend shareholder money from the corporate treasury on political campaigns, while two-thirds have political action committees that spend money contributed by corporate executives. Utilities – amongst the most highly regulated industries – are more likely than any other sector to support candidates, parties and interest groups’ political committees. Information Technology companies are the least likely to spend in these categories.
  • Board oversight encourages disclosure of what companies do spend, but there is no evidence that such oversight affects spending.

The study was conducted through an examination of S&P 500 companies’ federal and state campaign contribution data and other publicly available information, combined with the results of a Si2 survey sent to each company. The report also includes two case studies and a short primer on the various types of political spending. The full study is available at www.irrcinstitute.org and www.siinstitute.org and is included in the IRRC sponsored Social Science Research Network Corporate Governance Network at http://www.ssrn.com/cgn/index.html. (full press release)

On a related note, John Coates has a draft study, Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?, that found during the period 1998-2004 shareholder-friendly governance was consistently and strongly negatively related to observable political activity before and after controlling for established correlates of that activity, even in a firm fixed effects model. Political activity, in turn, is strongly negatively correlated with firm value. These findings – together with the likelihood that unobservable political activity is even more harmful to shareholder interests – imply that laws that replace the shareholder protections removed by Citizens United would be valuable to shareholders.

See prior post, Citizens United: Most Won’t Engage But Won’t Monitor Either, as well as Follow the (Corporate Campaign) Money @ the The Murninghan Post, 10/14/2010.

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We Talk Long-Term Investing, but…

A study, Investment Horizons: Do Managers Do What They Say?, conducted by Mercer and funded by the not-for-profit IRRC Institute, examines the investment horizon of active equity investment managers, comparing various strategies, different geographies and styles between June 2006 and June 2009. Nearly two-thirds of institutional investor-focused investment strategies exceeded their expected turnover from June 2006 through June 2009.

Turnover was on average 26 percent higher than anticipated, with some strategies reporting turnover between 150 and 200 percent more than expected. “Short-term investing often is cited as an issue by the press, policymakers, academics, and many in the business and investing community,” noted Jon Lukomnik, program director for the IRRC Institute. “What has not been recognized until now is that this is not only particular to day traders, arbitrage funds, or others who may have short time horizons by design. When two-thirds of long only equity institutional investment products have turnover that exceeds what they themselves expect, there is a systemic issue.”

“The findings should raise serious questions for investors,” Lukomnik continued. “When managers greatly exceed their expected turnover level, the impact can be significant in terms of cost, performance, and risk that the strategy is not being managed in line with its stated investment approach.”

“A deviation in actual versus expected turnover can be a possible indicator of deeper problems with investment processes,” said Danyelle Guyatt, the head of research for Mercer’s responsible investment team and the report co-author. “Clients interested in a strategy that seeks to capitalize on longer-term trends and hold stock in corporations for longer periods need to be aware if that situation is changing and why,” she added.

The study deployed two approaches to the data analysis. First, a quantitative analysis of portfolio turnover of over 900 strategies examined intended and realized average holding periods for various investment products across different regions and styles. Then, Mercer researchers conducted a qualitative case study analysis on eight active equity fund managers. The key findings of the quantitative analysis include:

  • Nearly two-thirds of strategies have turnover higher than expected, with some strategies recording more than 150-200 percent higher turnover than anticipated. Of the 822 strategies for which Mercer had expected and actual turnover information, 550 exceeded the turnover during the sample period. The average turnover was 26 percent higher than anticipated.
  • Within the entire sample of 991 strategies, the average annual turnover of the sample is 72 percent, with some 20 percent of strategies having turnover of more than 100 percent.
  • Value managers tend to have a lower annual turnover figure than the other style types. Large capitalization portfolios have lower turnover rates than small capitalization strategies, and socially responsible investing (SRI) strategies have lower turnover than non-SRI strategies.
  • Across regions, UK, Canadian and Australian equity strategies have the lowest average turnover value, while European (including UK), international and US strategies have the highest average turnover levels.

The key insights from the qualitative case study analysis from the fund managers include:

  • Causes of short-termism [1] include volatile markets and changing macroeconomic conditions; mixed signals from clients; short-term incentive systems; and behavioral biases.
  • Fund managers recognize the potential destructive nature of short-termism even while claiming it was unavoidable. The managers indicated that short-termism potentially places short-term pressure on companies; increases market volatility; demonstrates a lack of discipline in fund managers’ investment processes; and creates a misalignment of interests between fund managers and their clients.
  • The managers also identified potential solutions to short-termism, further details of which can be found in the report. The complete study, “Investment Horizons – Do Managers Do What they Say?,” is available at http://www.irrcinstitute.org/projects.php and www.mercer.com/ri.

The report goes on to briefly examine possible regulatory measures, the idea that longer client relations with money managers and others would foster longer-term holdings, and the need to reexamine just what long-term goals and benchmarks are. We need to walk the talk. Tomorrow I will post notes from Corporate Directors 2010 where this issues was also discussed repeatedly.

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