Corporate Governance

Who’s at the Door?

Activists knock from the inside. Waiting for that knock to act—to engage with your investors and gain an unbiased understanding of their perceptions and expectations of your company and strategy—will provide an activist with an advantage your board and management team can ill afford. Despite the acknowledgement of the ongoing concern of activism, too many companies are still at risk of being underprepared.

The recent decision by the Superior Court of Washington for King County in Blue Lion Opportunity Master Fund, L.P. vs. HomeStreet, Inc. should serve as a reminder that every public company should have a carefully drafted advance notice bylaw as part of the activism defense strategy. The court ruled in favor of HomeStreet, affirming that advance notice bylaws are common, and that the dissident failed to comply in this instance. The board’s decision to reject Blue Lion’s notice was an exercise of its business judgement, thus protecting the business judgement rule.

A new Rivel study, regarding shareholder activism of global investor relations officers (IROs) at approximately 630 companies, found that most companies are unconcerned, have not hired advisors and do not have a plan in place to respond to shareholder activism. Considering the continued rise in activism, the constant threat it poses to all companies and the fact that a majority of companies have engaged with an activist, the study results are concerning.

Key findings include:

  • IROs believe that shareholder activism is here to stay.
    • 64% believe activism will increase over the next couple of years, and 30% expect activism to remain constant.
  • Most companies have engaged with one or more activists.
    • 56% of the IROs surveyed have had direct experience with activism, a significant increase from 2014 when 45% of IROs reported having engaged with an activist.
  • Despite the prevalence of activism and expectations that it will continue to be a major force, most management teams are not particularly concerned.
    • 54% of the survey participants expressed that their senior management team is “not very” or “not at all” concerned about being targeted by activists.
  • Many companies have done little or nothing to prepare for shareholder activism.
    • Only 31% of companies have gathered structured feedback from their shareholders with a survey.
    • Only 27% have a communications plan in place to respond to activism.
    • Only 17% have preemptively engaged an investment bank for activism defense services.
    • Only 17% have preemptively engaged a communications consultant.

The poll also found sharply divided sentiments regarding the impact of shareholder activism. Thirty percent of IROs view activism as a “negative force in the equity markets,” while 23% consider it a positive force. Global buy-side investors have a more definitive view: nearly seven in ten global buy-side investors (69%) view activism as a positive force in the equity markets.

CalSTRS Focus on Facebook

In the wake of highly publicized recent data privacy breaches, concerns over the governance structure at Facebook are once again taking center stage.

CalSTRS, who previously voiced concerns over governance controls and board oversight, are preparing a letter to send to the company to voice their concerns in an effort to engage the company directly, and likely to illicit support from other stakeholders.

Christopher Ailman, CalSTRS CIO, recently deleted his personal Facebook account, stating that he felt that the company’s “governance is terrible.” Aeisha Mastagni, a portfolio manager in the CalSTRS’ corporate governance unit, issued a written statement in which she commented, “Additionally, we would like to understand what additional steps Facebook is taking to protect this data in order to regain the trust of their users, the public and their shareholders.”

Other asset owners have voiced similar concerns in the past, so it appears CalSTRS will have support for various initiatives to engage Facebook and seek resolutions. These may go beyond data privacy and cybersecurity. Concerns over board oversight, shareholder rights and diversity have been expressed, especially given the company’s growth and evolution.

2018 Proxy Voting Policy Updates

State Street Global Advisors, T. Rowe Price and Goldman Sachs have all updated their 2018 proxy voting policies.

The updated policy documents are available on the Governance Gateway to all CGIC members.  A few of the amendments are noted below.

State Street Global Advisors reiterated their backing of ISG’s six corporate governance principles and expects that issuers comply or explain any deviations via direct engagement. They will evaluate poison pill proposals at Canadian companies on a case-by-case basis, looking at whether it conforms to a “new generation” rights plan. They will rely on engagement to examine Canadian companies’ compensation plans.

T. Rowe Price (which has switched from using Glass Lewis to ISS as their proxy advisor) stated they intend to focus on board diversity during engagement but will hold out (for now) on releasing new voting guidelines based on ethnic and gender board diversity. Their policy is to always vote against shareholders’ right to act by written consent, and “other business” proposals that lack specificity. When analysing pay-for-performance, T. Rowe Price nixed the use of Glass Lewis and Equilar’s outside research for assessing linkage between compensation and companies’ three-, four- and five-year incremental TSR.

GSAM’s updated US proxy voting guidelines included an amendment to vote against or withhold on certain directors or the lead director/chairman when average board tenure exceeds 15 years and there has not been a new nominee over the last five years.

UK Gender Pay Gap Figures

As we commented on previously, companies in the UK have now filed information on their gender pay gaps.

The Equality and Human Rights Commission (EHRC) is reporting more than 10,000 companies have complied, with over 1,000 firms reporting figures at the deadline.

They cite a median gender pay gap of reporting companies of 9.7%; 78% of companies pay men more that women on average, with 14% paying women more.  Only 8% reported no gender pay gap.

A pay gap is not the same as unequal pay, which is illegal under UK law, but typically a result of having more highly paid men than women in an organization.

The five sectors reporting the greatest pay gap were:

  • Construction
  • Finance and Insurance
  • Education
  • Mining
  • Communication

The five lowest, all below the median, were:

  • Household Employers
  • Accommodation and Food
  • Health
  • Arts and Entertainment
  • Retail

Two of the companies reporting what has been dubbed a “negative” pay gap, where women are paid on average more than men, are Tesla Motors and Mamas & Papas.

As of this post, the EHRC reports approximately 1,500 companies have failed to comply.

The EHRC has stated it intends to pursue enforcement action against companies that have failed to file.  This will start with a letter to be sent Monday, April 9, advising companies that they have 28 days to comply or face further action. This action will ultimately result in summary conviction and unlimited fines to be set by the court. The EHRC intends to make this a public process, which is likely to prove very problematic for companies and individuals at those firms. They will also be investigating companies with irregular or implausible figures.

With the heightened scrutiny on this issue in both the public and corporate domains, combined with board diversity concerns, increased shareholder resolutions on gender pay equity and other related matters such as EEO-1, the question is how long until we see a push for universal disclosure of this nature in the US?  CEO pay-ratio disclosure could prove to be an insignificant concern if this becomes a mandate of investors and/or regulatory bodies.

ISG Updates Administrative Structure

The Investor Stewardship Group (ISG) has updated its administrative structure, including establishing three new committees: The Steering Committee, the Governance Committee and the Marketing & Communications Committee. It has also adopted an amendment process.

  • The Steering Committee will serve as the primary policy and decision-making body of the ISG.
  • The Governance Committee will be responsible for providing advice and recommendations to the Steering Committee on governance structure, policies and practices.
  • The Marketing & Communications Committee will be responsible for providing advice to the Steering Committee on all marketing and communications policies and practices.
  • Although ISG does not envision regular framework amendments, as it believes the framework should be evaluated periodically and updated in accordance with best practice governance and stewardship standards, the amendment process will facilitate any modifications.

The ISG framework, which went it to effect at the start of 2018, is attempting to establish a universally-recognized code of conduct in the US for good corporate governance.  The group currently has over 50 US and international institutional investor signatory firms, representing over $22 trillion AUM.

Glenn Booraem, Investment Stewardship Officer at Vanguard, stated “Now more than ever, capital markets need organizations like the ISG to establish appropriate governance and stewardship standards for companies and investors alike. This continuing evolution of ISG’s own governance demonstrates our continuing momentum to establish the first ever, broad-based US Governance and Stewardship code. We’re proud of the progress we’ve made with our fellow members and portfolio companies over the past year, and look forward to the continuing evolution of governance and stewardship expectations in the years to come.”