Latin America and the Credit Crisis
Submitted by: Juan Pajuelo, Latin American-Iberian Research Team Leader
The global credit crisis has affected Latin American markets to a lesser extent than those in North America and Europe, primarily due to the fact that the region's financial institutions have not invested significantly in U.S. mortgage-backed securities and the main international banks operating in the region are considered sound.
However, two factors present an immediate risk to the region’s growth: a dependence on overseas bank borrowing to finance foreign trade; and the stagnant growth of the G-7 countries and emerging Asian economies, which have served as markets for Latin American commodities.
“The financial markets are practically closed to emerging markets, and sooner rather than later, businesses and governments will have to study that alternative,” said Ricardo Hausman, an economics professor at Harvard University, at the Ibero-American Summit held in El Salvador on Oct. 29, according to the France 24 news service.
Latin American leaders are taking steps to reduce the impact of the crisis on their respective economies. Although some measures are not investor-friendly, such as Argentina's nationalization of private pension funds, most governments have tried to mitigate inflationary pressures by modifying monetary and fiscal policies to inject greater liquidity into their markets.
Latin American countries also will be impacted by the reduction in global demand for their exports and a decrease in commodity prices. Growth vulnerability in the region varies greatly between countries; yet despite facing the same economic storm, not every nation is in the same boat.
Unlike in the United States and Europe, there have been no calls by Latin American leaders for companies to limit executive severance payments or to curb incentive compensation that may lead to excessive risk-taking.
In Argentina, the government announced a pension reform plan on Oct. 21 that consists of the nationalization of up to $23 billion in private pension funds to protect retirees and workers. Cristina Kirchner, Argentina’s president, proposed the move after pension fund assets suffered losses from the collapse of stock and bond markets.
The investment community reacted to the nationalization plan by sending the Argentine Stock Market down 11 percent. The move also highlighted institutional weakness and sparked fear that the government was desperate to tap funds to avoid a default. The Argentine peso fell to its lowest value in six years and the government’s bonds lost almost 27 percent.
“Although the proposal, if approved, would provide the government with greater financial flexibility in the short term, it undermines the government’s already weak policy credibility and adds to negative perceptions about Argentina’s institutional integrity, particularly governance and respect of contracts,” Mauro Leos of Moody’s Investor Service said in a statement.
According to the Reuters news service, about 55 percent of the funds held by the Argentine pension system are invested in Argentina’s sovereign debt; 11 percent is in local stocks; and the rest is in short-term deposits, foreign assets, and other investments.
In addition, the country’s National Securities Commission (Comision Nacional de Valores), has relaxed rules on share buybacks, so companies can sustain their share prices.
Although Argentina's economy has recovered significantly over the past three years, uncertainty remains as to whether the current growth and relative stability are sustainable. Economic indicators show that the economy remains fragile due to high unemployment and inflation rates; limited availability of long-term fixed rate loans; high public debt; and very limited access to the international capital markets. Argentina has not had access to international debt markets since its 2001 default on $95 billion in bonds.
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Tuesday, November 18, 2008 |
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Labor Funds File Bailout-Related Proposals
Submitted by: Ted Allen, Publications
The Laborers’ International Union of North America and the International Brotherhood of Teamsters are filing new proposals that seek compensation reforms at companies that participate in the U.S. Treasury Department’s bailout program.
In the supporting statement for these 2009 resolutions, the labor funds argue that the pay restrictions in the Treasury’s Troubled Asset Relief Program (TARP) “fail to adequately address the serious shortcomings of many executive compensation plans.” Instead, the unions urge directors to adopt “more rigorous executive compensation reforms that we believe will significantly improve the pay-for-performance features of the Company’s plan and help restore investor confidence.”
According to the Associated Press, more than 110 financial firms have indicated that they likely will participate in the TARP’s Capital Purchase Program, under which the government has so far committed up to $250 billion to buy preferred stock. The labor funds have filed this resolution at JPMorgan Chase, KeyCorp, Bank of America, American Express, and SunTrust Banks, and plan to submit the proposal at more than 45 other firms.
The proposal calls for directors to adopt the following reforms:
* Limit annual incentive compensation to an amount not exceeding one times the senior executive’s annual salary;
* Require that a majority of long-term compensation be awarded in the form of performance-vested equity instruments;
* Freeze new stock option awards to senior executives, unless the options are indexed to peer group performance so that relative, not absolute, future stock price improvements are rewarded;
* Require senior executives to hold for the full term of their employment at least 75 percent of the shares of stock obtained through equity awards;
* Prohibit accelerated vesting for all unvested equity awards held by senior executives;
* Limit all senior executive severance payments to an amount no greater than one times the executive’s annual salary; and
* Freeze the accrual of retirement benefits under any supplemental executive retirement plan (SERP) for senior executives.
The labor unions urge directors to adopt all of these reforms unless barred by existing executive employment agreements. “At this critically important time for the Company and our nation’s economy, the benefits afforded the Company from participation in the TARP justify these more demanding executive compensation reforms,” the funds argue in their supporting statement.
The proposal does not specifically define “senior executives,” but regulations issued under TARP essentially define a senior executive officer (subject to TARP pay limitations) as the CEO, chief financial officer, and three other most highly compensated executive officers--in other words, the named executive officers in the proxy statement.
Labor officials told RiskMetrics that they expect that some companies will seek permission from the Securities and Exchange Commission to exclude these proposals on the basis that the firms have “substantially implemented” the requested reforms. “We anticipate a fight at the SEC, but we expect to win,” said Jennifer O’Dell, assistant director of the Laborers.
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Tuesday, November 11, 2008 |
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ICGN Sharpens Focus on Governance Ahead of G-20 Gathering
Submitted by: Subodh Mishra, Governance Institute
The International Corporate Governance Network is calling on key global leaders to consider strengthened governance practices and greater shareholder rights as a means of helping to address the credit crisis. In a Nov. 10 statement, the group said that “while corporate governance failings were not the only cause” of the present financial crisis, better governance would “be integral to an overall solution aimed at restoring confidence to markets” and shielding them from future crises.
The group, representing institutional investors holding roughly $15 trillion in assets, is directing its message at leaders of G-20 industrialized and emerging market nations who will gather Nov. 15 in Washington to coordinate efforts to solve the crisis.
“This is a real opportunity for governance,” said ICGN Chairman Peter Montagnon. “The ICGN has campaigned vigorously for shareholder rights.”
ICGN officials say that a number of key corporate governance issues should be addressed in order to restore confidence to capital markets. Though it provides little in the way of specifics, the London-based group is calling broadly for greater market transparency, which it prefers to placing restrictions on such practices as short-selling and the use of derivatives. The group also cautions against abandoning “fair-value” accounting standards and political interference in the setting of accounting standards.
These issues, along with a need for more competition in the credit ratings industry, will be a focus on the group’s engagement efforts going forward. But the primary focus will likely be on equipping shareholders with key rights, the need for which, it hopes, will resonate with G-20 leaders. In its statement, the group called for the following:
* The US debate on shareholder rights, particularly to appoint and dismiss directors should be expedited so that boards can be held to account. Weak shareholder rights limited their ability to hold boards to account, particularly in the areas of remuneration and risk management, which have been key to the development of the crisis;
* Giving shareholders a “say on pay” is an essential part of the solution, not just in the US but in other markets where this does not yet happen;
* Globally, we need a regulatory framework that ensures fair and transparent markets which inspire confidence in financial reporting;
* Financial institutions should make greater narrative disclosure about their business models and how they manage the risks inherent to those models. This will foster productive dialogue with shareholders; and
* Voting arrangements must allow shareholders to exercise their votes across borders. At present the system does not function well and votes are lost. This is a severe handicap in a global market.
ICGN delegates will gather on Dec. 10 in Wilmington, Delaware, for the group’s mid-year meeting, the theme of which will be corporate governance and the financial crisis.
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RiskMetrics Group Announces Fall Series on Managing Diverse Risks During the Financial Crisis
Submitted by: Sarah Cohn, Communications
RiskMetrics Group today announced a Fall 2008 Interview Series led by experts in the areas of risk, governance, and accounting that addresses the current financial crisis. The series, Conversations on Managing Diverse Risks During the Financial Crisis, provides financial market participants with access to a range of perspectives on managing risks during an unprecedented period of market turmoil.
The line-up for the series includes interviews with a number of RiskMetrics Group and industry experts on a wide range of topics, including: managing credit and counterparty credit risk, improving disclosure around retail structured products, a look ahead to proxy season 2009 in the U.S. and Europe, executive compensation and the bailout, and sustainability risk management in 2009 among other areas. The first two interviews Managing Credit and Counterparty Credit Risk and Comparing Historical and Present Market Volatility are already available online.
The series, Conversations on Managing Diverse Risks During the Financial Crisis, will run through mid-December. To access the interviews and view the complete series schedule, please visit here.
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Monday, November 10, 2008 |
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RiskMetrics’ Governance Exchange to Hold Webcast on Say-on-Pay on November 12
Submitted by: Sarah Cohn, Communications
The debate on say-on-pay votes at U.S. companies continues unresolved. Support for the concept this year by investors voting on shareholder proposals requesting say-on-pay was virtually even with 2007, including majority votes at 10 companies. So far, 11 firms have or will put management resolutions seeking an advisory vote on pay on their ballots, but it appears the item won’t become widespread until Congress acts.
RiskMetrics Group’s Governance Exchange will discuss the likelihood and impact of such legislation in a webcast to be held on Wednesday, November 12 at 1 p.m. EST. Speakers for the webcast, include: Richard Ferlauto, Director of Corporate Governance and Pension Investment at the American Federation of State, County and Municipal Employees (AFSCME); Charles G. Tharpe, Executive Vice President for Policy at the the Center on Executive Compensation; and Christianna Wood , Chief Executive Officer of Capital Z Asset Management and H&R Block Board Member, and . In addition, the panelists will debate the effectiveness of say-on-pay votes in addressing perceived problems with U.S. executives’ compensation. Carol Bowie of RiskMetrics’ Governance Institute will moderate the webcast.
To register for the webcast, please visit here.
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Friday, November 7, 2008 |
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A “New Opening” for Investors
Submitted by: Ted Allen, Publications
With the election of Barack Obama, investor activists are hopeful that his administration will open the door to advisory votes on executive pay, proxy access, broker voting reform, and greater attention to environmental and social issues.
“It’s a significant new opening for investors who are concerned about ESG [environmental, social, and governance] issues,” Tim Smith, a senior vice president at Walden Asset Management, told Risk & Governance Weekly. “It’s not just a rehearing; it’s an opportunity to have a partnership to move forward.”
These reforms, along with greater U.S. regulation of financial markets, appear increasingly likely after this week’s election of Obama, a Democratic senator from Illinois who sponsored “say on pay” legislation. So far, it appears that governance reforms may get significant support in Congress, where the Democrats expanded their majorities in both chambers. In addition, the global financial crisis and the controversial bailout of Wall Street firms have inspired both Democrats and Republicans to call for a crackdown on executive pay abuses. The new year likely will bring a wave of governance and regulatory reforms that go beyond those adopted in 2002 in response to the accounting scandals at Enron and WorldCom.
Activist investors are looking forward to a change in leadership at the Securities and Exchange Commission. Chairman Christopher Cox plans to leave when the Bush administration’s term expires in January, so the new president will name a new chairman to join the two Democrats and two Republicans already on the five-member commission. Given the public attention to the financial crisis, Obama likely will focus on the SEC soon after he names a new Treasury secretary.
“A lot of reforms that have been stonewalled at the SEC will finally see the light of day,” noted Michael Garland, director of value strategies at the CtW Investment Group, the investment arm of the Change to Win labor coalition.
Several investor activists mentioned former Commissioner Harvey Goldschmid as their choice to lead the commission. Goldschmid, who served on the SEC from 2002 to 2005, is now a law professor at Columbia University. Other potential candidates who have been mentioned in press reports include current Commissioner Elisse Walter; New Jersey Governor Jon Corzine; New York Attorney General Andrew Cuomo; Damon Silvers of the AFL-CIO; John Olson, a partner with Gibson, Dunn & Crutcher; Mary Schapiro, a former SEC commissioner who is CEO of the Financial Industry Regulatory Authority; and Robert Pozen of MFS Investment Management.
The agency’s “fundamental role is investor protection, and we need to have a chairman who is committed to that mission,” Garland told Risk & Governance Weekly.
Other activists also expressed hope that the SEC will become a more “robust” advocate of investor rights. They generally support a proposal, which Chairman Cox has endorsed, to have the agency take over the functions of the Commodity Futures Trading Commission, as long as the SEC’s enforcement authority is not diluted.
Continue reading "A “New Opening” for Investors
Submitted by: Ted Allen, Publications" »
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Thursday, November 6, 2008 |
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Investors Defend Accounting Rule
Submitted by: Ted Allen, Publications
During a roundtable hosted by the Securities and Exchange Commission, investor and auditor representatives defended mark-to-market (also known as “fair value”) accounting and urged the SEC to resist political pressure to suspend or repeal it.
“Fair value reporting is far from perfect, but it is a fundamental mechanism to provide investors with transparency,” said Scott Evans of the TIAA-CREF education pension system. “This crisis has many causes, but fair value accounting is not one of them.”
The SEC held the Oct. 29 roundtable as part of a study on mark-to-market accounting for financial institutions that was mandated by Congress under the financial industry bailout legislation, the Emergency Economic Stabilization Act of 2008. This accounting rule, which is part of Financial Accounting Standard (FAS) 157, requires firms to value mortgage-backed securities and other financial instruments based on current market prices, but the global credit crisis has caused asset values to collapse and made it more difficult for banks to meet their capital requirements.
Another roundtable is set for Nov. 21. The SEC, which is accepting public comments on the issue until Nov. 13, plans to complete its study by Jan. 2. The Oct. 29 roundtable had 15 panelists, including investor representatives, financial institution officials, auditors, analysts, and academics. In addition, various regulatory and government officials, including SEC Chairman Christopher Cox and thee other commissioners, attended.
Most of the investor advocates, auditors, and academics asserted that fair value accounting best represents the current economic reality and therefore offers improved transparency. “Fair value reporting, despite its imperfections, remains the best system,” said Vincent Colman of PricewaterhouseCoopers.
The proponents rejected the claims by bank officials and some lawmakers that FAS 157 is to blame for the current financial market crisis. They encouraged the SEC to study and understand the structural root causes of the crisis. Fair value supporters argued that changing the rules and moving away from FAS 157 will only diminish confidence in the market and will aggravate financial industry problems. A parallel was made several times to the economic stagnation in Japan that resulted when banks did not have to fully account for distressed loans on their balance sheets. As Ray Ball, an accounting professor at the University of Chicago recalled, that practice undermined investors’ faith in Japanese banks and “stifled the recovery of the economy.”
While acknowledging there are imperfections in fair value accounting, proponents said they are open to working to improve the rules. Colman suggested that the rules could be revised to distinguish between actual credit losses and other factors, such as value declines that stem from illiquid markets.
Mark-to-market accounting “is the best alternative we have in terms of comparability and transparency,” noted Richard Ramsden, a banking industry analyst with Goldman Sachs. “Mark-to-market is critical to restoring investor confidence in the financial sector.”
Opponents of fair value accounting argued that marking asset values to current market prices (especially in a distressed market) is unrepresentative and therefore reduces transparency. William Isaac, a former chairman of the Federal Deposit Insurance Corp. (FDIC), recalled that credit problems in the U.S. banking industry (which included exposure to distressed foreign debt) were much more serious in the early 1980s than they are today; and if mark-to-market accounting had been in place then, there would been devastating consequences.
Isaac said FAS 157 has been “destructive of bank capital” and noted the significant losses suffered by investors at Washington Mutual, Wachovia, and other banks. “No one is talking about the hundreds of billions of dollars that pension funds have lost because of these rules,” he said.
Two bank representatives--Aubrey Patterson, chief executive of BancorpSouth of Mississippi, and Chuck Maimbourg of Ohio-based KeyCorp--said fair value accounting is discouraging banks from undertaking mergers. Patterson said the rule requires banks to mark down assets that the bank has no intention of selling, which further hurts the bank’s balance sheet.
Isaac and other opponents of fair value accounting consistently brought up the inappropriateness of marking assets to “fire sale” prices or to a “computer model.” However, proponents countered that current fair value rules do not require marking to distressed values or fire sale prices. Rather, they noted that the Financial Accounting Standards Board (FASB)--which sets U.S. accounting standards--and the SEC have clearly stated that judgment should be applied, particularly at a time when the market is distressed. They noted that FAS 157 brings more judgment into the process than any other accounting standard. On Sept. 30, regulators issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active,” that provides added guidance for times of market stress. The Financial Accounting Foundation, which oversees FASB, is resisting calls to overturn FAS 157.
Several investor and auditor representatives emphasized the need for FASB to remain independent and free from political interference--otherwise financial statements will cease to be reliable. The banking representatives did not appear to share this concern; one representative stated that the Federal Reserve and the FDIC should approve accounting standards.
Lisa Lindsley of the CtW Investment Group, the investment arm of the Change to Win labor federation, noted that insufficient risk oversight by boards played a greater role in the financial crisis than fair value accounting. “What’s really needed is governance reforms,” she said, calling for proxy access, separation of CEO and board chair positions, and annual shareholder votes on executive compensation.
Jeremy Perler, co-head of accounting research at RiskMetrics Group, contributed to this article.
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Tuesday, November 4, 2008 |
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Japanese Investors Step Up Opposition to Pills
Submitted by: John Taylor, Japan Research Group
Corporate Japan may have a tougher time deploying “poison pills” as opposition to the use of such defenses mounts. In the latest signal that financial market participants have grown wary of the use of pills, shareholders of the Japanese payroll management company Works Applications were able to halt management efforts to install the defense. In September, the company became the first known to RiskMetrics Group to drop a poison pill takeover defense plan from its annual meeting agenda, acknowledging that votes posted in advance of the meeting had “fallen well short of anticipated support” for the measure.
Notably, the company sports just 15 percent foreign ownership, underscoring that domestic institutions are joining their foreign counterparts in opposing takeover defenses.
Works Applications’ recent retreat received scant media attention in Japan beyond a brief article in the Sept. 23 on-line edition of business daily Nihon Keizai Shimbun. According to the article, management told shareholders at the company’s Sept. 24 annual meeting that it had decided not to seek renewal of the plan in view of the paucity of shareholder support. According to a company statement released on the eve of the meeting, the company had “concluded that more careful study of the proposal content [was] required, and that it was resolved to delete these items from [the] annual meeting agenda.”
The move may be the latest manifestation of growing pushback to the growing prevalence of pills at Japanese companies. According to RiskMetrics data, more than 500 Japanese firms have adopted the defense since 2005 when legal experts deemed the defense to be legitimate under Japanese corporate law.
But by August 2007, Japan’s influential Ministry of Economy, Trade, and Industry began to publicly voice concerns over the use of pills. In its annual white paper on economic and finance issues, the agency singled out managements using pills as a means to entrench their positions, noting “hostile takeovers can boost productivity and corporate value by removing inefficient executives and improving management (the efficiency effect on management).”
METI’s pronouncement, coupled with increasing skepticism of pill usage from Japan’s business press, officials at the Tokyo Stock Exchange, and others, has decidedly altered views on defenses and helped dampen a feared explosion of poison pill adoptions during Japan’s 2008 annual meeting season. Although shareholder approval is increasingly treated as a prerequisite, if not legal requirement, for pill deployments, the incident at Works Applications would suggest that pill adoptions will decline heading into 2009, and firms may be increasingly reluctant to seek plan renewals.
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Thursday, October 30, 2008 |
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Canadian Corporations Will Again See “Say on Pay”
Submitted by: Subodh Mishra, Governance Institute
Cambridge, Ontario-based Meritas Mutual Funds will again file “say on pay” proposals at Canada’s top banks, fund officials recently disclosed. The decision to file for 2009 follows a successful campaign earlier this year when average support for the non-binding resolution amounted to 40.5 percent support at the country’s five largest banks.
The fund is targeting eight issuers in 2009, including the five banks. They are: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Nortel Networks, Royal Bank of Canada, Sun Life Financial, Toronto-Dominion Bank, and TSX Group -- operator of the Toronto Stock Exchange and Montreal Futures Exchange.
“Canada’s largest issuers provide their shareholders with solid, and ever-improving, executive compensation disclosure, but no efficient and inclusive way to respond to the decisions that have been made by the board on their behalf,” fund CEO Gary Hawton said in a statement. “If that disclosure was to ever bring a real problem into sharp focus, shareholders need to be able to do more than read about it. They need equal access to comment about it and the most efficient way to do so is through a vote.”
None of the banks that faced the proposal this year agreed to allow for a vote, though each “indicated that it would monitor shareholder views on the matter,” the fund noted in a press release. Bank of Montreal, for one, indicated it would make a “final recommendation to shareholders” on the matter in advance of its 2009 annual meeting.
Hawton predicts strong results in 2009, given support levels of 40 percent or more at some banks earlier this year. He is cautioning targeted companies against rejecting adoption of the proposal only to find investors give majority support to the resolution come the annual meeting.
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Wednesday, October 29, 2008 |
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Schering-Plough Will Survey Shareholders about Pay
Submitted by: Carol Bowie, Governance Institute
Schering-Plough announced on Oct. 24, 2008 that it will conduct a shareholder survey on director and executive pay. The survey will be mailed to shareholders with the company’s 2009 proxy materials, and results will be discussed in the CD&A section of the proxy statement for the 2010 annual shareholder meeting.
Schering-Plough says the survey is intended to “inform future work of the Compensation Committee and the Board” by providing a window into shareholders’ views of the executive pay program.
“This survey is evidence of our commitment to seek and consider shareholder input, as we did in 2006 with the shareholder survey on majority voting for directors” said Pat Russo, Chair of the Nominating and Corporate Governance Committee of the Board, in the company’s press release. Indeed, the company conducted a shareholder survey on governance issues after its 2006 annual meeting, which led to inclusion of two management proposals to amend the bylaws on the ballot for the 2007 meeting: one was to eliminate certain supermajority vote requirements, and the other was to elect directors by majority vote rather than plurality. The first proposal passed, but the second did not, although the board subsequently amended the bylaws to include a director resignation policy, triggered if a nominee in an uncontested election fails to receive support from a majority of votes cast.
It appears that the 2006 survey was conducted by an independent consultant rather than being mailed to shareholders with the proxy statement. For the executive pay survey, Rich Koppes, former General Counsel of the California Public Employees’ Retirement System (CalPERS) and currently of counsel to Jones Day law firm and at Stanford Law School, will provide oversight of the process used to tabulate and report the results, according to the release. Koppes also will serve as the conduit for shareholders wishing to respond to the survey on a confidential basis.
Schering-Plough has participated in the Working Group exploring the issue of “say on pay” and presumably is hoping to head off annual votes, although the company did not indicate how often it intends to conduct its pay survey. A questionnaire should give the compensation committee more nuanced information than an up-or-down vote—and would take proxy advisors out of the equation--but with anger growing daily about extravagant pay practices in the troubled financial sector, Congress may still have advisory pay votes on its to-do list.
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