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Governance Roundup

September 4, 2015

Bank of America combines CEO/Chairman positions over objections of shareholders.

In 2009, following the financial meltdown, Bank of America (“BOA”) agreed not just to appoint an outside independent chairman of the board but to institutionalize the split with a bylaw amendment.  This year, without consulting shareholders, BOA re-combined the two positions and then asked for retroactive approval of the amended bylaw, despite the objections of investors like CalSTRS, which wrote a strong letter outlining its concerns.1  Despite a substantial vote against it, the amendment was approved.  The stock responded by falling 1.27%.

The CalSTRS initiative at BOA is especially noteworthy because, as they acknowledge in their letter explaining why they want BOA’s board to split the Chairman and CEO roles, the directors have already volunteered to adopt proxy access, only one of nine companies to do so.  And the board proposed a bylaw that would provide for either a split Chairman/CEO or a lead director, an option many shareholder advocates consider acceptable and which CalSTRS itself acknowledges may be adequate in the future. 

CalSTRS explained in its letter why it was so insistent on splitting the two roles now:

We believe the roles of CEO and Chair of the Board have inherent conflicts which require the two posts to be separate and independent. Since Mr. Moynihan’s appointment as CEO in January 2010, the Company has continued to underperform, has failed important Fed stress tests, and has perpetuated a sub-par engagement with its shareholders. Given these missteps, we do not believe now is the time to reduce oversight of management by combining the roles of CEO and Chair.

We understand some shareholders have views that allow more flexibility regarding Company leadership structures. In fact, some shareholders may support the concept of a lead director at Bank of America at some point in the future, but we hope they agree now is not the time to grant your Board that flexibility.

They also noted that while, as BOA argues, 80% of the directors have changed since 2009, when shareholders voted to split the CEO/Chairman positions, most of the shareholders have not changed, and the rationale remains the same, given the company’s underperformance.

DC Appeals Court ruling on conflict minerals disclosure calls into question the government’s right to impose any disclosure requirements on publicly held companies.

A disturbing decision from the DC Circuit Court of Appeals overturned the conflict minerals disclosure regulations from the SEC that were required by the Dodd-Frank legislation.  Dodd-Frank directed the SEC to issue rules that would require companies to make certain disclosures about their supply chains, to give consumers and investors information they would find useful in evaluating a company’s products and stock.  Specifically, companies would have to disclose whether their products contained any tin, tungsten, tantalum or gold from mines in the Democratic Republic of Congo (“DRC”) that were controlled by armed gangs engaged in human-rights abuses.  Companies would be required to track the source of all relevant raw materials in their products, then file annual reports stating whether those goods were DRC conflict-free, conflict “undeterminable” (an interim category permitted for at least the first two years), or “not found” to be conflict-free.

The challenge was brought by the U.S. Chamber of Commerce and National Association of Manufacturers. The 2-1 ruling found that the rule was not sufficiently justified. What is particularly disturbing is that in dicta (non-binding commentary) the majority decision suggested that, while acknowledging that the standard is different for advertising than for securities filings, the entire foundation of disclosure requirements imposed by the government on corporations could be a violation of companies’ First Amendment rights.

Shareholders push portfolio companies to object to Chamber of Commerce action against climate change rules.

In the wake of the Obama Administration’s August 3, 2015 announcement of its Clean Power Plan to combat climate change, over 60 investors and organizations sent a letter to approximately 50 companies that are on the board or are prominent members of the U.S. Chamber of Commerce, a vigorous opponent of the plan that is orchestrating a broad-based strategy to block new regulations.

SEC settlement with Citigroup results in a fine, but no action against the responsible parties.

As Gretchen Morgenson noted recently in The New York Times: “How can we expect Wall Street’s me-first culture to change when regulators won’t pursue or even identify the me-firsters who are directly involved?  That question came to mind after reading the terms of a settlement struck on Aug. 17 between the Securities and Exchange Commission and two units of Citigroup. It is a deal that holds no one at the bank accountable for behavior that caused investors to lose an estimated $2 billion.”

Six big U.S. banks called for a “strong global climate agreement.” 

On September 28, 2015, Bank of America, Citi, JPMorgan Chase, Goldman Sachs, Morgan Stanley and Wells Fargo said in a joint release that government action, in addition to private business investment, is needed to address climate change.2  The release explained:

Scientific research finds that an increasing concentration of greenhouse gases in our atmosphere is warming the planet, posing significant risks to the prosperity and growth of the global economy. As major financial institutions, working with clients and customers around the globe, we have the business opportunity to build a more sustainable, low-carbon economy and the ability to help manage and mitigate these climate-related risks.

Our institutions are committing significant resources toward financing climate solutions. These actions alone, however, are not sufficient to meet global climate challenges. Expanded deployment of capital is critical, and clear, stable and long-term policy frameworks are needed to accelerate and further scale investments.

We call for leadership and cooperation among governments for commitments leading to a strong global climate agreement. Policy frameworks that recognize the costs of carbon are among many important instruments needed to provide greater market certainty, accelerate investment, drive innovation in low carbon energy, and create jobs. Over the next 15 years, an estimated $90 trillion will need to be invested in urban infrastructure and energy. The right policy frameworks can help unlock the incremental public and private capital needed to ensure this infrastructure is sustainable and resilient.

 While we may compete in the marketplace, we are aligned on the importance of policies to address the climate challenge. In partnership with our clients and customers, we will provide the financing required for value creation and the vision necessary for a strong and prosperous economy for generations to come.

This is enormously significant for many reasons.  First, it makes the business case for investments in sustainable and climate-restoring business opportunities.  Second, it does not recognize any legitimacy to denying the impact of our current activities on climate. Third, it acknowledges that business cannot solve this problem alone and calls on governments internationally to work together as they have done.  If they back this up with their political contributions – campaign and lobbying – it will be a powerful, even decisive counterweight to the money from anti-science, anti-environmental groups.  If politicians need Wall Street money, this resolution may have as big an impact on the political world as it does on the business side.

Japanese Prime Minister Shinzo Abe pledged to push for further improvements in corporate governance.

In a speech on September 29, 2015, Japanese Prime Minister Abe made a commitment to new targets for expanding the economy by 20% and making governance changes a top priority, including more transparent selection of CEOs and board members and unwinding the traditional system of cross-held shares.

CalSTRS partners on an energy productivity index for portfolio companies.

The first global energy productivity benchmark for listed industrial companies is a partnership between CalSTRS, ClimateWorks Australia and the U.S.-based ClimateWorks Foundation. CalSTRS is participating in the project as lead investor. The index will quantify companies’ energy risks and the financial value of improving energy productivity, helping investors to assess investment risk and make more informed decisions about engagement priorities.

Volkswagen CEO Martin Winterkorn resigns amid scandal over emissions-rigging “defeat device.”

After shocking revelations that as many as 11 million cars were specifically engineered to register on emissions-testing devices as compliant when in fact they were adding perhaps a hundred million additional tons of toxic pollutants to the atmosphere, Volkswagen’s CEO resigned.  But it did not take long for the focus to turn to the company’s notoriously insular board, so controlled by one family that one member’s fourth wife, formerly the nanny for his children, was made a director. The announcement that Winterkorn will continue to play a role, including supervising the investigation into the “defeat devices,” has led Hermes and others to call for a major overhaul on the board and in the executive suite.

It has also led to commentary from investors and those who chose not to invest in the company specifically due to the governance risk about what role governance should play in securities analysis. As the Financial Times noted: “There is one group of people who lost very little as a result of Volkswagen’s cheating on emissions tests — namely German institutional investors, who at the end of last year held just 2.1 per cent of the capital. That makes an interesting comparison with the 26.3 per cent stake held by foreign institutions. Clearly German investors were more sensitive to the governance issues for which VW had long been notorious than their foreign counterparts…. This underlines an important truth with important investment consequences: at the root of most corporate scandals lie governance failures. And while the focus of much governance comment and analysis is on the board and the role of institutional shareholders, what happens below board level can be quite as important as behavior in the board room, especially in relation to the incentive structures that mold the actions of employees.”

Executive sentenced to 28 years in prison for conspiracy, obstruction of justice, and wire and mail fraud in food poisoning case.

Stewart Parnell, the former head of Peanut Corporation of America, was recently sentenced to 28 years in prison for his role in concealing a 2008 and 2009 salmonella outbreak that sickened more than 700 people and killed nine. This is a very rare case of an executive being held personally responsible for corporate crime.  The company has now gone out of business.

1   http://valueedgeadvisors.com/2015/09/03/calstrs-letter-to-bank-of-america-on-chairmanceo-split/
2   https://www.ceres.org/files/bank-statement-on-climate-policy

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