Tag Archives | Sanford Lewis

Financial CHOICE Act: From too big to fail, to too big to listen

Financial CHOICE Act Does Away with Shareholder Proposals

Financial CHOICE Act Does Away with Shareholder Proposals

Great article this morning on the proposed Financial CHOICE Act from Lauren Compere, Director of Shareholder Engagement at Boston Common Asset Management entitled Too Big To Listen? Dodd-Frank and Shareholder Rights! See also “Shut Up”: Not What Good Companies Tell Their Owners from Julie Fox Gorte, Senior Vice President for Sustainable Investing, Pax World.

Below is a copy of a very thoughtful letter from Sanford Lewis, an amazing attorney who represents SRI and pension funds, as well as individual investors including John Chevedden. Two points they made that I failed to mention in my post:

  1. Rule 14a-8 was created to empower the individual investor; large institutional investors using it came later.
  2. Radical changes  may impinge on  “investment backed expectations” associated with the rule — an array of arrangements, contracts, etc. that implicate property rights.

The bill is being heard in Committee today and will be marked up in early May. It is still important to get in letters and email as I mentioned in my post, Financial CHOICE Act: Take Action. Below is the letter from Sanford Lewis with slight formatting changes.

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2016 SRI Service Award Nominations Due

Donna Katrin, 2015 SRI Service Award Winner

Donna Katzin of Shared Interest, 2015 SRI Service Award Winner

The SRI Service Award is one of the most prestigious awards given in the corporate governance industrial complex… and this one is for work in the field of Sustainable, Responsible, Impact investing. No one has to excuse themselves for working in SRI. Like motherhood and apple pie, SRI is inarguably good… although there are still a few who think the earth is flat and climate change is a hoax.

It doesn’t take much to nominate. No justification is required… but you can bet those with the most nominations will be widely discussed at the upcoming SRI Conference (see coverage of past conferences). I submitted the name of one of my heroes, Julie Goodridge, and since I’ll miss the Conference this year, I’ll tell you why after I tell you a little more about the Award. Continue Reading →

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RIA Hands Untied by SEC No-Action Denial

RIA Hands Untied

RIA Hands Untied

RIA hands untied by Newground Social Investments team and the SEC’s refusal to grant a no-action letter to Baker Hughes (BHI, $BHI) on February 22, 2016. Congratulations to Bruce Herbert and staff at Newground, as well as to their advisors.

We have discussed the importance of not counting abstentions before at Simple Majority Vote Counting Initiative for Proxies. Bruce has worked tirelessly in chipping away at vote counting deception for years… making some progress. However, what we are celebrating here are two precedents established that will ease the burden faced by Registered Investment Advisors (RIAs, Investment Advisor or Investment Adviser?) and their clients: Continue Reading →

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Ground-Breaking Proxy Proposals Headed to Shareowner Vote

Climate Change Portfolio Exposure

Boston Common Asset Management has a proposal that will appear on the proxy of PNC Financial Services ($PNC) requesting that it report to shareowners on the greenhouse gas emissions resulting from its lending portfolio and its exposure to climate change risk in its lending, investing, and financing activities. Watch for your proxy. The annual meeting will be held on April 23, 2012. According to the proposal, Continue Reading →

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Increase Liability Disclosures

(Endorse our investor sign-on letter by sending an e-mail with your name, title and organization to [email protected])

Should Companies Disclose More Information To Investors About the Liabilities They Face?

by Sanford Lewis, Counsel, Investor Environmental Health Network

When investors are unaware of impending financial pain at  the companies in their portfolios,  they often face expensive surprises.  Financial accounting  rules are supposed to arm investors with information to avoid these shocks, but the failures are many and notorious –  the collapse of Enron and  WorldCom,  subprime lending,  and massive bankruptcies  from asbestos product  liabilities.

Guidance for disclosure of pending liabilities  in financial statements  is provided by the Financial Accounting Standards Board (FASB).   After a proposal for reform in  2008  met stiff  opposition  from corporate lawyers, the board has issued a new draft  in July  2010, this time with a proposal that would avoid disclosure of legally privileged or prejudicial information.

At issue: corporate financial statement disclosures on liabilities

Financial statements are required to disclose  potential future losses, known to accountants as “loss contingencies.”    The  FASB concluded in 2008 that its current  contingent liability reporting standards  failed to provide investors and analysts with  sufficient information regarding the likelihood, timing, and amount of liabilities.

This is a  tricky  policy arena to negotiate. On the one hand, investors need good information; on the other hand, investors and companies do not want to  arm plaintiffs  with information to win higher recoveries  as a result of providing better information to investors.  Therefore,  legal and auditing professions have  carefully  tiptoed around one another  on disclosure  related to ongoing litigation.  Through their professional organizations they established a so-called “treaty,”  limiting the degree to which lawyers would disclose liability projections to auditors and companies for purposes of investor disclosure.

But in 2008 the FASB issued draft reforms  that would have  upset that delicate arrangement. Most notably, the draft would have required companies to disclose their attorneys’ worst-case liability projections. FASB was flooded with letters from corporate lawyers urging them not to     go forward with the plan.

So FASB went back to the drawing board.  On July 20, it issued a proposal  (Comments due by August 20) that  eliminates the “worst-case projection”  proposal, but does require companies to disclose more nonprivileged information, such as providing links to company pleadings and disclosure of expert witnesses’ liability estimates.

More About The Revised FASB Draft

Contrary to the 2008 proposal,  companies would be allowed to continue the controversial practice of disclosing only their estimate of the “known minimum” of liabilities where there is uncertainty as to the  most likely outcome.  Such an estimate  is unreliable for investors — the final liability in lawsuits  is often dramatically larger  than this figure — but it protects  corporate  positions in litigation.

Instead, the proposal seeks to require disclosure  only of non-privileged information, and places the responsibility with investors to use that information to develop their own estimates of the potential magnitude of liabilities.  As guidance to companies it includes the  logical principle that more information should be disclosed and made available  as a case proceeds. This makes sense, since more is known later,  but without specific operational guidelines about  precisely what information must be disclosed when  it will be hard for companies to act on this requirement.

The new proposal could provide  better guidance. For instance it could clarify that disclosed information should include the amount of settlements or judgments issued in similar cases at other companies. The need for such benchmarking could be explicitly  specified.

Scientific Literature Disclosure but Not for Longer Term Liability Risks

The July  2010 proposal adds a new requirement that disclosure may be triggered by new science that indicates “potential significant hazards related to the entity’s products or operations.”   However, it may have only limited impact, because it focuses on whether those studies lead to a requirement to accrue liability amounts, rather than  also triggering  aqualitative disclosures relevant to longer term risks.

Remote but severe liabilities

Liabilities judged by  a company to be “remote” would only be require disclosure if they have potential for severe impact and are either “asserted” claims  (lawsuits filed) or relate to other  potential claims that the management has concluded  are both likely to be filed and resolved unfavorably to the company. In practice, this means that even  the most severe long-term issues will seldom be disclosed.

This  perpetuates the tendency of companies to underestimate the likelihood of  longer-term, severe financial threats. Enron, the subprime lending crisis, and asbestos liabilities are three examples of longer-term liabilities that were not disclosed until it was too late. Such large issues loom undisclosed for many years, with eventual catastrophic consequences for investors. Yet under the proposed FASB standard, companies are allowed to avoid disclosing such severe long-term threats if they characterize the claims filed in litigation as “frivolous” or if there are as yet no asserted claims.

How to Comment to FASB

Endorse our investor sign-on letter  by sending an e-mail  with your name, title and organization to [email protected].

You can also submit your own comment letter  to FASB by August 20, 2010 by emailing [email protected], File Reference No. 1840-100.  Those without email may send their comments to the Technical Director — File Reference No. 1840-100 Financial Accounting Standards Board, Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116.  Contact Sanford Lewis at 413 549-7333 or [email protected] if you have questions.

Note that the FASB has received requests to extend the commenting deadline, but will not decide on an extension until August 18, 2010.  We will notify  the investing community if we learn that the deadline is extended.

Post republished on CorpGov.net with permission: The Investor Environmental Health Network  (IEHN) is a coalition of investors concerned with risks and opportunities associated with toxic chemicals in corporate products and operations.  IEHN  has previously   participated in revisions of the contingent liability disclosure standard with comments on the 2008 exposure draft,  outreach to investors for additional shareholder engagement, and by participating in the FASB stakeholders’ roundtable on this topic  in March 2009.   Our report, Bridging the Credibility Gap: Eight Corporate Liability Disclosure Loopholes That Regulators Must Close (2009) raised many of the issues relevant to  need for reform of the  FASB contingent liability closure standard, as well as reforms needed in Securities and Exchange Commission disclosure requirements.

I had the pleasure of providing editorial and substantive advice to Sanford Lewis on his paper Don’t Ask, Don’t Tell: A Poor Framework for Risk Analysis by Both Investors and Directors (HLSCG&FR, 11/15/09).  Lewis describes a growing clash between the needs and duties of directors and investors to manage risks, and attorneys who advise “don’t ask; don’t tell,” in order to minimize corporate liability in any possible future litigation. He warns that a strategy based on culpable deniability serves no one well.

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2010 Proxy Season

Robert Kropp, writing for SocialFunds.com, ran a recent series of three posts interviewing people on the passing proxy season.

First up was Environmental Shareowner Resolutions Gain Record Levels of Support in 2010 Proxy Season, in which Kropp interviewed Michael Passoff of As You Sow.  Looking back on shareowner vote totals for first-time environmental resolutions over the past decade, five of the top ten were for resolutions filed this year. One reason, according to Passoff, was that “Shareholder activists are getting better at making financial arguments about risks from environmental and social liabilities.” In addition to strong showings for resolutions on coal ash and hydraulic fracturing, which got considerable press, a first-time vote on Bisphenol A (BPA) at Coca-Cola won 21.9% of shareowner votes, and resolutions addressing oil sands development in Canada won substantial vote totals as well.

Kropp interviewed Laura Berry of the Interfaith Center on Corporate Responsibility (ICCR) whose members filed a total of 308 shareowner resolutions this year, addressing issues across the ESG spectrum. After years of attempting to convince financial companies to disclose the manner in which they collateralized derivatives, only to have the resolutions disallowed by the SEC, ICCR members were finallysuccessful in having the resolutions included on proxy ballots. Resolution filed at Goldman Sachs, Bank of America, Citigroup, and JP Morgan Chase requested that the companies “ensure that the collateral is maintained in segregated accounts and is not rehypothecated. (taking in collateral as guarantees on derivatives trades, and then using it as collateral for their own transactions)

Members are also “connecting the dots” on health care, asking, “do companies go on record saying they support universal health care, and then underwrite the US Chamber’s efforts to derail it?” Some retail shareowners are beginning to see some value in voting but “I don’t think the average retail investor really understands how to be a citizen investor yet.” “Institutional investors are beginning to understand the connection between lack of transparency and investment risk.” “Those of us who think about social and human capital have been working on these issues for such a long time,” Berry said. “Now, we owe it to the issues to move beyond our circle and make our case to mainstream investors.” (Higher Shareowner Votes Are Encouraging, But Not Enough to Change the System)

Kropp finished up by interviewing me for a post entitled, Will 2011 Be a Watershed Year for Corporate Governance? Speaking to a largely CSR audience I stressed the fundamental importance of corporate governance to any chance of winning on social and environmental issues. Pay attention to the rules of the game. In that regard, the most important development was Apache v. Chevedden where Apache won the battle but lost the war and the Dodd-Frank bill.

I was on a call with the Social Investment Forum yesterday where a panel was also discussing the 2010 proxy season. Conrad MacKerron and the folks at As You Sow put together a great recap. Two measures were passed with record high votes on sustainability/GHG emissions (60% at Layne Christensen) and climate change (53% at Massey Energy).  In 2000, no majority votes on CSR resolutions… none even above 40% and only 6 above 20% out of 266 resolutions (average vote of 7%). This year, 2 majority votes, 17 above 40%, 88 above 20% out of 361 (average 19% vote). MacKerron attributes to:

  • Activists making better financial arguments
  • Increased environmental awareness
    • Recognizing true vs. externalized costs
    • Calculating environmental and reputations risk
  • More mutual fund and pension fund support
  • SEC Staff Legal Bulletin in October 2009 made it harder for companies to omit resolutions on environmental or health risk assessment

On the call, Sanford Lewis mentioned that SEC staff would likely issue another legal bulletin in the fall. Comments to Meredith Cross, Director, Division of Corp. Finance, might be helpful. For next year, he sees more focus on risk evaluation, enterprise risk management and better coordination between funds to avoid duplication. Paul Hodgson sees even bigger wins for shareowners, with proxy access, expanded say on pay, continuing work on majority voting… an “era of shareholder activism.”

For much more, see post by Lejla Hadzic and Eric Shostal, More Shareholders Call for Political, Climate Risk Disclosure: A Post-Season Review of 2010 Environmental and Social Proxy Proposals, RiskMetrics Group, 7/15/2010. See also Should shareholder proposals serve as an early warning system for emerging risks and retail challenges? by Sanford Lewis and SIF proxy season recap call by Paul Hodgson.

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Two Overlooked Lessons From the Financial Crisis

In the year-end reflections two contributing factors deserve more attention. First, "prophetic warnings" from religious groups on the dangers of subprime loans via shareowner resolutions. Second, a call from Sanford Lewis for boards to revoke implicit policies of "don’t ask, don’t tell" with regard to liability issues.

The current financial meltdown should remind us of the importance and interconnections between ESG issues. Fully a dozen years before Wall Street experts and regulators reluctantly recognized the contribution of subprime mortgages to the current financial crisis, faith-based organizations urged major corrective action. The summer 2008 issue of The Corporate Examiner, a publication of the Interfaith Center on Corporate Responsibility (ICCR), carried an extensive review entitled The Buck Stops Here: How Securitization Changed the Rules for Ordinary Americans.

Subprime mortgages came about as a way to extend credit to lower-income people after passage of the federal Community Reinvestment Act in 1977, which encouraged banks to lend money in their local communities. Many ICCR members had pushed for the Act because subprime mortgages can give low income applicants access to home ownership when the cost and terms of conventional mortgages would be prohibitive. However, IRRC members were also on the forefront calling for subprime loans to be used responsibly, with reasonable terms.

As early as 1993, ICCR members filed six resolutions to more closely regulate subprime mortgages. “When our institutional investor members view their holdings through the lens of justice and sustainability, the priorities for action that emerge frequently anticipate market moves. Time and time again, the prophetic voice of faith has allowed our members to anticipate emerging areas of corporate responsibility, in investment policy as well as in social, economic and environmental policy. For more than a decade before anyone else, our visionary members have been expressing concerns related to predatory lending practices, inappropriate underwriting standards and the potential consequences of securitization of debt instruments," says ICCR Executive Director Laura Berry.

If financial markets had paid more attention to ICCR, perhaps we wouldn’t have gotten into the financial meltdown… certainly, it wouldn’t have been as big. Boards and shareowners would do well to pay more attention to this "early warning" system.

Earlier this year, I had the pleasure of providing editorial and substantive advice to Sanford J. Lewis, Counsel to the Investor Environmental Health Network, on his paper Don’t Ask, Don’t Tell: A Poor Framework for Risk Analysis by Both Investors and Directors (HLSCG&FR, 11/15/09) Lewis describes a growing clash between the needs and duties of directors and investors to manage risks, and attorneys who advise “don’t ask; don’t tell,” in order to minimize corporate liability in any possible future litigation. He warns that a strategy based on culpable deniability serves no one well.

Accounting principles for reporting environmental liabilities, for example, include subjective language such as “to the extent material,” “when necessary for the financial statements not to be misleading,” and “encouraged but not required.” At the same time, section 302 of Sarbanes-Oxley requires the CEO or CFO to certify the financial statement “fairly presents” the company’s financial condition, regardless of whether the financial statement is technically in compliance with generally accepted accounting principles.

Directors are caught between a rock and a hard place. If they report only “known minimum” liabilities, they risk violating SOX. However, a "fair presentation," could be used as evidence in court and raise possible settlement costs.

Lewis recommends a principled approach to “prejudicial” information, where a balancing test is used to weigh how prejudicial and how useful information will be. Under federal and state rules, evidence which might be considered prejudicial will nevertheless be found to be admissible in evidence if it is “more probative than prejudicial.” "A similar balancing test should be applied by accounting and securities rulemakers in considering the types of required disclosures to support the needs of investors."

Boards who listened too closely to the advice of their attorney’s may have been ignorant of potential risks but they can hardly be though blameless. We need to move from "don’t ask, don’t tell" to a careful weighing of the evidence and accounting standards that provide for more in the way of disclosure.

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