Corporate governance - Vigil

BlackRock Inc. and other heavyweight investors were more willing to flex their muscles against companies in the past year, setting the stage for future showdowns over issues from board seats to climate-change disclosure. BlackRock funds withheld support from 10% of board directors on company shareholder ballots, or more than 6,500 director election proposals, in the year ended in June. That is up from 8.5% in the prior year. In addition, the world’s largest asset manager increased support for shareholder-led proposals. It backed 64% of environmental proposals, up from 11% during the prior year. BlackRock cast key votes alongside other big investors in signature shareholder battles that forced companies to make changes. [...] How they wield this power for their millions of investors—or refrain from doing so—has far-reaching effects across corporations.

In late May 2021, an activist investor dealt a major blow to the oil giant ExxonMobil when it waged a battle to install three new directors onto its board. The shareholder, Engine No. 1, is a small investment firm from San Francisco. While the firm holds only a 0.02 percent stake in ExxonMobil, it galvanized massive shareholders, including BlackRock and California’s teacher pension fund, to vote against ExxonMobil. Three of the four candidates that Engine No. 1 nominated were elected onto the 12 person board, despite open hostility from the oil company. The new directors, Gregory Goff, Alexander Karsner, and Kaisa Hietala, are all expected to shake up ExxonMobil’s board, which has been widely seen as insular and out of touch. [...]  Engine No. 1’s victory is a milestone in the fight against climate change. It is the first time a major company has faced such a significant loss to a small activist investor. Engine No. 1, founded just last year, effectively replaced a quarter of an oil supermajor’s board with dissident directors, proving that ExxonMobil can no longer resist social change nor dismiss climate change as a fringe issue. While ExxonMobil’s defeat is the most remarkable, Chevron faced a similar loss on the same day when 61 percent of its investors voted to take more aggressive action on climate change.

Economics is about supply and demand—just not in financial markets. A building block of asset-pricing theory is that the value of stocks and bonds is determined by their expected future payoffs rather than by ignorant trades. If an investor unthinkingly throws money at, say, shares in Apple, opportunistic short-sellers are supposed to line up to take the other side of the bet, keeping the share price anchored to where it ought to be, given Apple’s likely profits. Free money gets picked up and dumb money gets picked off. Markets are efficient, in that prices come to reflect genuine information about the future. [...] The paper will surprise the typical economist, who, according to the authors’ surveys, believes that flows do not affect prices. [...] There may be an irony here. The authors do not study whether markets have become less elastic over time, but in recent decades funds that passively allocate fixed percentages to indices have grown in popularity, making their theory more plausible. The trend is a vote of confidence in markets’ efficiency, which should make the returns to active stock-picking low. Yet passivity may breed inelasticity—and therefore create opportunities for a canny investor who is ahead of the crowd.

When I first appeared at public company annual general meetings 30 years ago, they were pretty lively affairs. I remember 800 braying Asda shareholders packed into Pudsey Civic Hall after the share price collapsed. We had to open an anteroom with a video feed because we could not fit them all in. But today, most company AGMs are a shadow of their former selves. The days when loyal shareholders wanted to traipse the length of the country to attend a two-hour meeting for a cup of tea and a digestive biscuit are long gone. [...] With printing and postage considered, any written communication takes a week to arrive and in an era of 24/7 news, this does not facilitate timely investment decisions. By contrast, we have 47,000 shareholders who have registered with us for e-communications, who receive regular “as it happens” updates and are more engaged as a result — and at least twice as likely to vote at our AGM or participate in corporate actions. True digitalisation of our regulatory framework will democratise and not dilute shareholder voices. M&S is pushing the agenda but cannot be successful without changes to the Companies Act legislation, to ensure we can engage with every shareholder digitally throughout the year, not just over a prawn sandwich at our AGM.

Securities regulators are rethinking rules on popular plans that let corporate executives sell stock without violating insider-trading provisions. The plans—known as 10b5-1 plans—allow executives to create schedules for buying and selling shares in the future. In theory, a predetermined sale, even if it comes at a fortuitous time, wouldn’t be based on inside information. But years of research has shown that the reality is more complicated: Executives might establish a plan to sell shares that very day. Executives could set up a raft of plans to sell on different days, then cancel most of them. They can modify plans without disclosing what they are doing. Securities and Exchange Commission Chairman Gary Gensler has expressed skepticism about the plans and in June asked the commission’s staff to recommend changes that would curb abuses. Lawmakers called for changes last year after pharmaceutical executives developing Covid-19 vaccines sold $500 million worth of shares; many of the sales came under 10b5-1 plans that were modified after vaccine trials began. 

If there’s any doubt about the extent to which societal and legal expectations regarding climate change are evolving, a Netherlands court’s ruling ordering Royal Dutch Shell Plc. to reduce the CO2 emissions of its 1,100 companies by 45 per cent as of 2030 from 2019 level should put the naysayers to rest. “What you’ve got is a court interfering in the internal operations of a very big corporate target on the basis that the dangers of climate change outweigh the company’s commercial interests,” said Caroline Jageman, an energy and commercial lawyer at Jageman Law in Toronto. But what are the chances that a Canadian court would respond similarly? And what impact will the decision have on Canadian carbon emitters? [...] “The unique thing about the Shell ruling is that it is not merely preventative, but remedial in the sense that it imposes a specific target on the company and its subsidiaries,” Jageman said. “So the thinking about what’s reasonably required of corporations is definitely changing.” [...] “Making the same argument successfully in a Canadian court would definitely be an uphill battle,” Jageman said.

Experts warn of the ‘polarising effect’ of both vaccine passports and gimmicks to persuade reluctant citizens to take the jab. Carrot or stick? As the super-infectious Delta variant spreads around the world, threatening to stall the reopening and recovery in countries that thought their Covid-19 vaccine programmes were succeeding, governments are facing the delicate question of how to get hesitant citizens to take the jab. The responses often involve a combination of incentive and coercion. Inducements to receive Covid-19 jabs are proliferating. In the US, states are offering rewards ranging from $100 cash to free beer, theme park tickets and lottery tickets. In the UK, freebies include fast food and free taxi rides.  [...]  Stephen Reicher, a professor of psychology at the University of St Andrews, argues that “many complexities and many pitfalls” surround incentivisation schemes — and vaccine passports could have a “polarising effect”.  [...] For many experts, the discussion about incentives is a superficial response that ignores the much harder but necessary work of engaging directly with the groups in society who have reservations about the vaccine and trying to overcome them.

[...] Within the next couple of years, every public company in the U.S. might well be required to report climate information. Such an effort would be the biggest potential expansion in corporate disclosure since the creation of the Depression-era rules over financial disclosures that underpin modern corporate statements. Already it has kicked off a confusing melee as companies, regulators and environmentalists argue over the proper way to account for carbon. U.S. and European regulators already demand or are expected to require that public companies disclose their greenhouse-gas emissions. That might include the emissions produced by their suppliers and customers. Regulators also want better disclosure of climate-related risks for public companies. These can range from physical ones such as effects from extreme weather to financial risks such as if a fossil-fuel asset such as a coal mine loses value. [...] The SEC and other regulators say climate change poses specific risks to companies that investors should be told about. Among them is the risk that companies producing a lot of greenhouse gases could be avoided by some lenders, insurers or investors, either because those parties see the companies as harming the environment or because they view the companies’ businesses as vulnerable.

San Francisco’s Measure L, which passed with the overwhelming support of the voters, will be effective in 2022 for businesses operating in the City of San Francisco. Measure L titled the “Overpaid Executive Gross Receipts Tax”, imposes a supplementary tax on gross receipts or payroll expenses of any business in which the CEO (or highest-paid managerial employee) earns more than 100 times the median compensation of its employees. Companies with a CEO pay ratio of 100:1 or more will be subject to the Measure L tax, and the tax rate will increase for every additional 100 times the CEO’s pay exceeds the median worker’s pay. The tax rate reaches its maximum level when the ratio reaches 600 to 1, with a maximum tax on payroll of 2.4% or a surcharge on the gross receipts tax of up to .6%. Businesses which are exempt from the City’s gross receipts tax due to being a small business enterprise are exempt from the pay ratio tax. Also exempt are some nonprofit organizations as well as businesses exempt from local taxation, such as banks and insurance companies. The measure is expected to generate between $60 million and $140 million a year in taxes starting in 2022, according to estimates provided by the City of San Francisco.

Despite decades of reform efforts by regulators, shareholders and the independent director community, CEO pay continues to grow inexorably, far outpacing any gains to workers' pay. Since 1993, the National Association of Corporate Directors (NACD) has said that CEO pay should be more in line with what other employees receive. Boards, we have said, should not approve pay plan elements that result in unexpectedly high compensation, such as mega stock-option awards, and plans should be expressed simply, so that shareholders know what to expect when targets are met and pay is reported. But despite our admonitions, today's typical CEO pay packages (the ones shareholders vote up or down as they have their "say on pay" each spring) are long documents full of initialisms justifying pay that can rise as high as hundreds of millions of dollars per year. The situation is unfortunate, but it tends to be ignored as the world faces other serious problems, including our warming planet and subsequent climate change. Here, too, NACD aims to be part of the solution to promote "climate governance" — principles and practices that boards can adopt to respond to climate risk and help their companies transition to a net zero economy. But so far, we are not yet seeing much progress in the form of transformative, climate-oriented board approaches.

Investors poured $705 billion into exchange-traded funds through the first seven months of the year, pushing 2021’s world-wide tally to a record $9.1 trillion, according to data from Morningstar Inc. Net flows so far this year have nearly eclipsed the $736.5 billion investors had moved into ETFs globally in all of 2020. Most of the cash has gone into cheap, index-tracking funds, with large-cap and short-term bond ETFs, as well as products offering inflation protection, attracting significant investor interest, according to the data. U.S. ETFs accounted for a record $519 billion of the total, sending assets in U.S. funds to about $6.6 trillion. ETFs now hold more money than index-tracking mutual funds, which had about $8.8 trillion in assets as of June, though mutual funds overall still command more money, with about $40.7 trillion in assets. [...] The success of ETFs was far from guaranteed after the first one launched in 1993. But enthusiasm for low-cost investments has led to an explosion in ETF assets over the last 10 years. “ETFs are probably the greatest success story in financial services over the last two decades,” said Anaelle Ubaldino, head of ETF research and investment advisory at data firm TrackInsight, which also tracked ETFs crossing the $9 trillion mark last month. Vanguard Group has been the biggest draw this year, with its ETFs pulling in nearly $224 billion through the first seven months of 2021.

Hackers stole hundreds of millions in digital assets from the obscure cryptocurrency platform Poly Network this week in a move crypto experts say shows the risky and experimental nature of an industry that is still nascent and largely unregulated. In one of the biggest crypto thefts ever, US$600-million worth of digital assets were stolen from Poly Network, a decentralized finance – or “DeFi” – platform, on Tuesday, after hackers exploited a vulnerability that allowed them to divert the holdings out of it. [...] Unlike CoinSmart and other more well-known crypto companies such as San Francisco-based Coinbase and Binance, which was founded by Chinese entrepreneurs, Poly Network is not a crypto exchange – it does not facilitate the buying and selling of crypto tokens. Rather, decentralized finance platforms enable users to move digital currency from their own crypto wallets between blockchains. (A blockchain is essentially a digital ledger of transactions, and cryptocurrencies are built on them. Ethereum, for example, is a decentralized blockchain.) Because a platform such as Poly Network merely enables users to send their own crypto tokens across different networks, and does not hold or store those tokens, any losses from a hack will be absorbed by the individual platform user.

New Nasdaq Inc. rules meant to boost corporate board diversity are giving investors new ammunition to call out companies falling behind in adding women and minority directors. The stock exchange’s rules, approved by the SEC last week, aim to push companies to get more serious about not just recruiting qualified directors from underrepresented communities, but also push stragglers to disclose why they’re falling behind. [...] Shareholders concerned about diversity will have the data to vote against directors and offer proposals to spur diverse boards. Investors will also be able to scrutinize corporate statements about why they can’t recruit female or minority board directors. Companies will need to publish those statements on their websites or in the proxy materials they send to investors before annual meetings. [...] That dynamic will cause companies to think very carefully about how they disclose their board’s composition or their diversification efforts, said Elizabeth Bieber, counsel and head of shareholder engagement at Freshfields Bruckhaus Deringer LLP. A statement that isn’t narrowly tailored and carefully worded can reverberate unfavorably among investors, employees, and other stakeholders, she said. “It’s going to be difficult for a company to credibly put forward its explanation for not having diverse directors,” Bieber said.

Canadian angel investors deployed less capital in 2020 than either of the two years before, a new report has found, but experts say funding is back on the climb. Angel investors provided a total of $102.9-million in funds in 2020, which was 37 per cent lower than in 2019 ($163.9-million) and 28 per cent lower than in 2018 ($142.8-million), according to the National Angel Capital Organization, or NACO. While the number of deals increased year-over-year – 416 as opposed to 299 in 2019 – the total was still down from 2018, when there were 583 investments. [...] Claudio Rojas, chief executive officer of NACO, said angels were deterred in 2020 by the uncertainty brought by the pandemic. Many chose to pull their money out of the market to put into savings, he said, opting to hold back in what was seen as a high-risk market. “Because of the decline in the stock market and their portfolios, which declined significantly in March of 2020, there was likely less capital available to be put at risk into the early stage,” Mr. Rojas said. “Angels were still writing cheques supporting entrepreneurs. They just weren’t doing it at the same dollar amount as they did in a pre-COVID-19.”

Le ministre de la Santé, Christian Dubé, accompagné de représentants de la santé publique du Québec, en a fait l'annonce en point de presse mardi. « Notre objectif est que le passeport vaccinal permette aux personnes qui sont adéquatement vaccinées d’avoir accès aux événements publics à fort achalandage et aux activités à haut taux de contacts de socialisation.» Il s'agira d'activités et de services non essentiels. Les événements publics à fort achalandage incluront notamment les festivals et les lieux intérieurs de grande capacité, a précisé le ministre. Les activités à haut taux de contacts comprennent, entre autres, les bars, les restaurants et les gyms. Pour le moment, le passeport vaccinal ne s’appliquera pas aux commerces de détail, a précisé le ministre de la Santé. Les rassemblements religieux ne seront pas non plus visés au départ, mais des discussions auront lieu avec le milieu dans les prochains jours, a-t-il ajouté. Le gouvernement souhaite ainsi éviter de procéder à un autre confinement généralisé, l’approche privilégiée lors des trois premières vagues.

Hackers have started returning some of the $600 million they stole in what’s likely to be one of the biggest cryptocurrency thefts ever. The cybercriminals exploited a vulnerability in Poly Network, a platform that looks to connect different blockchains so that they can work together. Poly Network disclosed the attack Tuesday and asked to establish communication with the hackers, urging them to “return the hacked assets.” A blockchain is a ledger of activities upon which various cryptocurrencies are based. Each digital coin has its own blockchain and they’re different from each other. Poly Network claims to be able to make these various blockchains work with each other. Poly Network is a decentralized finance platform. DeFi is a broad term encompassing financial applications based on blockchain technology that looks to cut out intermediaries — such as brokerages and exchanges. Hence, it’s dubbed decentralized. Proponents say this can make financial applications such as lending or borrowing more efficient and cheaper. “The amount of money you hacked is the biggest in defi history,” Poly Network said in a tweet.