Corporate governance - Vigil

New York's attorney general sued the National Rifle Association on Thursday, seeking to put the powerful gun advocacy organization out of business over allegations that high-ranking executives diverted millions of dollars for lavish personal trips, no-show contracts for associates and other questionable expenditures. Attorney General Letitia James's lawsuit, filed in state court in Manhattan after an 18-month investigation, highlighted misspending and self-dealing allegations that have roiled the NRA and its longtime leader, Wayne LaPierre, in recent years — from hair and makeup for his wife to a $17 million US post-employment contract for himself. The troubles, which James said were long cloaked by loyal lieutenants and a pass-through payment arrangement with a vendor, started to come to light as the NRA's deficit piled up and it struggled to find its footing after a spate of mass shootings eroded support for its pro-gun agenda. The organization went from a nearly $28 million US surplus in 2015 to a $36 million US deficit in 2018. "The NRA's influence has been so powerful that the organization went unchecked for decades while top executives funnelled millions into their own pockets," James said in a statement announcing the lawsuit, which seeks to dissolve the organization. At a news conference Thursday, James characterized the organization as "a breeding ground for greed, abuse and brazen illegality."

That good business is about more than delivering shareholder returns is a theme Martin Lipton has been espousing since the ’70s. Over the past three decades, he’s been a voice of reason, calling for the eradication of the short-termism that has long had a crippling effect on corporate growth and investment. His campaign culminated in a 2016 article, “The New Paradigm,” written at the behest of Klaus Schwab at the World Economic Forum. It set forth a blueprint for recalibrating the relationship between public corporations and investors, one that calls for collaboration among corporations, shareholders and other stakeholders to achieve long-term value and resist short-termism. CBM recently spoke with Lipton, winner of the 2020 Lifetime Achievement Award, about his call for a meaningful and successful private-sector solution to short termism. Excerpts, edited for clarity and length, follow.

If CEOs really intended to amend their companies’ purpose, they’d at least consult their boards first. By putting American workers through months of turmoil, the Covid-19 crisis has heightened expectations that large companies will serve the interests of all “stakeholders,” not only shareholders. The Business Roundtable raised such expectations last summer by issuing a statement on corporate purpose, in which the CEOs of more than 180 major companies committed to “deliver value to all stakeholders.” Although the Roundtable described the statement as a radical departure from shareholder primacy, observers have been debating whether it signaled a significant shift in how business operates or was a mere public-relation...

Chinese technology stocks lost more than $75bn in value on Friday after US President Donald Trump unveiled executive orders targeting popular social media apps TikTok and WeChat. Shares in Tencent fell as much as 10.1 per cent in Hong Kong after Mr Trump issued an executive order that gave US companies 45 days to halt transactions with its WeChat app. A separate order targets transactions with ByteDance’s hugely popular video-sharing platform TikTok. Tencent’s stock recovered some of those losses to close down 5 per cent. In total, the sell-off lopped off $75.7bn in market capitalisation from Chinese technology groups listed in Hong Kong. Equity traders said the broad scope of Mr Trump’s statements left open the possibility that the US could bar all dealings with Tencent and ByteDance. That could potentially deliver a serious blow to Tencent’s US gaming business. The company also owns stakes in companies including electric car maker Tesla, games group Epic Games and music streaming business Spotify. The losses extended beyond the companies named in the bans. Chinese internet groups Alibaba and JD.com fell as much as 6.7 per cent and 5 per cent, respectively. ByteDance, which has been in talks with Microsoft over a mooted sale of TikTok’s business in the US and elsewhere, is not listed on the stock market. Blocking transactions with WeChat in the US would not seriously impact Tencent’s earnings, said Andy Maynard, a trader at China Renaissance in Hong Kong, but the wording of the executive order was “so ambiguous it can mean anything”.

Investors give up nearly half of their gross profits through incentive fees, according to an NBER working paper. Investors are paying their hedge fund managers much higher fees than they might think. A new study from the National Bureau of Economic Research (NBER) has found that, over the long run, the total performance fees paid by investors are more than 2.5 times higher than what they signed up for — and that’s before taking management fees into account, according to authors Itzhak Ben-David and Justin Birru of the Ohio State University and University of Arizona professor Andrea Rossi. “During the 22-year sample period, investors paid about half of their aggregate gross profits as incentive fees — whereas the average contractual incentive fee is below 20 percent,” they wrote. “After including management fees, investors collected about 36 cents for each dollar of gross excess return generated by funds on their invested capital. The other 64 cents were paid as management and incentive fees.” The study was based on analysis of nearly 6,000 hedge funds operating between 1995 and 2016. These hedge funds, on average, charged a performance fee of 19 percent of gross profits. “In practice, however, investors paid 49.6 percent of the cumulative gross profits as incentive fees,” the authors said. This amounted to $113.3 billion in performance fees paid on $228.2 billion in gross profits — almost $70 billion higher than if investors had actually paid 19 percent fees. “Adding insult to injury, these results are obtained before adjusting fund returns for risk,” the authors added.

Despite widespread reports of Covid-19 prompting a rethink on executive pay, fresh research suggests the pandemic has had only a passing effect. A new report concludes that only 36 companies in the FTSE 100 announced cuts to executive pay as a result of the crisis but these were “mainly superficial or short term”. Conducted by think tank the High Pay Centre and HR body the CIPD, the report also finds that median chief executive pay in 2019 fell 0.5% on 2018. Median pay is now £3.6m for FTSE 100 chief executives, 119 times that of the average British worker. According to the report, high pay levels are particularly “controversial” in the case of companies drawing on government support during the crisis. “The current economic uncertainty should encourage companies to consider whether the scale of pay awards reflect good business sense and the CEO’s individual contribution to the company’s success. The relatively small cuts to pay that CEOs have made to date suggest this is not yet happening,” the report says. Carum Basra, a policy adviser at the Institute of Directors, agrees—at least in part, saying “nothing is normal” in the current environment. “Over the course of the crisis, we have seen taxpayers  support many businesses, including those in the FTSE 100. Boards should therefore think very carefully about how they reward executives, particularly when other stakeholders might be losing out—notably employees and hard-hit SMEs in their supply chains.”

Warren Buffett is betting on brighter prospects for his Berkshire Hathaway Inc. Berkshire spent a record US$5.1 billion buying back its own stock in the second quarter, and may have kept that higher pace going in July. The billionaire investor sought to seize on a bigger discount to the S&P 500 during a quarter when the conglomerate’s operating businesses held up better than expected. Buffett said in early May that he was keeping cash high to be prepared for any direction the pandemic might turn and wasn’t overly attracted to buybacks. But as he searched for undervalued assets to spend billions on, he gravitated to his own firm’s shares. “Even though we don’t know how long it’s going to be and how much it’s going to permanently affect people’s behaviour, we think Berkshire Hathaway is in a really good position to survive,” said Bill Smead, chief investment officer at Smead Capital Management, which oversees $1.5 billion including Berkshire shares. Edward Jones analyst Jim Shanahan estimated that Berkshire repurchased about US$2.4 billion more of its stock in July. The 10 per cent drop in operating profit wasn’t nearly as precipitous as the 27 per cent decline expected by analysts at Keefe, Bruyette & Woods, and results were better than a forecast from Shanahan. Earnings generated by Berkshire’s businesses topped US$5 billion for the ninth time in the last 10 quarters. Buffett piled into his firm’s stock as Class A shares fell 1.7 per cent and Class B shares were down 2.4 per cent in the second quarter. He wasn’t as bullish on broader equities as the S&P 500 rallied 20 per cent. Berkshire had its biggest net sales of stocks in more than a decade.

THE POLITICS of technology in America are becoming ever more febrile. Big tech companies have long been accused of abusing dominant market positions; four were grilled by a congressional committee last week. Social-media firms are beset by allegations of bias. And the administration of President Donald Trump regards China’s growing technological prowess as a threat to both America’s competitiveness and its national security. In recent days the anti-Chinese theme has taken a new twist: Microsoft looks likely to buy the American assets of TikTok, a Chinese-made social-media app that teenagers around the world find addictive. Mr Trump, who has threatened to “close down” the app on September 15th unless it is bought by a “very American” company, has blessed the idea. In a further Trumpian turn he has also demanded that the Treasury should get “a very large percentage of the purchase price”, having been responsible for bringing the deal about. [...] Microsoft's shareholders appear to welcome the acquisition, despite the political uncertainties and a mooted purchase price of $50bn—twice as much as its biggest previous purchase, LinkedIn, a professional-networking and job-search platform. Microsoft’s share price has risen by 4% since the announcement of the prospective deal, adding around $60bn to its market value. In recent years America’s five biggest tech firms have all been eager acquirers of other, smaller firms (see chart)—one of the complaints of congressional Democrats. If Microsoft buys the American bit of TikTok, it will cement its position as the biggest spender in the group.

Virtual annual meetings are the post-pandemic norm but shareholders are worried over the loss of face-to-face engagement. The annual general meeting (AGM) circuit in the UK is famously formulaic. Grey-haired pensioners grasping a paper prospectus congregate for endless spreadsheet presentations, tedious question and answer sessions, and, finally, a reception where directors and shareholders mingle over tea, a prawn sandwich or a pint. AGMs of listed companies are an annual highlight for some shareholders who relish the chance to give feedback to company directors. A few have taken on a mythic quality, such as the Berkshire Hathaway AGM in Omaha, Nebraska, which drew in over 35,000 attendees. Some shareholders attend 50 to 100 meetings every year.  But due to the pandemic, 2020 has been an AGM circuit unlike any other. Companies have held closed-door meetings, or hosted digital AGMs over Zoom. Investors say these rapid changes have hurt their ability to participate as company owners, and fear companies will use this precedent to reset annual AGMs to do “the bare minimum necessary” and move online forever.  But companies say this year provides an opportunity to reset a “broken model” of shareholder engagement and restructure AGMs, which many boards of directors think of as a chore. 

Canada’s pension funds are beating peers globally in investment performance and are stronger at hedging against liability risks, according to research from McGill University and CEM Benchmarking.  Their success is partly explained by the fact they are more likely to manage their assets in-house, McGill researchers Sebastien Betermier and Quentin Spehner, along with CEM’s Alexander Beath and Chris Flynn, wrote in a July paper. The authors’ findings are based on a study of pensions, endowments, and sovereign wealth funds globally between 2004 and 2018. Large Canadian funds in particular outperformed in all measures of the study, which analyzed returns, asset allocation strategies, and cost structures. The authors defined large funds as those managing more than $10 billion in assets in 2018. “Not only did they generate greater returns for each unit of volatility risk, but they also did a superior job hedging their pension liability risks,” the authors wrote. “The ability to deliver both high return performance and insurance against liability risks is notable because hedging is typically perceived as a cost.” [...] On average, Canadian pensions manage 52 percent of their assets in-house, compared with 23 percent for funds outside the country, the McGill and CEM researchers found. The gap was even wider for very large funds overseeing more than $50 billion of assets, with Canadian pensions managing 80 percent internally versus 34 percent for their global peers.

In Oscar Wilde’s Lady Windermere’s Fan, the playfully wicked character Lord Darlington notes: “I can resist everything except temptation.” Darlington, of course, wasn’t talking about management decisions, but his self-proclaimed inability to resist things that attract him is shared by too many corporate executives who succumb to temptation at five major decision points. Buying a high-tech solution that appears to quickly address an identified need or problem is understandably tempting, especially during the COVID-19 pandemic, which has everyone feeling stuck in firefighting mode. So why resist? In short, the attractive easy out rarely pays off in the long run, and the difference between the value gained by investing in less-than-ideal solutions and the potential value that could have been realized by making better choices really adds up. [...]
IT INVESTMENT QUESTION #1: How extensively should we apply new technologies to organizational processes? The temptation here is to limit the application of new technologies to quick-payoff, high-visibility processes. [...]
IT INVESTMENT QUESTION #2: How should we adapt IT to changing business needs? The temptation here is to patch or “lift-and-shift” legacy systems. [...]
IT INVESTMENT QUESTION #3: How should we sequence the adoption of new technologies? The temptation here is to experiment with “hot” technologies in isolation. [...]
IT INVESTMENT QUESTION #4: How do we enable our workforce to use new technologies and improve their performance? The temptation here is to rely on standard classroom training programs. [...]
IT INVESTMENT QUESTION #5: How do we align technology strategy and business strategy? The temptation here is to move responsibility for IT to the business side.

Banks have weathered the first six months of the coronavirus storm. But after a surge in provisions for bad debts and fearing that a boost to trading desks will prove temporary, many believe more pain is yet to come. “The industry as a whole . . . is well prepared,” Thomas Gottstein, chief executive of Credit Suisse, told the Financial Times. “But if there is a huge second lockdown, a macroeconomic meltdown and actual failures and bankruptcies, [all the banks] will be hit.” Here are four important points from the industry’s results season:
1. Bad loan provisions rise
Government support schemes have helped suppress customer defaults on both sides of the Atlantic. Nonetheless, this year banks have booked tens of billions of dollars of provisions to cover an expected rise in defaults amid a rise in unemployment and uptick in corporate bankruptcies. [...]
2. Trading saves the day
Trading was a notable bright spot. Volumes surged as clients scrambled to reposition their portfolios during the pandemic. [...]
3. Rising bank capital 
The top six US banks managed to grow their capital marginally in the first half of 2020, despite taking a whopping $60bn of loan loss provisions during the period. [...]
4. Cost-cutting accelerates
Several banks entered the crisis with plans to slash their cost base. Their experiences over the past few months have only increased the need to trim outgoings. 

In an almost unprecedented move, Italy’s government paused the planned sale of part of Telecom Italia SpA to a private equity firm at the eleventh hour, amid concerns the deal could damage plans to create a national champion. With KKR & Co. poised to sign the purchase of the former phone monopoly’s secondary network, top ministers on Tuesday sent Telecom Italia Chairman Salvatore Rossi a last minute request for a one-month delay. The government views the sector as strategic and is keen to create a single ultrabroadband operator, according to people familiar with the matter. Telecom Italia shares rose as much as 4% in Milan trading, giving the company a market value of about 8.1 billion euros ($9.6 billion). The request marks another major intervention by Prime Minister Giuseppe Conte’s government into a decision of a private listed company after Autostrade, where the Benettons are being forced to exit the toll-road operator following a deadly bridge collapse in 2018. [...] “The board of directors looked very favorably upon the idea to speed up the single network project and will be enthusiastically taking part in the works the government intends to launch over the next few hours,” Telecom Italia said in a statement. The CEO will “discuss all the relevant aspects with the government authorities.” [...] The government doesn’t want to interfere with Telecom Italia, but rather demonstrate a strong commitment to promoting a national and integrated ultrabroadband network, according to a government official. Telecom Italia’s project is key and the state is taking a broad strategic view on the matter, including the involvement of other institutional and market players, the official said.

A new analysis of companies’ supplemental filings to their proxy materials with the U.S. Securities and Exchange Commission (SEC) during the majority of the 2020 proxy season shows at least 42 instances where proxy advisors have formulated recommendations based on errors* or analysis disputed by the companies themselves. For example, in one supplemental filing, a proxy advisor generated a recommendation using a disputed figure for a company’s net income, a basic but critical number. Another highlighted how a proxy advisor based its recommendation on a peer group that did not include the company’s actual competitors. Other filings showed instances where proxy advisors issued recommendations that appear to be contradictory with their stated policies. These results are consistent with the prior analysis of supplemental filings we conducted into the 2016, 2017, and part of the 2018 proxy seasons, and which uncovered a total of 139 apparent errors. The findings are significant as they show that disputes between companies and proxy firms have continued despite significant scrutiny from Congress, the SEC, and an array of impacted stakeholders. They suggest that these efforts have not fully had the intended effect and that further intervention is needed in order to ensure that investors have as accurate information as possible before voting their securities.