Proxy Preview: South Korea
Submitted by: Daniel Oh, Korea Market Analyst
The 2008 Korean proxy season will be marked by the effects of a number of high-profile regulatory reforms, as well as a greater number of contested director elections.
The majority of South Korean annual meetings will take place on three consecutive Fridays this year: March 7, 14, and 21. Korean companies are required to publish official agendas only 14 days before the meeting date. Though some companies have begun to disclose agendas as much as 20 days beforehand, the short release window remains a significant obstacle for proxy voting by foreign investors in the Korean market.
Meeting agendas and proxy statements are released online via the Korean Financial Supervisory Commission’s (FSC) Data Analysis, Retrieval, and Transfer system (DART) Web site. Like the U.S. Securities and Exchange Commission’s EDGAR site, DART is a searchable repository for all Korean company filings. Most companies continue to file in Korean, though a small percentage of firms have co-released their proxy information in English. The agendas are often less detailed than U.S. proxy statements, containing the time and place of the meeting and brief biographical information on director and auditor nominees.
It is unlikely that the 14-day release requirement will be extended, according to market regulators, because the country’s Parliament believes that an extension would benefit foreign investors more than domestic investors. Such a measure would need the approval of two-thirds of the Parliament to pass into law, which is historically hard to achieve.
Last year, Korean regulators did make a number of legislative changes that will affect the way companies interact with their shareholders and do business in 2008. The first was a series of amendments to the Securities-related Class Action Act (SCA Act), which took effect Jan. 1, 2007. Prior to 2007, shareholders could only bring suits against companies holding assets of more than KRW 2 trillion ($2.1 billion), and a group of at least 50 investors owning at least 0.01 percent of the company was required for the suit to be valid.
The 2007 amendments allow investors as a class to sue smaller companies. However, no lawsuits have been filed under the new rule yet because the costs are high for individual shareholders. In August of last year, press reports indicated there may be a class-action suit filed against Youngjin Pharmaceutical, which had admitted earlier to the FSC that it falsified accounting records from 2004 through 2006, according to the Joongang Daily News.
In a 2007 paper, University of California at Berkeley Law School Professor Stephen J. Choi suggested that a functioning class-action system in Korea may still run into hurdles even after the new amendments because the country has comparatively very few attorneys--and those attorneys are relatively inexperienced in litigating class-action cases.
Proposed Legislation
In September 2007, Korean lawmakers also proposed a series of revisions to Korea’s Commercial Act. Among them is a provision that would allow shareholders to file suits against subsidiaries of larger companies. Under the proposed amendment, investors holding 1 percent or more in a parent or holding company, which retains more than 50 percent of shares in a subsidiary, may bring an action against directors of the subsidiary company.
Another proposed reform would require the board of directors to get approval from shareholders before beginning a business relationship with a third party when the relationship may affect the company’s probability. The measure was drafted as a safeguard against directors diverting corporate resources into private benefit schemes. Another provision that would put a limit on outside benefit-seeking by directors would require board approval for any directors or director affiliates who enter into additional business relationships with the company.
Echoing calls for independent boards in the U.S., Korea’s Parliament proposed an additional amendment that would allow companies to adopt a voluntary separation between the board and management. Under the provision, companies choosing to adopt this reform would no longer have “representative directors” (executive directors) and would instead employ an “officer-based” system in which the CEO and other top executives would have separate responsibilities from the board.
If the new amendments are approved, director liability will be capped to encourage active governance involvement by board members, and to lessen the fear of lawsuits, especially in light of the new SCA Act amendments. Non-independent directors (inside directors) would have immunity from loss and damages from lawsuits in the amount of up to six times their annual pay. Independent directors (outside directors) would have losses covered up to three times their annual pay. Additional possible reforms include allowing companies to use legal reserves for dividend payouts, introducing electronic proxy voting, and allowing firms to incorporate under the designations “Limited Liability Company” (LLC) or “Limited Partnership” (LP).
Whether these amendments are actually implemented depends on the government of new South Korean President Lee Myung-bak, who took office on Feb. 25. Lee, a former CEO of Hyundai Construction and Engineering as well as a former mayor of Seoul, has pro-Western and pro-business views.
Economic revival of the Korean peninsula, Lee said in his inaugural speech, “is [the] most urgent task,” the Associated Press reported. Showcasing his pro-business stance, Lee said in December that he plans to abolish the equity investment “ceiling rule,” China’s Xinhua news service reported. The “ceiling rule” is an amendment to Korea’s Fair Trading Act that caps the total amount of equity that family-owned business groups, or chaebols, can invest in new companies and affiliates at 40 percent of net company assets. The cap was raised in 2007; the investment restriction for these chaebols had been 25 percent of net assets. Criticizing the excessive regulatory measures undertaken by the previous government, Lee’s presidential transition committee said that the new government will stop unduly discriminatory treatment of domestic companies. A member of the transition committee’s panel on economy, Kang Man-Soo, said Lee’s landslide December victory suggested that Koreans were unhappy with present policies, Korea.net reported.
Possible Contentious Meetings
Korea’s 2008 proxy season will likely see more shareholder proposals than previous years as more activist investors and minority shareholders become aware of the benefits of good corporate governance.
At least half a dozen companies this year are expected to face proxy contests in directors elections--many of the nominees proposed by minority shareholders. Firms may also face opposition to management's auditor choice, analysts say. Hankuk Electric Glass, a glass manufacturer for the electronics sector, could face a contested election at its March 17 annual meeting, though official meeting documents have not been released yet. Other companies facing possible proxy contests include video game developer Actoz Soft, Byucksan Engineering & Construction, SFA Engineering, and Sungjee Construction. According to RiskMetrics data, Daehan Flour Mills, Hansol Paper, and Dongwon Development are in discussion with minority shareholders to avert proxy contests at their upcoming meetings.
At Hyundai Motor’s March 14 meeting, Chairman and CEO Chung Mong-koo likely will face opposition to his re-election as an affiliated director. Shareholders are angry because Chung was convicted in February 2007 of creating a slush fund to pay lobbyists for government favors, according to news reports.
An even larger slush-fund investigation is ongoing at Samsung Group, whose various affiliates will also hold meetings in March. Samsung is Korea’s largest conglomerate; its flagship enterprise is global electronics manufacturer Samsung Electronics. Special prosecutors, led by independent counsel Choo Joon-woong, are probing allegations that the conglomerate put together a slush fund established in 2002 to bribe candidates in that year’s political elections, and to purchase artwork, according to the Associated Press. The fund, estimated at KRW 43.3 billion (about $46 million), disappeared after the 2002 elections.
According to Choo, Samsung Group collected about KRW 83 billion in 2002 by purchasing bonds from the private money market for bribery purposes. Special investigators raided Samsung Electronics’ corporate headquarters on Feb. 14, searching for documents related to the slush fund, the country’s Yonhap news agency reported. With a few months left until the completion of the Samsung bribery probe, the fate of company executives remains uncertain. The prosecutors’ first investigation report is due March 10. Whether directly or indirectly involved with the scandal, major Samsung affiliates Samsung Securities and Samsung Marine & Fire Insurance may also see fallout from the ongoing investigation. Samsung Electronics has attempted to distance itself from its parent company in the wake of the slush fund investigation.
The investigation stretches beyond Samsung, as well. Former Samsung lead counsel Kim Yong-cheol told the FSC in November that the company was running a vast bribery network encompassing the government, the judiciary, and the news media, and that Kim himself had bribed prosecutors on behalf of Samsung Group and its chairman, Lee Kun-hee. In December, the FSC announced that it believed the nation’s second-largest lender, Woori Financial, and brokerage Goodmorning Shinhan Securities, set up accounts under Kim’s name without his knowledge, Asia Pulse reported.
Staff Writer L. Reed Walton contributed to this story.
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February 28, 2008 |
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Sovereign Funds in Europe: Yesterday’s Proposal by the European Commission
Submitted by: Christel Dumas, Marketing
Yesterday, the European Commission put forward proposals to the European Council on sovereign wealth funds (SWFs) and financial stability. The Commission is proposing that EU leaders endorse a common EU approach to increasing the transparency, predictability and accountability of SWFs.
On financial stability, the Commission wants the European Council to confirm the principles which will guide the EU’s efforts to improve financial market transparency and reinforce prudential control and risk management, and to set out the broad lines of the action to be taken.
To view the news release, please visit here.
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February 27, 2008 |
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Big Changes Afoot at U.S. Financial Accounting Standards Board
Submitted by: Marc Siegel, Head of Research
Yesterday, the group that oversees the U.S. Financial Accounting Standards Board (FASB) voted to enact some sweeping changes to how standard setting will be accomplished in the future. As one example, effective in just four months, the FASB Board will go from seven members to five. Another troubling development is that the FASB Chair will have ultimate decision-making authority as to the agenda the Board will consider. This puts too much power in the hands of a single individual and could make it more difficult to recruit and retain other Board members.
On balance, rather than addressing these types of day-to-day operational issues, the Financial Accounting Foundation (FAF) should have worked toward addressing and potentially leading the way in the development of a national plan toward achieving the goal of a single, global set of accounting standards. That need is far more critical since the recent push toward international accounting convergence is resulting in reduced transparency and comparability for financial statement users.
RiskMetrics Group just published a report, Big Changes Afoot at U.S. Financial Accounting Standards Board but are they the right ones, to the Accounting Trends section of its Knowledge Center. To access the report, please visit here.
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February 26, 2008 |
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Investors Push for Proposal Adoption
Submitted by: L. Reed Walton, Publications
With the 2008 U.S. proxy season approaching, shareholders are still pushing companies to adopt governance reforms that received majority support at meetings in 2007.
The Council of Institutional Investors (CII) is waging a letter campaign to urge firms to implement shareholder demands. The group, an organization of 130 public, labor, and corporate pension funds, originally sent letters in July to 99 companies where shareholder resolutions received more than 50 percent support from the votes cast “for” or “against.”
According to RiskMetrics Group data, more than 40 companies have made changes in response to majority-supported resolutions last year. At least 115 proposals won 50 percent shareholder support or greater in 2007, but that number may grow as companies with fourth-quarter meetings continue to report voting results.
In a new tactic, CII has actively followed up with companies that have not implemented investor-backed reforms since the initial round of letters, according to CII Deputy Director Amy Borrus. On Dec. 11, the investor group sent letters to 19 firms that had not responded to the initial letter in July, again urging them to adopt reforms--or at least set up a board committee to review the issue.
The CII also asked member investors to co-sign the correspondence. Fifteen public and private funds--including the AFL-CIO, the labor-affiliated Amalgamated Bank, and the public pension funds of Arkansas and Colorado--signed onto the December letters, though not all members signed each letter.
“We’re very pleased that so many of our members--both public [pension funds] and unions--have stepped up to the plate and signed on to these letters,” Borrus told Risk & Governance Weekly. “It’s very gratifying.”
One of the companies on the list, Allegheny Energy, announced Dec. 19--just over a week after the CII letter was sent--that it had adopted several reforms based on majority-supported proposals. According to regulatory filings, the company changed its bylaws to include a provision that shareholders owning 25 percent of outstanding stock may request a special meeting, and adopted a majority voting standard in uncontested board elections. A majority vote proposal by the United Brotherhood of Carpenters and Joiners of America won 50.2 percent support, and a special meetings proposal submitted by a retail shareholder received 57.2 percent support at Allegheny’s May meeting. The company also decided to create the post of “presiding director.”
Another company receiving a CII letter, home products company Fortune Brands, has failed to respond to majority-supported proposals to declassify its board of directors for two years. The measure received 68.2 percent support in 2007 and 66.8 percent in 2006, and members of the Rossi family have filed that proposal again this year. Fortune spokesman Clarkson Hine told R&GW that the company had no record of having received the Dec. 11 letter.
At Pulte Homes, a board declassification proposal received greater than 60 percent shareholder support in both 2006 and 2007. Regulatory filings at the home construction company do not indicate that a change to the classified board structure has been made. Pulte did not return calls for comment by press time. Other firms that received CII letters in December included papermaker Weyerhaeuser, where a proposal to eliminate supermajority requirements won over 60 percent support in 2006 and more than 70 percent support last year; and Sierra Pacific Resources, where there was 61.9 percent support for board declassification last year.
Additional CII Letters
On Jan. 30, the CII sent another batch of seven letters--this time to companies that had responded to the initial request in June, but had not followed up since. Among the companies receiving the letters were: AMR; Borg-Warner; Kimberly-Clark; Nicor; SunTrust Banks; and Vornado Realty Trust. The seventh company, FirstEnergy, is considering sponsoring a management proposal to eliminate supermajority vote requirements at its annual meeting on May 20, according to RiskMetrics data.
The CII held off sending letters to four firms--Centerpoint Energy, mall property operator Taubman Centers, power company PPL, and Honeywell International--because they indicated that they had plans to adopt majority-supported proposals, Borrus told R&GW. Honeywell told investors in December it would put forward a provision in 2008 to allow shareholders owning a 25 percent stake to call a special meeting, based on a 2007 majority-supported proposal by investors June Kreutzer and Cathy Snyder. Taubman is considering taking action on a Service Employees’ International Union declassification proposal as soon as this year, CII reported.
According to a Feb. 22 CII release, Kimberly-Clark and Nicor told the shareholder association they plan to sponsor management proposals on the issues that received majority support in 2007. A proposal asking for the elimination of supermajority provisions received over 80 percent support at Kimberly-Clark, while a similar measure received over 60 percent support at Nicor.
The same release told of an additional nine letters--sent Feb. 19--and co-signed by 11 member funds. The CII wrote that seven of the companies--CSX, CVS Caremark, Goodyear Tire & Rubber, HESS, Lowe’s, McGraw-Hill, and Yum! Brands--had responded to earlier letters with plans to address the majority-supported issues by the end of 2007, but “reviews of the companies’ SEC filings and other reports suggest that none of [them] have taken action.” Two more firms, Corning and Stanley Works, told the CII that their boards had decided against implementing the resolutions. The most recent letters to those companies urged them to reconsider those decisions, the CII wrote.
Other Companies Respond
Some firms not targeted by the CII have responded to majority-supported proposals from 2007. Morgan Stanley announced Jan. 22 that it had changed its bylaws to allow shareholders to amend bylaws with a majority vote, rather than the 80 percent previously required. More than 50 percent of Morgan Stanley shareholders voted for a resolution on this topic submitted by the Rossi family.
Sara Lee adopted a bylaw amendment Feb. 1 stating that shareholders will be allowed to make changes to those bylaws by way of a majority vote. The resolution received just over 80 percent support at the firm’s October annual meeting.
In of the most closely watched issues--the advisory vote on executive pay--Ingersoll-Rand pledged Dec. 18 to discuss the topic with its 25 largest shareholders, according to regulatory filings. At the company’s 2007 annual meeting, a majority of shareholders at the industrial supply company voted in favor of holding an annual investor vote on executive compensation.
Another firm that saw majority support for a “say on pay” proposal in 2007, Par Pharmaceuticals, has agreed to adopt the yearly advisory votes. Par’s Senior Director of Investor Relations and Corporate Affairs Allison Wey said that the first shareholder vote will be held in 2009. Verizon Communications also plans to hold its first advisory vote on pay in 2009 in response to a majority-supported shareholder proposal last year.
On Jan. 11, MeadWestvaco agreed to abandon its “poison pill” takeover defense, after a proposal by investor William Steiner received nearly 80 percent support in May.
A few firms have already responded to proposals filed for the 2008 proxy season. Houston-based cafeteria chain Luby’s plans to ask shareholders to vote to declassify the board at its 2009 annual meeting. Investors voted on a shareholder declassification proposal at this year’s Jan. 15 annual meeting. Luby’s has not yet released vote totals from the meeting, but the company's move to declassify was announced after the vote was held. A similar measure at the firm in 2007 earned 44.5 percent shareholder support.
Marsh & McLennan Companies has agreed to put forward a management proposal to declassify its three-tier board at its May 15 annual meeting. The Amalgamated Bank’s LongView fund withdrew a declassification proposal following the agreement, the company reported.
To view the firms which received CII letters urging proposal adoption, please Download file
Editor's Note: All vote percentages are calculated based on the votes cast "for" and "against" a resolution--not including abstentions or broker votes. This article provides examples and is not a complete list of U.S. companies that have made reforms in response to shareholder proposals.
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February 25, 2008 |
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European Voting Policies--What You Need to Know for 2008
Submitted by: Christel Dumas, Marketing
RiskMetrics Group welcomes three governance expert speakers in its next online forum : John Garbutt of HSBC in the UK, Kris Douma of MN Services in the Netherlands, and David Diamond of Crédit Agricole Asset Management in France. All three have developed their own voting policies which they will apply during this proxy voting season. All three have chosen to focus on different issues which they believe are important when exercising shareholder rights: be it differentiated requirements per market; labor issues; social issues and more.
They will share their experience and focus tomorrow February 26 at 3.30 PM CEST; 2.30 PM GMT; 9.30 a.m. EST, as part of RiskMetrics Group's ongoing What You Need to Know series. Join these leading European Asset managers and discover how they address key topics that arise in general meetings. Compare their approach to yours and learn more about RiskMetrics’ European updates on proxy voting policies. To register for the webcast, please visit here.
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February 22, 2008 |
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Norway’s “Golden Skirts”
Submitted by: Amir Maki, Scandinavian Market Analyst
As of Jan.1, it became mandatory for all Norwegian companies listed on the Oslo Stock Exchange (Oslo Børs or OBX) to ensure that at least 40 percent of directors were women.
Non-compliance, according to the Norwegian Public Companies Act, can result in a company being de-listed from the OBX. It is also possible for the government to dissolve a company for not fulfilling board requirements.
The gender requirement applies to all publicly owned enterprises (state-owned limited liability and public limited companies, state-owned enterprises, companies incorporated by special legislation and inter-municipal companies) and all public limited companies (PLCs) in the private sector. Limited liability companies are excluded from this regulation. Currently there are about 500 PLCs in Norway.
The gender equality initiative in Norwegian firms began in 2004, when all government-owned companies were required by the Companies Act to maintain boards with 40 percent representation of each gender. For the non-state owned PLCs, the requirements were initially voluntary. However, a July 2005 assessment by the government revealed that only 16 percent of board members were women. In light of the slow progress, Norway’s Parliament in 2006 made the 40 percent requirement mandatory for non-state owned companies after Jan. 1 of this year. PLCs registered before Jan. 1, 2006, were given a two-year transitional period to comply with the law, all firms registered after that date were required to follow the conditions immediately.
The law states that both genders must be represented if the board consists of two or three members. If the board consists of four or five members, at least two must be women. If the board consists of six to eight members, three must be female. At least four women must be on the board if it has nine members, and if the board consists of 10 or more members, then at least 40 percent should be female. If there is more than one employee representative on the board, then both genders must be represented, unless one gender constitutes less than 20 percent of the work force.
As a result, companies have had to recruit about 1,000 female directors, and many firms have claimed it is difficult to find experienced candidates, The Economist reported in January. Some of the most qualified women sit on 25 to 35 boards, leading the Norwegian business community to label them “golden skirts.” As a consequence of the limited supply of experienced female directors, some Norwegian investors have become concerned about “overboarding,” or directors sitting on too many boards. Overboarding, the investors say, can compromise director attendance, adequate preparation for board meetings, and overall performance. In response to the increased demand for female leadership, the Confederation of Norwegian Enterprise has launched a program, called Female Future, and has trained about 600 women in preparation for board and leadership positions.
According to a study by the Norwegian Statistical Bureau (Statistik sentralbyraa), 24.6 percent of Norway’s 2,639 directors were women as of January 2007. The same study revealed that 38.2 percent of the PLCs complied with all the gender representation requirements by the end of 2006, double the number of compliant companies in 2005. However, companies still needed about 460 women at the start of 2007. The search for competent board members and executives stretched across borders to neighboring Nordic countries and to the public sector. For example, Aker Kvaerner, one of Norway’s largest oil companies, has recruited four former ministers to several of its subsidiary boards. By the end of 2007, the Statistik sentralbyraa noted that 84 percent of public firms attained the female board representation requirement.
The oil and gas sector, according to The Economist, possibly had the greatest difficulty in finding qualified female candidates. For instance, DNO, a Norwegian oil firm with operations in the Middle East, found women for its board in November, but they are experienced in human resources and finance rather than oil extraction and supply, company President Helge Eide told The Economist.
Globally, the nomination committees of corporations are dominated by male directors who generally propose men to serve on the boards. Although the 40 percent rule in Norway has put a burden on boards, studies have shown that greater female representation has positive effects. For example, a study by the Conference Board of Canada in 2002 found that corporations with female board directors have superior governance practices, particularly on oversight and control of audit and risk. A joint study of 89 European companies by McKinsey and Amazone Euro Fund concluded that companies with the most gender-diverse management teams outperformed their peers in return on investment by 10 percent, and in pre-tax and pre-interest earnings by 48 percent. The study also noted that stock prices at gender-diverse companies grew 1.7 percent faster than the share prices of less diverse peers.
According to Corporate Women Directors International’s 2007 report on board representation, women hold 11.2 percent of the board seats among Fortune Global 200 companies. In the U.S., women hold about 17.6 percent of board seats, in Sweden 19 percent, and in the United Kingdom 13.9 percent. Female board representation is lower in other developed markets, including the Netherlands (12.2 percent), Germany (10.9 percent), Switzerland (9.5 percent), France (7.6 percent), Italy (2.9 percent), and Japan (1.3 percent).
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February 21, 2008 |
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European Governance Landscape Webcast--What You Need to Know for 2008
Submitted by: Christel Dumas, Marketing
Are you looking to better understand the European corporate governance landscape prior to the start of proxy season? As part of RiskMetrics Group's ongoing What You Need to Know series, Jean-Nicolas Caprasse, RiskMetrics Group's Head of Governance Services, will be joined by European lead analysts who will share their insight and knowledge of the European Corporate Governance Landscape through an online forum on Friday, February 22 at 3.30 PM CET; 2.30 PM GMT; 9.30 a.m. EST.
During this webcast, RiskMetrics Group analysts will compare and contrast director elections and board compositions in european markets. They'll also highlight new and creative remuneration tools to look out for; the status of remuneration reports approved at general meetings and many more remuneration topics, focusing on recent updates and issues to look out for in the upcoming proxy season. In addition, Jean-Nicolas Caprasse will present recent statistics describing the European Governance Landscape.
To register for the governance landscape webcast, please visit here.
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February 20, 2008 |
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IRS Gets a Little Tougher on Performance-Based Pay
Submitted by: Carol Bowie, Governance Institute
A recently released September 2007 private letter ruling from the IRS appears to close a loophole under Section 162(m), the regulation that allows corporations to deduct certain top executives’ pay over $1 million only if it qualifies as “performance-based” compensation.
The ruling stipulated that an award that provides for accelerated payout--e.g., at the target or maximum level--upon the holder’s involuntary termination without cause or resignation for good reason would not qualify as performance-based under Section 162(m).
The ruling thus takes aim at all awards of cash incentives or performance-based restricted shares with terms that authorize them to be paid out under involuntary termination scenarios regardless of actual performance—and it appears that such awards would not qualify as performance-based regardless of whether employment termination actually occurs. Previously, termination without cause/constructive termination had been on the list of accelerated payout scenarios--along with death, disability, and a change in control--that would not run afoul of Section 162(m)’s performance-based exceptions.
It’s hard to argue with the IRS’s logic. After all, such involuntary terminations often follow a period of poor results, since “performance” is rarely on the list of reasons that can trigger a top executive’s dismissal for cause. It is still unclear how much pay might be affected by the new guidance, but the ruling is the first sign in some time that the IRS may take a tougher stance on performance-based exceptions under Section 162(m) which, after all, was intended to discourage outsized executive pay packages not driven by positive performance.
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February 15, 2008 |
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Investor Group Confronts Mutual Funds Over Sudan
Submitted by: L. Reed Walton, Publications
Shareholders at several dozen mutual funds will likely be able to vote on whether the funds should withdraw their investments from companies operating in or supporting Sudan.
The Securities and Exchange Commission ruled Jan. 24 that Boston-based Fidelity, the nation’s largest mutual fund company, could not exclude a proposal that urges 11 Fidelity funds to adopt procedures to screen out investments in companies that contribute to genocide. The resolution, submitted by non-profit group Investors Against Genocide (IAG), cited Fidelity’s investments in PetroChina, which has ties to the Sudanese government through its parent, China National Petroleum Company.
More than 400,000 people in Sudan’s Darfur region have died from violence or starvation, and an additional 2.3 million have been forced from their homes since fighting between ethnic Sudanese and Arab militias backed by the country's government began in 2003, according to the Save Darfur Coalition.
Twenty-two U.S. states and 58 colleges and universities have adopted Sudan-related divestment policies, and 15 companies have completely divested or have publicly announced plans to do so, according to the Sudan Divestment Task Force. Last year, Warren Buffett’s Berkshire Hathaway, which was once PetroChina’s third-largest shareholder, began reducing its stake in the company.
On Dec. 31, President George W. Bush signed the Sudan Accountability and Divestment Act, which allows mutual funds and private pension funds to more easily drop their investments in companies that support the government of Sudan. The increased government and press attention to Darfur does not seem to have affected the mutual fund industry, Eric Cohen, chairman of IAG, told Risk & Governance Weekly.
The SEC ruling likely clears the way for the IAG resolution to appear on the ballots at many mutual funds this year. IAG has filed the proposal at 28 of Fidelity’s mutual funds, 20 Vanguard funds, and several others--totaling more than 50. The non-profit group, encouraged by the recent SEC decision in the Fidelity case, plans to file the proposal at hundreds of additional mutual funds in the coming months, Cohen said.
Investors Against Genocide, previously known as the Fidelity Out of Sudan campaign, is a Boston-based organization that has received support from 46 Massachusetts legislators, the National Council of Churches, and the American Jewish World Service, among others.
U.S. mutual funds do not often receive shareholder proposals, and IAG is targeting these investment vehicles almost exclusively, making the large number of filings this year unprecedented. SEC spokesman John Nester declined to comment on how the agency would rule on requests by other mutual funds to exclude the IAG proposal, according to the Boston Globe.
Fidelity told the Globe that it disagrees with the commission’s decision. “Although the SEC staff has not concurred with our position, we continue to believe the proposal deals with matters relating to a fund's ordinary business operations, and contains false and misleading statements,” Fidelity spokesman Vince Loporchio said. The proposal will first go to a vote at several Fidelity funds on March 19.
On Feb. 11, the agency proposed regulations to implement the Sudan divestment legislation. The rules would require registered investment companies to tell shareholders how many shares were divested and when, as well as the name of the company that was the target of divestment and its ticker symbol.
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February 14, 2008 |
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The Other Side of Stress Testing
Submitted by: Ran Fuchs, Head of Credit Business
Basel II endorses stress testing as one of the main risk assessment tools. While the definition of stress testing is open to interpretation, it is mostly taken as the change in the value of a portfolio resulting from external market conditions. In practice, the process is made up of four distinct steps:
1. External stress events (such as bird flu or default of a major financial institution) are ‘invented’.
2. These events are ‘translated’ and their economic impact on market factor (interest rate, GDP, …) is modeled
3. Running simulation on an organization’s portfolio based on the change in the market factors
4. Producing statistics to compare the result to the modeled portfolio in comparison with the same portfolio under ‘standard’ conditions
While the latest credit crises have demonstrated the necessity of stress testing, a complementary, yet just as important application of the same methodology has been mostly neglected: testing the stability of our measurements.
In most financial institutions, once a model has been verified and approved, it becomes part of the workflow and is rarely questioned or tested again. However, as all models have their limitations, understanding the limitations of a model is just as important as knowing its output.
One of the limitations of any risk model is its sensitivity to input parameters. In some cases models can become too insensitive, when big changes in market factors will only produce minute changes in the output. In other occasions, models may demonstrate the opposite behavior and become too sensitive, producing a ‘butterfly effect, that is, minute changes in the input parameters produces unjustifiably large changes in the output. Such behaviors could happen with any model, and don’t reflect on the quality of the model in general, but rather indicate that we are trying to use the model under conditions to which it is not calibrated.
Regularly using stress testing like functionality with marginal-change scenarios, rather than the ‘typical’ stress scenarios, will highlight the occasions when we cannot blindly rely on our model– a crucial piece of information when using any model for making decisions.
RiskMetrics Group will be holding a webcast, Iterative Basel II Implementation for European Banks: Credit simulation in low data coverage environments, on Wednesday, Feb. 20 at 14:00 GMT/15:00 CET. The webcast will cover: low data environments, the three pillars of Basel II, different approaches to missing data, the iterative approach to implementing Basel II, and the weakness of the linear approach to Basel II in a low data environment.
To register for the webcast, please visit here.
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February 12, 2008 |
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SEC Allows Omission of Proxy Access Proposals
Submitted by: Ted Allen, Publications
The Securities and Exchange Commission has granted requests by Bear Stearns, JP Morgan Chase, and three other companies to exclude proxy access proposals from investors.
Access proponents had anticipated the Feb. 11 SEC staff rulings after the commission’s Republican majority voted in November to allow firms to resume omitting resolutions to permit shareholder-nominated board candidates to appear on management proxy statements. The SEC declined to adopt an alternative rule that would have allowed investors with at least a 5 percent stake to file access bylaw resolutions.
“The ‘no action’ rulings were expected. We believe they were based on a flawed rule-making process,” said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County, and Municipal Employees, which co-filed four of the access resolutions. “We will announce our intentions in the next few weeks.”
The issue may be headed back to the courts. While Ferlauto declined to comment this week on what access proponents would do, he has said in the past that investors may resort to litigation or seek access legislation. AFSCME waged an earlier court fight with American International Group that resulted in a 2006 federal appeals court ruling that opened the way for access proposals to appear on three company ballots in 2007.
AFSCME co-filed its proposals at Bear Stearns and JP Morgan with the state pension systems for North Carolina and New Jersey. The SEC staff also allowed apparel maker Kellwood to exclude an access resolution from the California Public Employees’ Retirement System and permitted E*TRADE Financial to omit an AFSCME proposal. The SEC also approved a “no action” request by Ohio-based Croghan Bancshares to bar a resolution from an individual shareholder. To review the SEC’s rulings, please visit here.
In the meantime, investors are pursuing other strategies this year to promote board accountability. AFSCME has submitted a binding proposal at Apache calling for the reimbursement of solicitation expenses incurred by successful dissident investors in “short slate” contests. An individual investor at ExxonMobil filed a proposal that urges the oil company to require future board nominees to hold $3 million in company stock or represent institutions that own 5 million voting shares. ExxonMobil unsuccessfully petitioned the SEC for permission to exclude that resolution.
In addition, labor funds and other investors have filed more than 18 proposals urging firms to separate the roles of CEO and board chairs. The United Brotherhood of Carpenters and Joiners and other investors plan to submit more than 100 resolutions seeking majority threshold voting in board elections.
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2008 Proxy Preview: Canada
Submitted by: L. Reed Walton, Publications
Shareholders in Canada have filed several new proposals at this year’s bank meetings that seek greater executive pay accountability, greater disclosure of investments in hedge funds and subprime mortgages, and rewards for long-term holders.
As the 2008 proxy season unfolds, shareholder proposals concerning climate change risk, environmental performance, and sustainability reporting will also be considered by shareholders at a number of other Canadian companies.
Executive compensation is a perennial topic of concern--mostly at the large national banks where CEO pay is highest--but this is the first year that Canadian companies are facing advisory vote resolutions from Canadian investors, according to RiskMetrics data.
This year, 16 advisory vote measures--known as “say on pay”--were submitted to companies in Canada, according to the Vancouver-based Shareholder Association for Research and Education (SHARE), which keeps a database of proposals and vote results each year.
Overall, investors have filed 139 resolutions at 22 Canadian companies so far this year, up from 97 proposals in 2007, SHARE reports. By comparison, investors in the much-larger U.S. market have submitted more than 550 resolutions this season, according to RiskMetrics data.
Unlike U.S. Securities and Exchange Commission rules, Canadian law allows shareholders to file multiple resolutions at the same company and permits proposals on similar topics. The vast majority--96 in total--of this season’s resolutions were filed by the prolific Montréal-based investor group MEDAC (Mouvement d’Education et de Défense des Actionnaires, or the Shareholder Education and Defense Movement).
Most of the advisory vote proposals were filed at large Canadian financial companies--which receive the bulk of shareholder resolutions each year and generally hold their annual meetings in late February or March. The remaining resolutions were submitted at large-cap firms like Montréal-based aircraft maker Bombardier and BCE, a telecom company set to be taken private.
Cambridge, Ontario-based Meritas Mutual Funds--a social investment group--submitted a non-binding “say on pay” resolution to five major banks, the Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Bank of Montréal, Toronto Dominion Bank, and the Royal Bank of Canada.
Those companies and several other firms also received a MEDAC “say on pay” proposal that would be binding if approved. In the resolution, MEDAC notes that a number of “say on pay” proposals received majority or near-majority support in the U.S. market last year.
The 2008 resolutions are not likely to fare as well at Canadian companies, however, as Canadian shareholder proposals typically get significantly lower support than those in the U.S. Of the 70 proposals to go to a vote in 2007, the average support was 6.9 percent, according to SHARE. That average doesn’t include a proposal asking National Bank of Canada to identify its compensation consultants, which was backed by management and received 80.6 percent support.
In 2006, the American Federation of State, County, and Municipal Employees, and the Milwaukee, Wis.-based Catholic Equity Fund both filed “say on pay” proposals at Merrill Lynch Canada. The two resolutions averaged 22.3 percent support. No advisory vote proposals were filed in Canada by either Canadian or U.S. investors in 2007.
It remains to be seen what support the proposals this year will receive in light of a report by the Canadian Coalition for Good Governance (CCGG)--an influential institutional investor group with 48 members managing a total of C$1.4 trillion in assets--stating that now is not the appropriate time to adopt advisory pay votes in the Canadian market.
The CCGG report cited various reforms that companies have adopted in recent years. Seventy-two firms have instituted director-resignation policies, while other companies have abolished slate voting in board elections and hired independent executive pay advisors. The coalition also noted that the country’s provincial securities regulators, which make up the Canadian Securities Administrators (CSA), are planning to release revised, more comprehensive pay disclosure rules in March or April that would go into effect for companies with fiscal years ending on or after Dec. 31, 2008.
Because of these reasons, the CCGG said it would not press legislators to require companies to hold “say on pay” votes, despite calls by some investors. “We will look to corporate Canada to continue to improve the executive compensation process … if we feel progress on this issue has stalled, we may support resolutions such as ‘say on pay,’” David Beatty, CCGG’s managing director, said in a Jan. 7 press release about the report.
Instead, the CCGG wants directors to continue to take an active role in increasing pay disclosure. “Our feeling is that boards are trying to do a much better job of it, but they can use further education with respect to best practices,” Beatty told R&GW.
The CCGG releases annual reports on best practices for compensation disclosure and other governance issues on the coalition’s Web site. Some of the companies that have received compensation proposals this year, such as Manulife Financial and Bombardier, are cited by the group for having exemplary compensation disclosure.
SHARE, which counts “say on pay” proponent Meritas among its clients, disagrees with the CCGG stance. Laura O’Neill, SHARE’s director of law and policy, told Risk & Governance Weekly that other SHARE members support pay votes.
Other Compensation Proposals
So far, investors have filed 40 pay-related resolutions, about the same as last year, according to SHARE. Most of the compensation proposals for 2008, however, differ from those filed in 2007.
Last year, eight companies were asked by MEDAC to tie executive stock option awards to each firm’s “Economic Value Added” measurement. Those proposals received an average of 3.8 percent support. MEDAC did not re-file that proposal this year, but the group is asking 11 firms--mostly the large banks--to bar executives from exercising options until they leave the company.
MEDAC also declined to re-file a proposal requesting a link between executive compensation and the average salary of company employees. The proposal averaged 3.2 percent support in 2007.
Resubmission thresholds for investor proposals are the same in Canada as they are in the U.S.; a proposal must receive 3 percent support in its first year to be resubmitted
This year, MEDAC instead is asking 11 companies for disclosure on the disparity between executive compensation and the salaries of average workers. Proposals requesting additional disclosure usually fare better in Canada than those asking for specific governance changes, O’Neill of SHARE told R&GW.
For instance, in 2007, a proposal by MEDAC asking for disclosure of compensation consultants won an average of 8.44 percent support at six meetings. According to a Jan. 21 CCGG report, around 40 percent of companies did not disclose the names of their compensation consultants in 2007, and 36 percent did not say whether they retained one.
According to Canadian news reports, MEDAC successfully convinced many of the country’s banks in 2000 to disclose the fees that audit firms are paid for consulting and other non-audit services. The investor group hopes to have the same success with disclosure surrounding compensation consultants.
So far, investors have not filed any proposals to limit supplemental executive retirement plan (SERP) benefits, but those resolutions fared well last year. In May 2007, proposals filed by the Carpenters’ Local 27 Pension Trust won more than 41 percent support at Manulife Financial and Finning International, despite management opposition, according to SHARE.
Another novel MEDAC proposal this season asks the banks and large companies to pay out twice the amount of severance pay and bonuses received by departing executives into employee pension funds in the case of a merger or acquisition.
The proposal, even if it won significant support, would likely not have much impact at the Canadian banks. The Canadian government denied two proposed domestic bank mergers in the 1990s, and it currently limits ownership stakes in the large chartered banks to 20 percent or less. However, the proposal might attact more investor interest if the federal government decides to repeal these restrictions, as it has been urged to do this year by the Canadian Bankers Association (CBA).
“A merger or acquisition is a very legitimate business transaction that is available to any other business in Canada … so the fact that it is denied to banks really doesn’t make any sense,” Nancy Hughes-Anthony, the CBA president, told the Reuters news service on Jan. 10.
The administration of Prime Minister Stephen Harper, though, has repeatedly said that it does not consider bank mergers a priority, Reuters reported.
Long-Term Shareholder Benefits
Investors also have filed new resolutions that seek to reward long-term shareholders for their loyalty. MEDAC has submitted two proposals--each to the same 11 companies--angling for greater benefits for those mostly institutional investors who tend to hold stocks longer.
The first proposal asks companies to increase dividends for long-term shareholders, and the second requests that companies grant voting rights only to those investors who have held shares for a year or longer.
The proposals were written “in order to put some handicaps on traders that are trying to make a fast buck or to [exert] influence by buying a lot of shares in order to beat or approve some proposals by shareholders,” MEDAC Founding President Yves Michaud told the Toronto-based Globe and Mail in October after the proposals were filed.
O’Neill told R&GW that SHARE supports the idea of encouraging long-term investment but cannot support MEDAC’s proposals because they go against the association’s fundamental good governance principle of “one share, one vote.”
“I think directionally it’s interesting, because our members tend to be long-term shareholders,” Beatty of the CCGG told R&GW. However, the CCGG is not taking a stance on the loyalty dividend issue this year, focusing instead on improving compensation disclosure.
Under Canadian Bank Act restrictions, neither proposal is possible in actual practice as the law requires equal treatment of common shareholders of Canadian banks.
Mortgage-Related Proposals
Because the collapse of the U.S. subprime mortgage market and resulting credit crunch have global implications, institutional and individual shareholders in Canada have filed new proposals that seek greater disclosure of holdings in collateralized debt and the American mortgage market.
Through early 2007, a number of Canadian banks invested in the soaring real estate market of their neighbor to the south, buying asset-backed commercial paper (ABCP) or short-term investment vehicles that were supported in part by mortgage assets.
Much ABCP is issued by banks, but the non-bank-issued bonds--accounting for about C$40 billion, according to the Financial Post--began to plummet when the mortgage market went into decline. Issuers could not find buyers for new debt, and therefore could not afford to pay investors whose paper had matured.
Trading in the non-bank ABCP market in the country has been effectively frozen since August, when 10 major Canadian financial institutions agreed to stop trading in order to convert the ABCP into longer-term debt to increase market liquidity. Investors are concerned, the Canadian press reports, that the trouble will begin to spill into bank-issued ABCP.
Several companies, including National Bank of Canada and health insurer Industrial Alliance, have formulated plans to buy back tens of millions of dollars of ABCP from investors, according to news reports.
MEDAC, which submitted a proposal last year asking banks and larger Canadian companies to disclose their dealings with hedge funds, has revised the resolution this year to ask for disclosure of ABCP investments as well. The hedge fund proposal averaged 12.5 percent support over six meetings, which was among the best showings by a shareholder resolution topic in 2007.
Editor’s note: Unless otherwise noted, all vote results for 2007 are based on SHARE data.
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February 11, 2008 |
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Credit Card Master Trusts: Delinquecies on the Rise
Submitted by: Kevin Mixon, FR&A Analyst
As the fallout from the tightening in residential mortgage lending and sub-prime segment continues to unfold, RiskMetrics Group’s Financial Research and Analysis team continues to closely monitor the performance of credit card master trusts. The performance of these trusts, which hold credit card loans that are sold off to investors, can be an important bellwether in assessing consumer credit quality. Since November 2007, we highlighted a notable deterioration in credit quality across our survey group of credit card master trusts, which continued in December.
With Americans’ total revolving debt on the rise – most of it on credit cards – it is prudent to take note of the rate of delinquencies and default of credit cards loans. The Wall Street Journal recently relayed our analysis of more than $200 billion of credit-card loans that are sold off to investors by major card issuers such as Citigroup, Capital One Financial, American Express and J.P. Morgan. This analysis showed that in December, an average of 7.6% of credit-card loans were either at least 60 days delinquent or had gone into default, up from 6.4% a year earlier. A further sign of weakness in consumer credit quality can be gleaned from this study of 14 large pools of credit-card assets, where we found that delinquencies and bad loans had jumped by as much as 19% in the last six months of 2007.
We will continue to monitor consumer credit quality though our analysis of credit card mast trusts, which in addition to its potential impact on consumer spending, can affect the broader macro economy.
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February 8, 2008 |
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Climate Change is in the Wind
Submitted by: Emily McAteer, RiskMetrics Group Climate Change Research Group
Although Super Tuesday did not resolve who will be our 2008 Presidential nominees, it did make one thing almost certain: the United States will embrace climate change legislation in the next administration. All three leading candidates—Sens. Clinton, McCain and Obama—have made it clear this issue would be high on their agenda after entering the White House. Congress is also getting ready to act, with the introduction of no less than seven congressional bills proposing greenhouse gas (GHG) controls in the past year. This leaves little doubt that the U.S. is gearing up to follow Europe—albeit belatedly—in placing a price on carbon emissions.
This change in political winds hasn’t been lost on U.S. chief executives, including in the banking sector. A price on carbon will inevitably alter costs of production, the pricing of securities and the assignment of credit and asset valuations. It will also bring new opportunities for banks to engage in carbon trading, develop new climate-focused products and invest in the burgeoning clean technology sector. As Mindy Lubber, president of the investor and environmental group coalition Ceres, said at the RiskMetrics Governance Conference held in New York City this week, “it is unimaginable that the banks will be anything other than one of the most important players” in addressing climate change.
A month ago, RiskMetrics Group produced a report commissioned by Ceres that examined how 40 of the world’s largest financial institutions are preparing themselves for climate change. The study found that while banks are not high emitters of greenhouse gasses themselves, they are the primary financiers of the world’s most carbon-intensive industries. And while most banks are beginning to focus on their own emission footprints—and in many cases pledging to go “carbon neutral”—only a handful are factoring a price for carbon in their lending and investment decisions.
As a recommendation, the report, Corporate Governance and Climate Change: The Banking Sector, called on banks to “explain how they are factoring carbon costs into financing and investment decisions, especially for energy-intensive projects that pose financial risks as carbon-reducing regulations take hold worldwide.”
Carbon Principles Announced
Only a month later, three big banks on Wall Street have responded. On Monday, Feb. 11, Citigroup, JPMorgan Chase and Morgan Stanley have adopted the “Carbon Principles,” a set of guidelines for advisors and lenders to evaluate carbon risks associated with new investments in the U.S. electric power sector. This framework comes after nine months of dialogue with leading environmental organizations, including Environmental Defense and the Natural Resources Defense Council. Seven of the nation’s largest coal-burning utilities also were consulted and have written statements of support for the guidelines.
While banks have been stepping up their commitment to address climate change in recent years with a huge increase in support of renewable energy investments, they have largely shied away from acknowledging any material risks associated with their continued financing of carbon-intensive energy sources like coal. In fact, some of the same companies that advocate policies to combat climate change also are the largest global financiers of the coal industry. Under the “Enhanced Diligence” framework called for by the Carbon Principles, it now will be more difficult for U.S. electric utilities to build new, conventional coal-fired power plants.
The evaluation process calls on utilities to see if cost-effective demand reductions can limit the overall need for new generating capacity. Moreover, consideration should be given to renewable energy and low-carbon distributed energy sources as an alternative to building new, large baseload power plants. Finally, any new coal-fired generation should take into account whether carbon emissions can be economically captured and stored, rather than released to the atmosphere. Only after these other options have been ruled out should banks consider financing of new, conventional coal-fired power plants.
The Carbon Principles leave some key questions unanswered, however. One is whether they will extend beyond the United States eventually to serve as a litmus test for new power generation around the globe. Another question is what price on carbon will be assumed for this Enhanced Diligence framework. If the assumed carbon price is too low, it may not have much affect on final decisions regarding new power plants.
On Tuesday of this week—just one day following the Carbon Principles announcement—Doug Cogan, lead author of RiskMetrics’ climate change study, sat with Pamela Flaherty, Senior Vice President of Corporate Citizenship at Citigroup, on a panel at the RiskMetrics Governance Conference. Citi was the top-scoring U.S. bank in the study and a driver of the Carbon Principles. In discussing her company’s wide-ranging climate change initiatives, Flaherty commented, “Our journey has not been one of taking a score card and checking it off… It’s been about finding those points where we can make a difference for our business and clients.”
Clearly, banks’ role as the primary financiers of the country’s most carbon-intensive industries is a place to start to “make a difference.” While the Carbon Principles will not preclude new coal-fired power plants from bank lending portfolios, they do ensure a more rigorous evaluation process in evaluating the risks associated with financing carbon-intensive projects. It will be interesting—and telling—to see whether other banks and utilities follow suit and sign on to the Carbon Principles in the weeks and months ahead.
*This commentary expresses the views of the author alone and does not purport to represent the views of RiskMetrics Group or its clients.
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February 1, 2008 |
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French CEOs Have Highest Pay in Europe, Report Shows
Submitted by: L. Reed Walton, Publications
French CEOs earn the most in Europe, though their pay is still far below the average compensation for U.S. executives, according to the Hay Group, a human resources firm.
French chief executives received the highest median total direct compensation--including salary, bonus, and fair value of long-term incentive awards--according to the survey of compensation at the 50 largest European companies, “How Chief Executives Are Paid,” released by Philadelphia-based Hay Group in January. Numbers were based on the most up-to-date financial reporting figures available from each company, the study noted.
Companies in France also provide the largest long-term incentive opportunities. The most popular long-term incentive plans in Europe were stock options and performance shares, with nine of the surveyed French companies granting the former and two the latter.
The report indicated that companies in the United Kingdom pay their chief executives higher base salaries on average. The total direct pay might have been lower because, all of the U.K. companies surveyed had performance-based share plans. Less than half of those firms have stock option plans, and less than a quarter have matching bonus plans, according to the Hay Group.
Median total cash for European CEOs was about €3.3 million with total direct annual pay (total cash plus the fair value at the award date of any long-term incentive bonuses) averaging about €5 million.
German companies paid the highest bonuses in Europe, with a median payment of 185 percent of salary. U.K. firms were in second with a median bonus payment of 160 percent of salary. By comparison, the median U.S. executive receives bonuses of 300 percent of his or her base pay, the survey noted.
Seventeen European companies reported using deferred bonuses to compensate their CEOs--by which the executives’ bonus payments are held for a period then paid, most commonly in the form of shares. Two companies in the survey--both German--use deferred cash bonus plans, but none of the other European firms do.
The Netherlands had the lowest rates of total CEO compensation. However, the CEO of a Dutch company, Jeroen van der Veer of Royal Dutch Shell, received the fourth-highest total direct compensation of any European chief executive, the report notes. Arun Sarin of U.K.-based Vodafone Group had the highest, followed by executives at GlaxoSmithKline and BP, also based in the U.K.
Dutch investor advocates have warned domestic companies against upward-spiraling CEO pay. In November, the Dutch institutional investor association, Eumedion, sent a letter to the 75 largest companies in the Netherlands urging them to use U.S. companies cautiously in their pay-benchmarking peer groups.
According to the survey, the median total direct CEO compensation at the largest 50 U.S. companies by market capitalization is around €13 million (about $19.4 million). The highest-paid American CEO in the survey (Ed Whitacre Jr. of AT&T) had a total direct compensation in 2006 of about €7.3 million above Sarin, the highest-paid European CEO.
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