Corporate governance - Vigil

We recommend the following seven action items for evolving with the markets:

#1. Take time to understand the data already being utilized by ratings providers along with the outputs reflected in investment analysis (i.e., SSGA R-Model, Blackrock Aladdin Climate, etc.)

#2. Ensure ESG disclosures are on topics material to economic reality rather than those that tell an easy marketing story—PR marketing and Investor marketing is analogous to Oil and Water

#3. The corporate sustainability report as it is known today is a great start, but it represents only the second inning of the ballgame—evolution is required to take control of the narrative

#4. Recognize that commitment to one framework is not enough – investors treat frameworks and ratings as a mosaic and use proprietary methodologies to piece together and measure differentiators

#5. Realize that ESG disclosures in their current form do not provide the underlying context required to properly value intangibles, implying a disconnect in firm value

#6. Understand that replicating peer efforts does not provide a unique perspective and in most cases compounds the “echo chamber” concern, especially at the board level

#7. Invest in a comprehensive cybersecurity program, as it is critical both to financial and to ESG performance, and is probably one of the next “shoes to drop”

Independent directors have incentives to build reputations as friendly to the companies hiring them, researchers say. Researchers proposed that bankruptcy judges should regard independent directors as truly neutral ‘only if all creditors support their appointment, making them accountable to all sides of bankruptcy disputes.’ Companies on the brink of insolvency are increasingly appointing independent directors to their boards as they prepare for a bankruptcy filing, but their neutrality is disputed by creditors, lawyers and academics. The companies label these directors as disinterested experts who act to maximize value for creditors by investigating the reasons for the bankruptcy, dealings between the company and its owner, and other matters. [...] The problem, according to new research, is that some of these directors are biased in favor of the companies that hired them. The directors have financial incentives to build reputations as friendly to the companies and lawyers that help them land similar gigs in the future, researchers at the University of California Hastings College of the Law and Tel Aviv University said in a study published last month.

During a trip to Vermont seven years ago, I toured the Ben & Jerry’s factory, as you do if you don’t ski and are bored of leaves, and was pleased to see Jerry Greenfield still pottering among the ice cream machines.  The co-founder’s presence added to the illusion that this was an independent business, even though it had been sold to Unilever in 2000. That illusion was carefully cultivated at the time of the takeover and has generally served both the ice cream maker and its parent company well for two decades — until now. This week Ben & Jerry’s announced that selling ice cream in the occupied Palestinian territories was “inconsistent with our values” and that it would stop, an apparent protest against Israeli settlements. [...] It ensured that Ben & Jerry’s would continue to have an independent board entrusted with “preserving and enhancing the objectives of the historical social mission of the company”. The complaint from the board’s chair, Anuradha Mittal, to NBC News this week was that although the withdrawal policy belonged to Ben & Jerry’s, the statement had been written by Unilever and included a commitment to remain in Israel, which had not been blessed by the ice cream company’s board. It is a sticky mess. Incapable of offering a coherent response, Unilever seems to be praying the backlash will not grow into a broader boycott of its products.

The ex-chair of the board of the world’s largest pension fund, who oversaw its $1.7tn portfolio as it became a pioneer of responsible investment, has warned the institution to remember its core duty to Japanese pensioners: returns. The GPIF [Government Pension Investment Fund] must always go back to its investment purpose,” says Eiji Hirano, who stood down from the job three months ago. His comments reflect concerns that too great a focus on environmental, social and governance (ESG) standards can add risk, including a possible collision between the law and the investment philosophy under the GPIF’s previous regime.  [...] 
A significant clash came in late 2019 when Mizuno announced that the GPIF would stop lending its global equity stocks to short sellers — who bet on share price falls. Although the move was controversial, prompting fierce debate within the fund because of the forgone revenues, Mizuno — who last year joined the board of Tesla, the carmaker led by outspoken anti-shorter Elon Musk — argued that the practice was antithetical to ESG principles. “I never met a short seller who has a long-term perspective,” Mizuno told the Financial Times then, adding that he felt comfortable with the decision because it represented a choice between making cash immediately or being “better stewards for our constituency”.

The U.K.’s accounting regulator said audits performed by the big four accounting firms and smaller rivals failed to meet expectations, raising troubling questions about the financial statements upon which investors rely. The Financial Reporting Council, which oversees the U.K. arms of international auditing firms, said that the performance of Deloitte LLP, Ernst & Young LLP, Grant Thornton UK LLP and PricewaterhouseCoopers LLP had improved from the year before but still fell below expectations, with about 80% of audits assessed as good or requiring only limited improvements. “The number of audits that we have assessed as requiring improvements remains unacceptably high,” the Financial Reporting Council said. Each year, the regulator inspects a sample of individual audits to assess their quality. It focuses on what it calls higher-risk audits, such as companies in financial difficulty or where the auditor has identified governance weaknesses.

When social issues arise that stimulate public expectations, there are numerous factors and constituencies to be considered before a corporation can make a formal response. It’s critical to have a process, communication plan, and monitoring capabilities to maintain a pulse on public sentiment and manage accordingly. How can boards and business leaders stay proactive rather than reactive when it comes to initiating corporate responses? In this episode, Paul Washington, Executive Director, Environmental, Social and Governance Center, The Conference Board, outlines a best practice framework for issuing a public response to social issues:

• What criteria should boards and management teams use to determine if a public stance and response is needed?
• What process should boards follow for developing and issuing a public response?

The anniversary of the Apollo moon landing marked one small step for space travel but a giant leap for space billionaires. Jeff Bezos and Richard Branson vividly demonstrated this month that soaring up to the near reaches of the sky appeared safe and, above all, a lark. The planet has so many problems that it is a relief to escape them even for 10 minutes, which was about the length of the suborbital rides offered by the entrepreneurs through their respective companies, Blue Origin and Virgin Galactic. But beyond the dazzlement was a deeper message: The Amazonification of space has begun in earnest. What was once largely the domain of big government is now increasingly the realm of Big Tech. The people who sold you the internet will now sell you the moon and the stars. Mr. Bezos, the founder of Amazon and still its largest shareholder, made clear at the news conference after Tuesday’s flight that Blue Origin was open for business. Even though tickets were not generally available, sales for flights were already approaching $100 million. Mr. Bezos didn’t say what the price for each was but added, “The demand is very very high.”

The contention that the shareholders own companies is based, at best, on lack of understanding of the law, of business, and of history. At worst, it is driven by greed, power, and the desire to protect a business governance that has devastated much of America for some 40 years. Why, you might ask, is the issue of who owns the corporation so vitally important? Because at the heart of the debate between two versions of capitalism lies controversy. One side feels a deep need to protect the interests of the shareholder first and foremost. The other side feels the pain that comes from de-prioritizing the other stakeholders in a corporation – including its employees, customers, and the community in which it lives. In truth, the shareholder almost certainly will do as well with either version of capitalism. Change is always hard and threatening to those wanting to protect the status quo even if it won’t cost them a thing. 

Calls for businesses to strike a new balance between shareholder primacy and responsible, long-term business models that consider the interests of a range of stakeholders are now mainstream and have been intensified by the COVID-19 pandemic. Companies face real challenges in addressing these changes in their reporting. The annual report itself is creaking, as it is asked to accommodate more and more content - much of it in the major growth area of ESG reporting. It’s a report for shareholders that was not designed to address the needs of a wider range of stakeholders. We recognise the many challenges that companies face and how difficult it is to address them. In our report (available to download below), our aim is to provide practical observations and suggestions around how reporting can be taken forward under the current framework, and how it can be adapted to the new priorities and challenges.

The SEC’s request for public input on climate disclosures attracted 297 institutional comments totaling 3,290 pages. The views range from questioning the SEC’s authority to imploring the SEC to mandate comprehensive, internationally aligned and assured disclosures in SEC filings. This post summarizes thirty comment letters we consider both important and representative of differing stakeholder views, in anticipation of a formal SEC proposal expected in or before October 2021. The SEC took a first step toward the adoption of climate disclosure requirements by issuing a request for public input (the RFPI) on March 15, 2021. The RFPI requested comments from investors, registrants and other market participants “[i]n light of demand for climate change information and questions about whether current disclosures adequately inform investors.” To facilitate the SEC staff’s view of existing disclosure rules, the RFPI requested comment on fifteen questions, ranging from how the SEC could best regulate climate disclosures to whether the SEC should expand its focus from climate disclosures alone to a focus on environmental, social and governance (ESG) matters as part of a broader, comprehensive disclosure framework.

While coronavirus (COVID-19) temporarily halted the steady rise in shareholder disputes seen in recent years, shareholders still found time to file a range of claims, including allegations of a lack of diversity among boards of directors and senior management, as well as new categories of event-driven, pandemic-related litigation. However, as the situation slowly improves, many expect to see an uptick in the volume of both shareholder activism and litigation in 2021 and beyond, as parties adjust to the post-COVID-19 landscape. FW: Reflecting on the last 12-18 months or so, are you seeing an increase in the number of shareholder disputes? What are some of the common causes of such disputes? Sylvia: In 2020, the overall number of filings in the US still significantly outpaced the historical average. Due to an increase in M&A activity, primarily driven by de-SPAC (special purpose acquisition company) transactions, suits challenging the adequacy of deal disclosures have increased during the past six months. 

Efforts are under way to protect the world’s financial networks from a quantum attack. But some question if the threat to crypto assets is really as existential as feared. There’s a paradox at the heart of cyber security. It relates to the trade-off between keeping our secrets safe and protecting the communications of bad actors. [...] With quantum computing around the corner, however, some believe the power balance struck in the 2000s could be on the verge of breakdown due to the technology’s potential to break current encryption standards. This time, they say, the consequences could be far graver than anything in the past because of the scale of economic value and infrastructure that has been linked in the interim to secure encryption. But others think the threat may be being overhyped by those who wish to profit from selling quantum security or by those who have an interest in getting institutions to migrate to platforms they control and can exploit.

Lavish bonuses such as those awarded to Jamie Dimon are rational from a board’s point of view, but not to ordinary shareholders. JPMorgan Chase’s board surprised investors by giving Chief Executive Officer Jamie Dimon 1.5 million stock options on top of his considerable compensation as long as he sticks around and hits performance targets for five more years, according to a securities filing. Mr. Dimon, a 65-year-old cancer survivor who last year had emergency heart surgery, can’t sell the shares until 2031. It is hard to say how much more that motivates the billionaire banker to stay, but it is clear where the board’s sentiment is coming from. Going back to the time of its purchase of Bank One in July 2004, which brought Mr. Dimon to its executive suite, JPMorgan Chase’s shares have produced a total return of 524%, blowing away the 145% return of the S&P 1500 Financials Index. Was his leadership responsible for at least some of that excess performance? Arguably yes. But what about the next five years? Some back-of-the-envelope math could make a strong case that his “surprise” award is prudent.

What motivates board oversight of racial equity: The following risks and opportunities motivated directors’ increased focus on racial and ethnic diversity, equity, & inclusion (DE&I): reputation, strategy, financing, regulatory and compliance, and human capital. Directors did not cite the potential economic impact of racial inequity as a key motivator. Oversight in practice: Directors referenced one or more of the three major committees—audit, compensation, and nominations and governance—as having explicit oversight of racial and ethnic DE&I. Most boards undertake a hybrid approach to oversight—discussing the issue in committee, but also making it a full-board topic. The full-board discussions often center on the interplay between DE&I and strategy and on DE&I as a component of corporate culture.

Intel Corp. Chief Executive Pat Gelsinger sees the global semiconductor shortage potentially stretching into 2023, adding a leading industry voice to the growing view that the chip-supply disruptions hitting companies and consumers won’t wane soon. The world-wide shortage has fueled rising prices for some consumer gadgets. [...] It could take one or two years to get back to a reasonable supply-and-demand balance in the semiconductor industry, Mr. Gelsinger said in an interview after the company posted second-quarter earnings on Thursday. “We have a long way to go yet,” he said. “It just takes a long time to build [manufacturing] capacity.” Supply shortages should start showing signs of easing later this year, Mr. Gelsinger said, echoing comments from Taiwan Semiconductor Manufacturing Co., the world’s largest contract chip maker. TSMC last week said the chip shortage that has hampered car makers could start to ease in the next few months after it ramped up its production of auto chips. TSMC and Intel are adding new chip-production plants, though some of that capacity won’t be ready for about two more years.

Ample evidence shows that when executives consistently make decisions and investments with long-term objectives in mind, their companies generate more shareholder value, create more jobs, and contribute more to economic growth than do peer companies that focus on the short term. [...] We wanted to understand better what differentiates long-term-oriented companies from others. How have they sidestepped the pressures? We reviewed and synthesized our own research and that of others in academia and the business world. We also surveyed executives and analyzed data on management and corporate performance. In the process, we identified five behaviors that managers and boards can take to reorient their organizations toward long-term value creation rather than just short-term performance:

#1. Invest sufficient capital and talent in large, risky initiatives to achieve a winning position.
#2. Construct a portfolio of strategic initiatives that deliver returns exceeding the cost of capital.
#3. Dynamically allocate capital and talent (through divestitures, if need be) to the businesses and initiatives that create the most value.
#4. Generate value not only for shareholders but also for employees, customers, and other stakeholders.
#5. Resist the temptation to take actions that boost short-term profits.

Bitcoin’s steep selloff is undercutting the argument made by the digital currency’s proponents that it’s an inflation hedge. The original cryptocurrency has lost about half of its value since mid-April, fizzling after a spectacular rally that saw it surge above $60,000 from around $7,000 at the start of 2020. It traded Wednesday afternoon at $31,864, and got a small boost after Tesla Inc. boss Elon Musk said he has personal holdings of the cryptocurrency, as does his space company SpaceX. The timing is ironic. Bitcoin’s supporters for years have touted it as an inflation hedge like gold, mainly because the bitcoin network has a set limit on the number of units that can be created: 21 million. Their argument hadn’t previously been tested, however, because inflation has largely been under the Federal Reserve’s 2% target since bitcoin’s 2009 launch. Now for the first time in years, shortages of semiconductors, lumber and workers are putting pressure on consumer prices, sparking worries about inflation. At the same time, governments and central banks have been forced to spend trillions to prop up their economies, potentially sapping the purchasing power of their currencies.