Archive for the ‘Shareholder and Activism’ Category

Union Activism: Do Union Pension Funds Act Solely in the Interest of Beneficiaries? [PDF]

–Response from Brandon Rees, Acting Director, AFL-CIO Office of Investment

Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: December 11, 2012

Union pension funds manage approximately $3.5 trillion in retirement assets on behalf of public and private sector employees covered by collective bargaining agreement.  They are also very active in the proxy process, sponsoring approximately one-third of the shareholder proposals that are included in corporate proxies each year.

Federal and state laws (including ERISA) require that the trustees and administrative bodies that oversee these funds manage their plans “solely in the interest of participants and beneficiaries.”  Furthermore, the U.S. Department of Labor is clear that pension funds are not to use plan assets and their voting rights “to further legislative, regulatory or public policy issues through the proxy process.”

We examine this issue is greater detail, including the types of proposals put forward but union pension funds, the support these proposals receive, and the companies they target.  We ask:

• Are union-sponsored proposals made solely in the interest of their pension beneficiaries?
• How can the public or a pension beneficiary assess the motives of funds that sponsor proxy proposals?
• How do union pension funds determine which positions to advocate and which companies to target?
• Are unions violating their ERISA duties by sponsoring these proposals?

Read the attached Closer Look and let us know what you think!

Shareholder Lawsuits: Where Is the Line Between Legitimate and Frivolous? [PDF]

Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: November 27, 2012

Shareholders of public companies are not responsible for designing executive compensation packages. Still, a shareholder vote on compensation is required in two circumstances:  when a company wants to establish an equity-based compensation plan, and annually as part of the Dodd Frank requirement shareholders have an advisory “say on pay.”  In deciding how to vote, shareholders rely on information provided in the annual proxy.

Recently, shareholder groups have sued companies for inadequate disclosure.  They allege that the companies provide insufficient disclosure to determine how they should vote on these matters.

We explore this issue in closer detail and ask:

• How much disclosure is too much disclosure?
• If a company follows SEC guidelines, why is this not sufficient?
• When do lawsuits cross the line from legitimate to frivolous?
• If disclosure litigation is successful, what other board decisions would be subject to potential lawsuits?

Read the Closer Look and let us know what you think!

To view the entire collection of Stanford Closer Looks please click here. You can also follow more corporate governance and leadership news at @StanfordCorpGov and  @StnfrdLeadrship.

Abstract: 
This paper examines changes in executive compensation programs made by firms in response to proxy advisory firm say-on-pay voting policies. Using proprietary models, proxy advisory firms, primarily Institutional Shareholder Services and Glass, Lewis & Co., provide institutional shareholders with a “for” (positive) or “against” (negative) recommendation on the required management say-on-pay proposal in the annual proxy statement.
Analyzing a large sample of firms from the Russell 3000 that are subject to the initial say-on-pay vote mandated by the Dodd-Frank Act, we find three important results.

First, proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes. Second, a significant number of firms change their compensation programs in the time period before the formal shareholder vote in a manner consistent with the features known to be favored by proxy advisory firms apparently in an effort to avoid a negative recommendation. Third, the stock market reaction to these compensation program changes is statistically negative. Thus, the proprietary models used by proxy advisory firms for say-on-pay recommendations appear to induce boards of directors to make choices that decrease shareholder value.

Number of Pages in PDF File: 59

Keywords: proxy advisory firms, say-on-pay, institutional shareholder voting

Ten Myths of “Say On Pay”
Authors: Professor David F. Larcker,  Stanford Graduate School of Business; Allan McCall, co-founder of Compensia and currently a PhD candidate at the Stanford GSB; Gaizka Ormazabal, Assistant Professor of Accounting at IESE Business School at the University of Navarra; and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford GSB.
Published: July 28,  2012

Say on pay is the practice of granting shareholders the right to vote on a company’s executive compensation program at the annual shareholder meeting.  Under the Dodd-Frank Act of 2010, publicly traded companies in the U.S. are required to adopt say on pay.  Advocates of this approach believe that say on pay will increase the accountability of corporate directors and lead to improved compensation practices.

In recent years, several myths have come to be accepted by the media and governance experts.  These myths include the beliefs that:

1. There is only one approach to “say on pay”
2. All shareholders want the right to vote on executive compensation
3. Say on pay reduces executive compensation levels
4. Pay plans are a failure if they do not receive high shareholder support
5. Say on pay improves “pay for performance”
6. Plain-vanilla equity awards are not performance-based
7. Discretionary bonuses should not be allowed
8. Shareholders should reject nonstandard benefits
9. Boards should adjust pay plans to satisfy dissatisfied shareholders
10. Proxy advisory firm recommendations for say on pay are correct

We examine each of these myths in the context of the research evidence and explain why they are incorrect.

We ask:

* Should the U.S. rescind the requirement for mandatory say on pay and return to a voluntary regime?

Read the attached Closer Look and let us know what you think!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news on Twitter: @StanfordCorpGov .  To view the entire collection of  Stanford Closer Looks please click here.

Shareholder Activism: How It Began and How It’s Reshaping Today’s Investment Landscape. Three part Series with Mason Morfit, ValueAct Capital and Abe Friedman, former Global Head of Corporate Governance & Responsible Investment for BlackRock

Click here to RSVP

Please join us for an overview of shareholder activism in a three part series, beginning with the history and an overview of the key players in the space; continuing with a behind-the-scenes look at non-contentious shareholder engagement and how it is impacting companies and the market; and ending with an overview of proxy fights, PR wars and activist defense.

Mason Morfit, a partner at ValueAct Capital and one of the most successful shareholder activists in the US, and Abe Friedman, former Global Head of Corporate Governance & Responsible Investment for BlackRock, the world’s largest asset manager, will share insights from their experience in the trenches engaging every day with management teams and boards on behalf of investors.  In addition, they will offer insights on activism globally, how activism in the US is changing and what that means for corporate America in the next decade.

5:30 pm Reception
6:00 pm – 7:00 pm Session

Monday April 16: Activist Investing: Background, Impact and the Players
Stanford Law School, Room 190

Monday, April 23: Non-contested situations in activism and behind-the-scenes influence
Stanford Graduate School of Business, N302

Monday, April 30: Contested Situations: Proxy Fights, PR wars and activist defense
Stanford Law School, Room 190

• Scarlet Letter: Are the CEOs and Directors of Failed Companies “Tainted”? (PDF) Stanford Graduate School of Business – Corporate Governance Research Program, Professor David F. Larcker and researcher Brian Tayan, MBA 2003

There is a consistent pattern that emerges when a company suffers from a major governance failure: the stock price falls, the company faces lawsuits, and there is elevated turnover in both the executive suite and the boardroom.  

The impact on the careers of the former executives and directors of these companies is less clear.  Recent experience suggests that many CEOs and directors of failed companies are able to retain outside directorships–and even obtain new ones–following their forced departures.

1. Should this be a concern for shareholders?

2. What is the standard by which the culpability of an executive or director should be measured?  When are they “too tainted” by their experience to serve at other companies?

3. Is it plausible that officers and directors involved in an accounting or ethical problem can “learn valuable lessons” from the experience?

Read the attached Closer Look and let us know what you think!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news at http://twitter.com/#!/StanfordCorpGov. To see the entire collection of the Stanford Closer Look series, please click here.

Institutional Shareholders and Activist Investors Authored by Professor David F. Larcker and Brian Tayan, Researcher, GSB Corporate Governance Research Program/MBA ’03.

 CGRP16 – Seven Myths of Corporate Governance (PDF) by Professor David F. Larcker and Brian Tayan, MBA '03

In recent years, there has been much discussion over how to improve governance systems broadly. In the process, certain myths have developed that continue to be accepted, despite a lack of robust supporting evidence.

These myths include the beliefs that:

1. The structure of the board always tells you something about the quality of the board

2. CEOs in the U.S. are overpaid

3. Pay for performance does not exist in CEO compensation contracts

4. Companies are prepared to replace the CEO if needed

5. Regulation improves corporate governance

6. The voting recommendations of proxy advisory firms are correct

7. Best practices are the solution to bad governance

We examine each of these myths in closer detail and explain why they are false.

So long as these myths are accepted by practitioners and the public, how can we expect managerial behavior and firm performance to improve? Read the attached Closer Look and let us know what you think!

Larcker and Tayan are the authors of recently published book: Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences, FT Press

Topics, Issues and Controversies in Corporate Governance: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. To see the full series of  Stanford Closer Looks click here.

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