Corporate Governance

JUST: Goldman Sachs’ New ETF

Goldman Sachs has partnered with Paul Tudor Jones’ foundation to launch a new exchange-traded fund by the name of JUST on Wednesday, June 13th. Unlike other funds, Goldman Sachs’ new fund targets firms that engage in “just business behavior.” The fund will be comprised of selections from Russell 1000 companies and will track the top 50 percent of those in each industry based on JUST Capital’s model. This model scores businesses using a formula related to workers, customers, products, environment, jobs, community and management, and was compiled after JUST Capital surveyed over 72,000 Americans to gain an understanding of business practice issues—related to environmental, social and governance issues—that matter most to them.

While the fund lacks a proven track record, it is important to note that the fund would have outperformed the Russell 1000 by 3.47% over the last two years. In addition, the companies in the fund outperformed the remaining companies in the Russell 1000 in many socially conscious areas. These companies paid 71% less in fines for consumer sales-terms violations, 94% less in Equal Employment Opportunity Commission fines and produced 45% lower GHG emissions per dollar of revenue, while also creating American jobs at a 20% greater rate.

The Fund boasts a unique methodology, giving it the ability to evolve from year to year as investor concerns shift over time. Most other ESG methodologies remain static over time, measuring the same statistics year after year.

Main Street Investors Coalition

A group of five industry associations, the National Association of Manufacturers, the American Council for Capital Formation, the Equity Dealers of America, the Savings and Retirement Foundation, and the Small Business & Entrepreneurship Council, have launched a new initiative—the Main Street Investors Coalition.

The group cites several concerns, including the role of proxy advisory firms, the proxy proposal process and, as they view it, the politicization of public pension funds.  However, the biggest and potentially most explosive focus area of the coalition is to push back on the current ESG momentum and use of non-financial metrics in valuation and investment decisions.

George David Banks, Executive Director of the Main Street Investors Coalition and Executive Vice President for the American Council for Capital Formation, recently cited four focus areas for the coalition in an op-ed to The Hill:

  • We will call for managers to focus on maximizing performance ahead of pursuing social and political objectives that have not been sanctioned by fund members.
  • We will insist that public pension funds meet the same basic regulatory and reporting standards as private pension funds as the first step to addressing a broken and deteriorating system.
  • We will require that retail investors who own passive funds through 401(k)s, index funds and other vehicles have a say in how their shares are voted.
  • We will demand that “black-box” proxy-advisory firms be more transparent about potential conflicts of interest between their business areas in order to ensure that their guidance actually benefits shareholders.

Zynga Restructures Voting Rights

Zynga Inc. (ZNGA), famous for online game FarmVille, as well as its multi-class stock, announced a reversal of its voting archetype this week. In a rare move, founder Mark Pincus, who wielded all the Class C 70-1 voting rights and some of the Class B 7-1 rights, will convert all outstanding shares to one-vote, therein diluting his voting power from 70% to just under 7% while maintaining the same equity investment of $226 M. Just as Pincus converted to a system that many large institutional investors and pension funds have long advocated, Xiaomi— the Chinese smartphone giant—is going public in the opposite direction, in what is forecast to be the world’s largest IPO since 2014 ($100 B). They will be taking full advantage of the Hong Kong Stock Exchange’s allowance of the dual-class listing.

While conflicting research see-saws between whether dual-class companies financially outperform the more common single-class companies, those employing the dual- (or multi-) class voting structure are the ones that attract the brunt of criticism. Concerns over perceived high-profile corporate governance disconnects and management malfeasance have served to amplify the negative connotation of this structure. Zynga’s stock edged higher by 3% following the press release and otherwise has been hovering between $3 and $5 for nearly five years— down from its high of $14.70 three months post-IPO in early 2012.

Today, approximately 19% of Russell 3000 companies exercise dual-class voting rights, compared to 15% across the S&P 500 and S&P 100 alike. With the likes of Accenture, Charter Communications and Facebook, dual-class S&P 100 companies represent around $3 trillion of market capitalization, and as an equal-weighted index, gained 24% since the start of 2017.

Gender Pay Grilling at Schroders

On Thursday, April 26th, UK financial services firm, Schroders, held their annual meeting, wherein a representative from ShareAction, a shareholder advocacy group, grilled CEO Peter Harrison about the company’s gender pay practices. This is in the aftermath of their UK-mandated gender pay disparity disclosure, which revealed a 27% mean pay gap (expressed as % higher pay for males) and a 29% median pay gap. In addition, results showed a skewed proportion of women on management teams compared to the 53% of females in the bottom quartile of employees.

Spurred on by front-page gender discrimination litigation at Alphabet and Oracle, increasingly, publicly-held firms (especially in IT and financial services) are either receiving this gender pay resolution from shareholders, voluntarily undertaking a pay gap analysis as Salesforce.com did or starting to roll out their federal EEO-1 workforce demographic stats on their websites.

This comes at a time when, not only in Europe, but in the US, the issue of gender pay and diversity is becoming increasingly contentious. While “blue chip” boards in the US and Europe are making strides toward improving board gender diversity, activists like ShareAction are aiming focus elsewhere in companies other than the board level (i.e., leadership and C-Suite diversity). Last year, five S&P 100 banks that received the gender pay shareholder proposal disclosed an average of 55% female global employees, 30% female global leadership, 22% female named executive officers and 27% females in board seats. Schroders, interestingly, voted FOR 18% of shareholder proposals calling for an evaluation of gender pay discrepancies at US firms last year.

The CGIC is set to release an analysis of the gender pay gap proposal in 2017. Please contact Dave Bobker with inquiries regarding this study.

Gun Manufacturers Under Pressure

ISS and Glass Lewis have supported a shareholder proposal submitted by the Sisters of the Holy Names of Jesus and Mary to Sturm, Ruger & Company calling on the gunmaker to create a report on gun safety.

The board recommended that shareholders vote against the proposal. In the proxy statement, the company stated that, “The intentional criminal misuse of firearms is beyond our control. Similarly, the constitutional right of firearms ownership carries with it certain responsibilities, and the Company has long advocated the safe and responsible ownership and use of firearms.”

BlackRock and Vanguard are the two largest investors in Sturm Ruger, collectively owning around 25 percent of the company’s outstanding stock. Both asset managers have publicly declared that they will raise safety concerns with gunmakers—we commented on BlackRock’s public stance on the issue in the blog post BlackRock Targets Gun Manufacturers on March 2 in the wake of the Stoneman Douglas High School shooting. So far, neither fund has made any further public statement on the issue or on this proposal. We will closely monitor the situation for their potential support, which would appear to be likely, given their previous concerns and tougher stance on several social issues.

Given the current scrutiny on the voting of larger investors, that it is aligned with public commentary, we should expect further media commentary after the annual meeting for Sturm, Ruger and peers.