Xcel Energy Reaches Climate Risk Disclosure Pact With New York
Submitted by: Ted Allen, Publications
New York Attorney Andrew Cuomo announced an agreement with Xcel Energy for the utility firm to provide more disclosure to investors on the financial risks of climate change.
“This landmark agreement sets a new industry-wide precedent that will force companies to disclose the true financial risks that climate change poses to their investors,” Cuomo said in an Aug. 27 press release. “Coal-fired power plants can significantly contribute to global warming and investors have the right to know all the associated risks.”
The agreement was hailed by Mindy S. Lubber, president of the Ceres investor coalition, which has called for greater corporate disclosure of climate risks. “This groundbreaking settlement will send ripples far beyond Xcel Energy. It serves notice that all companies face financial exposure from climate change and will be expected to better inform investors of their strategies for dealing with it,” Lubber said in the New York press release.
Dick Kelly, chairman and CEO of Minneapolis-based Xcel, said the accord “will enhance our already aggressive efforts to be responsible environmental stewards.” “We previously provided detailed information concerning the expected impact of climate change and greenhouse gas emissions regulations on our operations, and under this agreement we will make even more detailed disclosures,” Kelly said in a press release, which notes that the company has voluntarily reduced its greenhouse gas emissions by more than 18 million tons since 2003.
According to Cuomo, Xcel agreed to provide detailed disclosure annually on present and probable future climate-change regulation and legislation; climate-change related litigation; and the physical impacts of climate change. Ceres--joined by Cuomo and state officials from California, Maryland, Florida, Rhode Island, and five other states, as well as the California Public Employees’ Retirement System--have petitioned the Securities and Exchange Commission (SEC) to clarify what companies should be disclosing about climate change risks. The SEC has not publicly acted on that request.
The settlement arose from an investigation that Cuomo launched last September when he demanded information from Xcel and four other major utility firms--AES, Dominion Resources, Dynegy, and Peabody Energy--that plan to develop additional coal-fired power plants. The subpoenas to the utility firms were issued under the Martin Act, a 1921 New York state law that grants the attorney general “broad powers to access the financial records of businesses,” Cuomo said.
At that time, Peabody Energy denounced Cuomo’s probe as political grandstanding. In a press release, the company said the investigation “has nothing to do with investor communications,” but is an “unwarranted use of the legal system to advance the ‘just say no’ agenda, which opposes practical energy answers and has driven America to an unnecessary energy crisis.”
Cuomo’s predecessor, Eliot Spitzer, invoked the Martin Act when he probed Wall Street analysts and mutual fund companies earlier this decade. Whereas Spitzer used the threat of criminal prosecution to negotiate settlements with investment banks, Cuomo primarily has used civil enforcement tools. In early June, he announced a settlement with Moody’s, Standard & Poor’s, and Fitch Ratings to reform the way they rate mortgage-backed securities. Throughout this month, Cuomo--with help from the SEC and other state officials--has made headlines by announcing that major brokerage firms have agreed to buy back billions of dollars in auction rate securities.
While some business advocates complain that Cuomo should leave these matters to federal regulators, he has received praise from other observers who don’t believe that the SEC has done enough to respond to the credit crisis. In an editorial on the rating firm settlement, Financial Week said “this is one of those times when the SEC could use a spine transplant from state regulators.”
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Thursday, August 28, 2008 |
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Another View on Say-on-Pay Progress this Past Proxy Season
Submitted by: Tim Smith, Senior Vice President of Environmental, Social and Governance Issues at Walden Asset Management
The 2008 proxy season demonstrated strong steady support by a remarkable cross section of investors for the reform requesting that an Advisory Vote on Executive Pay be instituted by companies. Even though the number of companies where votes were held grew from 2007, the average vote remained constant around 42%.
In addition ten companies received votes of over 50% and the vast majority of votes were in the 40-49% range. For a second year resolution with a significant number of companies this is an unusually high voting plateau to reach. In addition there is a broad cross section of voting support, some very public and others more circumspect in their support, from T. Rowe price to TIAA-CREF.
With a number of financial companies the votes dropped, e.g. Citigroup, Merrill Lynch, and Morgan Stanley, which is puzzling since major compensation issues exist with those companies. It is hard to know if the reason is a change of the shareholder base because of sales and an influx of new investors. But it does not seem as though institutional investors are stepping back from their support of this reform. They tend to back it on principle, thus the confusion about voting shifts.
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From the point of view of proponents, these votes send a very strong message to company boards and management that this governance issue should be put on their agenda as a top priority for study and action. It is fascinating to see the range of responses, from companies committed to dialogue and careful study of the issue to companies which seem to hunker down and arrogantly ignore the feedback from shareowners. This is most frustrating when a resolution receives a 40 or even a 55% vote and the company refuses to talk.
Other companies are holding back to see what happens in the elections and if “say on pay” will become law. Looking forward, proponents plan to continue to raise this issue through resolutions with approximately 100 companies in 2009.
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International Financial Reporting Standards (IFRS) Could be Used by US Companies As Soon as Next Year
Submitted by: Marc Siegel, Headof Accounting Research
The US Securities and Exchange Commission voted unanimously yesterday (5-0) to propose a “roadmap” to what has been termed accounting convergence. The proposal provides a timetable toward the lofty goal of a single set of global accounting standards. Specifically, a small number of US-based companies (estimated to be slightly more than 100) could be eligible in 2009 to switch from reporting under US GAAP to reporting under IFRS. To be eligible, the company would need to be one of the 20 largest companies in its global peer group, with many peers already using IFRS.
Longer term, the proposal envisions moving large US registrants to IFRS in 2014, mid-size companies adopting in 2015 and the bulk of the remainder adopting in 2016. However, there are some caveats to these long-term milestones including a stabilized funding mechanism for the International Accounting Standards Board. There will be a checkpoint in 2011, at which point in time a new SEC Chairman would make a “go or no-go” decision on the longer term IFRS adoption schedule. Some have wondered whether the US Congress will ultimately weigh in on this issue. A wholesale adoption of IFRS would mean that US-based companies, for the first time, are utilizing accounting standards not promulgated by a US-based standard-setter. In other words, politics could play a role in the ultimate outcome of these efforts.
Having said that, this roadmap is a necessary step to spur to action all the training, education and other work to be done so that investors, analysts and all users of financial reports are ready if and when US-based companies begin to report using IFRS.
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Monday, August 25, 2008 |
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Another Majority Vote for “Say on Pay”
Submitted by: Carol Bowie, Governance Institute
Valero Energy recently disclosed results for the Advisory Vote on Compensation proposal that its shareholders voted on this year – the tally shows support of 53.7 percent (based on votes cast for and against), up from 53 percent support for the same proposal in 2007. Both years’ resolutions were submitted by the Unitarian Universalist Association of Congregations (UUA).
Valero thus becomes the tenth company on this year’s list of majority supported “say on pay” shareholder proposals. The list stopped at eight firms in 2007. Under its bylaws, Texas-based Valero counts abstentions when tallying results for shareholder proposals, and by its reckoning the measure did not pass. Valero spokesman William Day told Risk & Governance Weekly that, so far, the company has no plans to address the proposal.
In another distinction, the Valero resolution is the second to get majority backing from votes cast for two years in a row. The other was voted on at Ingersoll Rand. The measure also garnered 50.7 percent support at computer maker Apple this year after obtaining a near-majority (46.6 percent) in 2007.
While support declined somewhat at several financial firms that had the resolution on their ballots over the last two years, overall “say on pay” shareholder proposals have averaged about 42 percent support so far this year over more than 50 meetings where votes have been reported, according to RiskMetrics data – virtually the same level as 2007. Only two votes remain pending for fall meetings, at Procter & Gamble and Oracle. Proponents may currently be more focused on this year’s political election, which may give a boost to their push for advisory pay votes. According to the draft Democratic national platform released on Aug. 7, for example, party leaders “will ensure shareholders have an advisory vote on executive compensation, in order to spur increased transparency and public debate over pay packages.”
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Friday, August 22, 2008 |
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Appellate Court Rejects Challenge to Sarbanes-Oxley, PCAOB
Submitted by: Subodh Mishra, Governance Institute
A federal appeals court today rejected a challenge from Nevada accounting firm Beckstead and Watts, and the pro-business Free Enterprise Fund, claiming that the Public Company Accounting Oversight Board (PCAOB) is unconstitutional. The plaintiffs argued that the Sarbanes-Oxley Act of 2002, which gave rise to the PCAOB, violated the Constitution’s separation of powers provisions because the PCAOB’s board is not subject to presidential power to appoint or remove members, and because Congress does not control the board’s budget. The 2-1 ruling upholds a March 2007 lower court decision.
In a statement, the PCAOB said it was “gratified” by the decision and noted the court’s opinion is consistent with positions taken by several investors and investor groups, including the Council of Institutional Investors, AFL-CIO, and TIAA-CREF, as well as regulatory bodies such as the Securities and Exchange Commission.
“The decision today … is welcome news for the [SEC], investors and U.S. capital markets,” SEC Chairman Christopher Cox noted in a press release. “The [SEC] believes that the PCAOB is a highly effective organization whose continued existence is vital to protecting investors and furthering the public interest in the preparation of accurate and informative audit reports.”
Critically, observers say the decision will be welcome news at a time when capital markets are pulling back. “Had the decision gone the other way, it would have introduced a lot of uncertainty to capital markets, particularly at a time when we don’t need more uncertainty,” Duke University securities law professor James Cox told RiskMetrics Group. “From a public policy perspective, this was a very welcome decision.”
Professor Cox noted that it was the poor performance of the audit profession that gave rise to the last period of significant market uncertainty, when Enron, WorldCom, and other corporate titans collapsed under the weight of accounting irregularities. “We’ve avoided [a repeat] with this decision,” he said.
Today’s ruling also is a boost to the PCAOB’s financing mechanism, which relies on fees paid public companies.
According to the Associated Press, Judge Brett Kavanaugh of U.S. Court of Appeals for the District of Columbia circuit wrote in his dissent that the case represented “the most important separation-of-powers case regarding the president's appointment and removal powers to reach the courts in the last 20 years.” The PCAOB’s structure “unconstitutionally restricts the president's appointment and removal powers,” Kavanaugh wrote.
Christian Vergonis, an attorney for the Free Enterprise Fund, said the group was disappointed with the decision and intends to appeal either to the full appeals court or directly to the Supreme Court, the AP reported.
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Did VaR Forecast the U.S. Subprime Crisis?
Submitted by: Alan Laubsch, RiskMetrics Labs Asia, and Ron Papanek, Market Strategist
That depends on what VaR model was used. Most banks' models performed poorly which is not surprising given the popular use of historical simulation. While historical simulation provides stable VaR numbers, it has weak forecasting power and is entirely inappropriate during regime shifts (see Finger's "How Historical Simulation Made Me Lazy"). Responsive volatility estimators, such as EWMA and ARCH type models performed much better, and indeed provided early warning signals months before the full subprime meltdown in July 2007.
Download file Chart 1 illustrates the RM 2006 VaR forecast vs. realized log spread changes on the 2006-1 AAA ABX tranche. The first warning was a 300% vol increase from Dec 12 to 21 '06. The second was a 12 standard deviation / 350% vol spike on Feb 23 2007 (this was the day after HSBC announced that it fired the head of its US mortgage lending business as losses reached $10.5bn... the alarm bells were clearly ringing). Even though spreads almost tripled on that day from 11 to 30.8 bps, as seen in Download file Chart 2, it was not too late to hedge. In fact, spreads proceeded to tighten to a low of 14.08 bps on June 25 '07 before widening significantly in three major bear waves. In other words, risk managers had between two to six months lead time to execute hedges.
The main lessons are (1) pay attention to early warning signals, and (2) not all VaR models are created equally. To be useful, VaR should be dynamic and responsive to market conditions. After all, risk is dynamic. And while no model is perfect some models are certainly more useful than others.
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Wednesday, August 20, 2008 |
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Postponement of Discharge Vote Highlights Subprime Woes in Germany
Submitted by: Matthew Roberts, International Governance Research
IKB Deutsche Industriebank, the German bank that suffered the most significant losses as a result of the subprime mortgage crisis, will hold its second annual meeting of the year on Aug. 28 amidst growing uncertainty about its liquidity and future ownership situation. The bank, which specializes in financing small to midsize companies and is 45 percent owned by the German government, received a EUR 8.5 billion ($12.5 billion) bailout from the German government and a consortium of German banks in 2007 to cover subprime-related losses.
The losses were incurred in off-balance sheet transactions undertaken by the bank’s structured credit conduit Rheinland Holding, and the scope of the damage initially came to light in July 2007 after the release of the bank’s preliminary annual results. The timing of the discovery forced the bank to restate its earnings and delay its 2007 annual meeting until March 2008. An independent assessment of the damages by PricewaterhouseCoopers blamed IKB management for failing to implement effective risk analysis and risk management controls, and for giving its IKB Credit Asset Management subsidiary, which ran Rheinland Holding, a disproportionately high degree of responsibility over the company’s risk position.
Notably, for the second consecutive annual meeting, management is recommending that shareholders postpone liability discharges for members of the bank’s management and supervisory boards who were in office during the lead up to the subprime crisis. The vote of discharge, which is a routine agenda item at German annual meetings, is generally considered to be a symbolic vote of confidence in the actions of the management and supervisory boards during the previous fiscal year. Also, because supervisory board directors in Germany generally are elected once every five years, the vote to discharge represents one of the few opportunities that shareholders have to express their dissatisfaction with a company’s leadership. Although a vote to discharge does not necessarily preclude a company and investors from taking legal action against its directors, a management recommendation to postpone or refuse discharge is a good indicator that a company is considering such action.
In this case, IKB management has recommended postponing discharge because former IKB management and supervisory board members are currently being investigated for breach of duty under the authority of a special audit proposed by the Dusseldorf-based shareholder organization DSW and approved at the March 2008 annual meeting. DSW was able to successfully reverse IKB management’s original recommendation for discharging the supervisory board and pass its special audit proposal with 82 percent approval. DSW managing director Carsten Heise told RiskMetrics Group that the strong showing was attributable to the German government’s willingness to going along with the proposal. According to Heise, IKB is cooperating fully with the investigation, and that the results are expected to be published this fall.
Although IKB suffered more significant subprime-related losses than most other European banks, the bank’s concentrated ownership structure, combined with political support from Berlin, were clearly the decisive factors that enabled DSW to pass its special audit proposal. For the sake of comparison, the German government’s ownership percentage at IKB (45 percent) was actually greater than the total share capital participation at two shareholder meetings for large European banks with subprime-related shareholder proposals: UBS (37 percent) -- where a similar special audit proposal narrowly failed – and Deutsche Bank (33 percent) – where several more extreme shareholder proposals failed to receive significant support. Both of those banks have large free floats, whereas the German government’s dominant ownership position at IKB effectively allowed it to control the proceedings with a two-thirds voting majority. Thus the success of DSW’s proposal at IKB doe not reflect a groundswell of investor support in Europe so much as it reflects political pressure within Germany to get to the bottom of what has been a significant financial hit for the German government (this pressure was further illustrated last month when the opposition Free Democrat party pushed for a special government committee to investigate IKB’s managerial transgressions). In this respect, IKB appears to be an exceptional case, rather than the signal of changing investor sentiment in Europe.
In the lead up to next week’s annual meeting, the bank remains in a precarious financial position, and there is widespread concern in the German financial community that IKB’s collapse could trigger a more wide-ranging banking crisis there. Because the bank’s current liquidity is not expected to last beyond the end of the year, IKB management proposed a EUR 1.5 billion ($2.2 billion) recapitalization passed at the March annual meeting, but the recapitalization was blocked until last month by a number of shareholder lawsuits that were seen by some in the industry as opportunistic. By the time the shareholder lawsuits had been settled, the German government had stepped in to guarantee a subscription of at least EUR 1.25 billion ($1.84 billion) under the proposed rights issue, although this guarantee is currently being reviewed by the European Commission to determine whether it constitutes state aid (the subscription would take the government’s ownership stake in IKB to over 90 percent). This appears to be a formality however, since the government has resolved to sell its stake as soon as possible, preferably for a price of approximately EUR 800 million ($1.18 billion). According to news reports, private equity investors Ripplewood and Lone Star Funds have submitted final bids after Swedish Bank SEB – thought by many to be the preferred candidate – dropped out of the bidding. This creates an interesting scenario in which the German government would end up selling an important midsize domestic bank to a foreign private equity fund only three years after the Social Democratic Party (the junior partner in Germany’s ruling grand coalition) tried to swing national parliamentary elections through populist rhetoric that included branding foreign private equity and hedge funds as “locusts.” An announcement on the winning bid is expected soon, possibly by the end of the week.
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Wednesday, August 13, 2008 |
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Regulatory Actions around Auction Rate Securities
Submitted by: Marc Siegel, Head of Accounting Research and Analysis
As we’ve seen over the past week, several of the large banks have begun to announce plans to make whole the retail and institutional investors in auction rate securities. Some of these announcements have resulted from regulatory action while some companies are attempting to preempt regulatory action by entering into voluntary programs. Details around the regulatory actions precipitating the announcement by banks are highlighted in a recent article by Mondaq Business News. Specifically, the story discusses the Securities and Exchange Commission’s announcement last week to settle with Citigroup Global Markets, UBS Securities and UBS Financial Services to repurchase auction rate securities of retail investors in the near term and use best efforts to repurchase at par the securities of institutional investors by the end of 2009 or 2010. Additional news about auction rate securities and other big banks can be seen here. The New York Attorney General has indicated he may still pursue other avenues of investigation with respect to auction rate securities.
Given the federal and state regulator’s views on auction rate securities, we’re likely to hear more actions in the months ahead. Please let us know your thoughts on the auction rate securities situation.
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Tuesday, August 12, 2008 |
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Yahoo! Revised Vote Count Underscores Need for Reform of Proxy Voting Process
Submitted by: L. Reed Walton, Publications, and Ted Allen, Publications
Investors heard last week that votes against the re-election of Yahoo! board members were significantly higher than initially reported, due to an error.
Four directors -- Chairman Roy Bostock, CEO Jerry Yang, Ronald Burkle and Arthur Kern -- all received greater than 30 percent opposition at the company’s Aug. 1 annual meeting. The company had previously reported that no board member received more than 22 percent withhold votes. Another director, Gary Wilson, had just under 30 percent opposition, according to a company press release. The revised release, dated Aug. 5, notes that the error originated with Broadridge Financial Services, the firm that Yahoo uses to collect and tabulate shareholder votes.
No other directors received greater than 10 percent opposition. Incumbent director Robert Kotick is due to step down, as the board expands to accommodate billionaire investor Carl Icahn and two of his dissident nominees under an agreement that pulled the plug on Icahn’s bid to replace the entire board in a proxy contest. The three new Yahoo directors are likely to be appointed around Aug. 15, Dow Jones Newswires reported.
The company’s initial vote tally announcement, just after the meeting on Aug. 1, caught the attention of Yahoo critic Eric Jackson, founder of Ironfire Capital. Jackson leads a network of investors owning approximately 3.2 million Yahoo shares. He noted a discrepancy of about 200 million shares between the number of votes cast for directors last year and this year. After Jackson wrote about the error in his weblog, Capital Research Global Investors--which owns a 6.2 percent Yahoo stake--asked for a recount. According to the Associated Press, Capital opposed Yang and figured that he would have received more than the 14 percent opposition originally reported.
Broadridge said that a printing error was responsible for the incorrect results and re-issued the tallies, according to the AP. The revised results show that investors withheld 33.7 percent support from Yang, whereas opposition to his election was minimal last year. Bostock and Burkle had the most re-election opposition this year, with 39.6 and 37.9 percent withholds, respectively, versus dissent of 31.2 and 32.5 percent, respectively, in 2007.
The vote at Yahoo underscores the complexities of proxy voting in the U.S. market, where ownership is widely dispersed and about 85 percent of company shares are held in “street name” by brokers and other custodians. Edward Rock, a law professor at the University of Pennsylvania who co-wrote a 2007 paper, “The Hanging Chads of Corporate Voting,” said the proxy voting process is “crude, imprecise, and fragile.”
“Broadridge delivers more than 1 billion communications to investors per year. . . . It is an accident waiting to happen,” Rock said, according to MarketWatch.
“When it comes to the tabulation of proxy votes, most investors don't even know what they don't know,” said Pat McGurn, special counsel at RiskMetrics Group. “The tabulation process is as airtight as a sieve. It is as transparent as a brick wall. Simply put, the proxy voting infrastructure has failed to keep pace with the complexity of the investment process. It is only a matter of time until there is a complete meltdown at a significant meeting. Officials from the SEC, the stock exchanges, and Delaware must come together with key market players to fix the system.”
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Monday, August 11, 2008 |
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RiskMetrics Group’s 2008 Policy Survey
Submitted by: Gary Hewitt, Marketing
Feedback from institutional investors and issuers on emerging corporate governance issues is a key part of RiskMetrics Group's annual policy review and update process. This year, RiskMetrics is soliciting feedback through six regional surveys, covering the United States, the United Kingdom, the Americas, Asia, and Europe, and a survey designed for international markets in general.
The survey focuses on the most significant governance issues, such as director elections and board attendance, separation of chairman and CEO positions, executive compensation (including “say on pay”), proxy contests, and M&A.
For the first time, RiskMetrics also is conducting a parallel survey for all U.S. corporate issuers to gather further market insight on these emerging governance issues. RiskMetrics encourages respondents to complete surveys for all markets in which they have a corporate governance interest.
Individual survey responses will not be shared with anyone outside of RiskMetrics and will be used only by the RiskMetrics Policy Board for policy formulation purposes.
For more information on the surveys, and to participate, please click here. The deadline for responding has been extended to Aug. 19.
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