Media Center

5/16/2024

Editorial: The Retreat From ESG Proxy Voting

Wall Street Journal (05/16/24)

In the world of shareholder proxy voting, a little media scrutiny goes a long way, writes the Wall Street Journal editorial board. "Asset managers hoped investors wouldn’t notice how their shares were being voted, but many have curbed their ESG enthusiasm now that word is getting out. Even BlackRock (BLK) has turned a new leaf. These are the findings of “Putting Politics Over Pensions,” a new report by the Committee to Unleash Prosperity, which tracks big firms’ records on shareholder votes. Last year’s report broke the bad news that portfolio managers were following the progressive political herd on environmental, social, and corporate-governance proposals. Most funds backed political resolutions unrelated to enhancing shareholder value, such as forcing companies to divest from fossil fuels or adopt racial equity audits. The news this year is that some of the funds are backtracking. The latest report finds that support for ESG resolutions dropped 25% in 2023 from 2022, including a 30% drop among the 25 most active fund families. Progressive shareholders—often with only a few shares—are putting forward more proposals than ever, trying to pressure executives into adopting their causes as corporate policy. But non-ESG-branded funds aren’t backing them like they were a year ago. One pleasant surprise is BlackRock, which earned a B and ranks fourth on the list, up from C a year earlier. Chief executive Larry Fink has done some rethinking since he became an ESG advocate in 2018. BlackRock said it rejected most ESG proposals last year because they were “over-reaching, lacking economic merit,” and “unlikely to help promote long-term shareholder value.” Well said. Plenty of fund families are still flunking. BNP Paribas (BNPQY), Victory Capital Management, and Danske Bank (DNKEY) all earned F- grades, approving nearly all of the 50 damaging shareholder proposals that were scored in the ranking. That includes proposed racial equity audits for Walmart (WMT) and Chevron (CVX), and forcing Kroger (KR) and Amazon (AMZN) to adopt plans to use less plastic. The retreat from ESG was nonetheless wide and significant. Asset managers such as Goldman Sachs (GS), Charles Schwab (SCHW), and Geode Capital Management rejected many more political proposals last year than they did in 2022. In some cases, senior executives ordered portfolio managers to change their voting habits after reviewing their companies’ abysmal records in 2022. One cause of the shift is asset managers’ growing reluctance to follow the direction of the proxy-adviser duopoly, Institutional Shareholder Services (ISS) and Glass Lewis. The firms claim about 97% of the market for guidance on shareholder votes, and they back ESG at an overwhelming rate. Both earned lower grades than most of the funds they advise—a D for Glass Lewis and an F for ISS Until last year most fund managers seemed to accept the duopoly’s recommendations as gospel. Today more fund executives are second-guessing the proxy advisers’ guidance. “It is increasingly clear that proxy advisers have undue influence,” wrote JP Morgan (JPM) CEO Jamie Dimon in his April letter to shareholders. His firm’s asset-management arm was among the dozens that rejected more ESG proposals last year, and he suggested that managers ought to do more of their own research on how to vote. "The funds rejecting ESG are embracing their responsibility to investors," write the editors. "All asset managers have a fiduciary duty to maximize returns, and that includes their approach to proxy voting. The advisory firms and other ESG enthusiasts offer strained theories to suggest that costly climate policies somehow boost profits. But fund families managing billions of dollars in stocks should know better, and investors would be wise to flee if they don’t."

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5/15/2024

Podcast: ESG-skeptic proxy Voting at ISS and Investor-targeting Strategies

IR Magazine (05/15/24) Distefano, Naomi

In this episode of the podcast IR Voice, investor-targeting strategies and a new set of proxy voting guidelines adopted by ISS are discussed. First, IR Magazine senior reporter Tim Human speaks to Elena Arabadjieva, COO and head of IR at the Singapore-headquartered real estate investment trust Cromwell European REIT. Arabadjieva explains how her company — a Singapore-listed REIT that holds all of its assets in Europe — crafts its investor-targeting strategy, how the use of new technology is supporting the firm’s targeting efforts and how much support it receives from the sell side around targeting activities. Later in the episode, deputy editor Garnet Roach talks with Jerry Bowyer, president of Bowyer Research, which recently unveiled new proxy voting guidelines tailored for investors seeking to counteract the influence of ESG ideology promoted by political activists through proxy voting. These guidelines, now accessible through ISS, underscore the primacy of shareholder interests.

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5/14/2024

Proxy Votes Nudge Companies on Human Rights, Worker-Friendly Policies, and Biodiversity

Morningstar (05/14/24) Norton, Leslie

A Travelers Companies Inc. (TRV) shareholder says the company currently faces “public scrutiny over the potential risk associated” with the Arctic National Wildlife Refuge. The Gwich’in Steering Committee asked Travelers to pledge to stop insuring energy projects in the refuge in order to protect its communities, culture, and way of life. United Nations principles expect companies to conduct human rights due diligence and recognize the right of Indigenous people to self-determination, according to the proposal. The Travelers annual meeting is on May 16. These risks may be “rare” for Travelers, but “this does not exempt the company from assessing and reporting on its human rights due diligence processes” overall, writes Morningstar Sustainalytics analyst Ignacio Garcia Giner. Trillium ESG Global Equity PORTX, which filed the proposal, previously asked Travelers how it assessed recommendations for improving the impacts of its policies on communities of color. The 2023 proposal received 35% support, and the 2022 proposal received 47% support. Analysts believe voting support above 25% catches the board’s attention. Meanwhile, CVS Health Corp. (CVS) shareholders are nudging the drug retailer to report on whether it interferes when employees exercise their right to unionize. The proposal was made by New York State’s comptroller, acting as a trustee of the New York State Common Retirement Fund, and asks CVS to report on its adherence to its commitment to workers’ freedom of association and collective bargaining. CVS holds its annual meeting on May 16. Boeing Co. (BA) shareholders will vote on whether the aerospace giant should report annually on pay gaps across race and gender and whether such gaps pose reputational, competitive, and other risks to the company. Reporting on pay equity assesses the dollar amount earned by women for every dollar earned by men across similar roles, or the dollar amount earned by minorities versus nonminorities across similar roles. The proposal was made by shareholder advocate James McRitchie of CorpGov.net. Boeing holds its annual meeting on May 17. Writes Giner: “The company does not see value in providing an unadjusted pay-gap analysis. We believe assessing and publicly disclosing both median and adjusted gender pay-gap analyses to be the starting point to ensure pay parity. We also believe the requested reporting would strengthen the company’s DEI strategy and help assist with its near-term representation and pay parity commitments.”

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5/14/2024

Proxy Advisors to BlackRock: Why Are You Paying Larry Fink So Much Money?

Barron's (05/14/24) Ungarino, Rebecca

BlackRock (BLK) has come under pressure in recent years over its unparalleled size, enormous influence in voting on other public companies’ policies as a shareholder through its funds, and sustainable investing practices. Joining the criticisms: the way the firm pays its top management. The two most influential U.S. proxy-voting advisors are recommending that shareholders vote against approving 2023 pay packages BlackRock is looking to award top executives—including CEO and co-founder Larry Fink—at its annual shareholder meeting on Wednesday. At issue is the asset management firm’s compensation for Fink and the five executives who serve as president, chief operating officer, global client business head, chief financial officer, and vice chairman. BlackRock says it evaluates these executives against the firm’s financial performance goals, “strategic objectives,” and “organizational priorities” when deciding incentive awards. Institutional Shareholder Services and Glass Lewis, the two largest proxy advisory companies that track thousands of annual meetings, have said separately in recent weeks that the paydays BlackRock wants to give management are cause for shareholder concern because it is unclear exactly how the firm arrives at those awards’ overall size. There is also a misalignment between the investment firm’s performance and the pay packages BlackRock has outlined, the two advisory firms said. “We believe that the disconnect between pay and performance during the year in review warrants shareholder concern,” Glass Lewis said last month. Glass Lewis last recommended that BlackRock stockholders vote against executive compensation in 2018. Although most of BlackRock’s equity-based awards are rooted in “clearly disclosed multi-year goals that appear reasonably rigorous,” ISS said in its report, it has “significant” concerns about how the firm decides to dole out cash incentives. ISS said Fink’s pay of $27 million last year was higher than median CEO pay at peer firms. Fink’s pay in 2023 declined 18% from $32.7 million the prior year; median CEO pay at ISS-selected competitors was $21.5 million in 2023. While BlackRock stock’s total return has outperformed the S&P 500’s total return over five years, it has lagged behind on a one- and three-year basis, according to ISS, which also pointed to flat revenue year-over-year. Net income and per-share earnings rose in that time, ISS noted. BlackRock, which managed $10.5 trillion of assets as of March, has recommended that shareholders support ratifying its 2023 executive compensation. The New York-based firm said in its proxy statement that it reached out to its 50 largest shareholders to discuss different matters ahead of its meeting and found that “no significant concerns regarding executive compensation were raised from our engagements.” “BlackRock has a longstanding pay-for-performance culture, and our executive compensation program is based on the same metrics-driven approach that has received substantial shareholder support in prior years,” a BlackRock spokesperson said in a statement to Barron’s. “Over the last five years, the firm has delivered industry leading growth and shareholder value, generating more than $1.9 trillion in new client assets and outperforming the financial services sector and the S&P 500. We look forward to engaging with our shareholders.” It is rare that stockholders vote against companies’ proposed pay packages in general. Investors at just 12 companies in the S&P 500 voted against the item last year and the average vote for so-called say-on-pay across the index was 88.7%, according to consulting firm Semler Brossy. During the 2023 shareholder meeting, BlackRock investors overwhelmingly supported the executive pay item, with 92% voting in favor. It encompasses pay for so-called “named executive officers,” or NEOs—legalese used by BlackRock and other large public companies to define top officials, such as CEOs and CFOs. Like other big asset managers, BlackRock casts tens of thousands of their own votes at other companies’ annual meetings because of the stakes it has amassed through its funds. BlackRock is also working on a new program that gives individual investors options to vote. “One of the reasons that BlackRock is a particular concern is that BlackRock also votes on pay packages. If BlackRock itself has a problematic pay package, that suggests a tolerance for high pay,” said Rosanna Landis Weaver, a consultant who examines executive pay with the not-for-profit shareholder advocacy organization As You Sow. The group is voting against BlackRock’s executive pay this year. Segal Marco Advisors, a consultant that advises clients overseeing some $600 billion of assets on matters including proxy voting, also plans to vote against BlackRock’s say-on-pay proposal, said Max Dulberger, Segal Marco’s director of corporate governance and engagement. Pay and CEOs who also serve as board chairs, such as Fink, are under scrutiny at several Wall Street firms. A tiny London-based activist investment firm, Bluebell Capital Partners, has proposed that BlackRock split the roles of CEO and chair. BlackRock has recommended that shareholders vote against the proposal.

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5/14/2024

Shareholders Vote to Keep Whitestone REIT Board, Stymying Proxy Battle

Commercial Observer (05/14/24) Pascus, Brian

Bruce Schanzer’s bid to join the board of Whitestone REIT (WSR) has been rebuffed by shareholders. Shareholders voted Tuesday to keep David Taylor and Nandita Berry, two existing trustees of Whitestone’ six-person board, in place instead of replacing them with Schanzer and his business partner Cathy Clark, an investor in the shopping center space. The vote came during the firm’s 2024 annual meeting of shareholders. Schanzer, chairman and CIO of Erez Asset Management, a real estate investment firm that bought a 1.7% stake in the company, had asked shareholders to give him the opportunity to turn around the fortunes of Whitestone, a Houston-based real estate investment trust (REIT) with a shopping center portfolio exclusively invested in Arizona and Texas and a market capitalization of $571 million. Whitestone’s board framed Schanzer’s bid as a takeover attempt and issued several combative press releases that called into question both his character and motivations. “Whitestone’s Board and management team thank our shareholders for their support and input during this proxy contest,” Whitestone said in a statement to CO. “We are pleased that shareholders have reaffirmed their support for the board’s highly qualified nominees and recognized our commitment to continue creating shareholder value.” The vote is the culmination of a months-long proxy battle between Schanzer, Erez Asset Management, and Whitestone senior leadership over control of the REIT. Over the last several months, Schanzer has argued in letters to shareholders that Whitestone’s board failed to meet three key quantitative performance targets — primarily FFO per share (referring to funds from operations, a proxy for cash flow) — and that current board trustees lack experience overseeing shopping centers, public REITs or real estate capital markets. In April, Schanzer told CO in an exclusive interview that board mismanagement had repeatedly issued equity at steep discounts to net asset values, which had manipulated the REIT’s stock price and drastically reduced the stock’s value. Whitestone’s stock price is currently $12.48 per share. The former Cedar CEO believes Whitestone’s stock should be trading at closer to $16 or $17 per share. But Whitestone’s existing leadership dug in and resisted Schanzer’s attempts to join the company C-suite. The board issued several letters to shareholders essentially framing the board seat bid by Schanzer as a hostile takeover that threatened the REIT’s business model. “We are also concerned as a new activist, Erez Asset Management, threatens to disrupt our progress, derail our strategy, and destroy our momentum to generate value for our shareholders,” said the board in its April 29 letter. The shareholder vote Tuesday affirming Whitestone’s existing leadership comes after more than two weeks of press warfare by the two parties and several months of strategizing. On May 6, Whitestone sent a letter to shareholders alleging that beginning in late 2023 Schanzer “colluded” with former Whitestone CEO James Mastandrea, who was fired for cause in 2022 after leading the REIT for 16 years. Whitestone argued that Schanzer misrepresented whether he’d ever had a business relationship with Mastrandrea, and that this demonstrated “double-talk” and “lies and deception” on the part of Schanzer. The Whitestone May 6 letter shareholder cited screenshots of slides taken from a powerpoint presentation allegedly created by Schanzer that revealed Erez Asset Management leadership had met with Mastandrea about securing his support for Schanzer’s board seat bid. Whitestone argued that Mastandrea was working with Schanzer to “settle the score” with those at Whitestone who terminated his employment two years ago. Schanzer and Erez fired back with two letters on May 8 and May 9. Schanzer argued to shareholders that Whitestone’s board is “entrenched, insular, and does not have the best interests of shareholders as its highest value,” but did not address any of the allegations regarding Mastandrea. “The company’s current trustees are responsible for years of deficient capital allocation decisions that have destroyed significant shareholder value, poor corporate financial management that has resulted in both short-term and long-term guidance misses, and major governance and disclosure failures that have deprived shareholders of a truly independent board,” wrote Schanzer on May 9. “There is a lot to fix and a lot to do.”

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5/10/2024

SEC Exclusion Rates for Shareholder Proposals Approach Trump-era Levels

Responsible Investor (05/10/24) Verney, Paul

Exclusion rates for this year’s cohort of U.S. shareholder proposals are on par with those during President Trump’s administration, according to research by the Shareholder Rights Group. Analysis by Sanford Lewis, attorney and director and founder of the Shareholder Rights Group found that since November the SEC has supported corporate petitions to exclude shareholder proposals “roughly 68% of the time.” This contrasts with 56% in the 2023 proxy season. “We note that this year’s exclusion rates are on par with the average exclusion rate in the prior administration, from 2017-20, which was 69%,” Lewis wrote. During Trump’s presidency, shareholders found it increasingly difficult to get ESG-orientated proposals on the ballot at company annual meetings. Lewis added that a key factor behind the “surge of exclusions” was a sharp increase in the number of “no action” requests filed this proxy season by companies. This year, as of May 1, 259 bids to exclude had been put to the regulator, compared with 167 in 2023, representing a 55% increase. So far, 139 of these requests have been granted, up from 76 in the 2023 season. The rise in both the proportion and volume of successful exclusions of proposals by companies follows a collapse in average support for ESG proposals last year, which fell by close to a third from the 2022 proxy season to just 22%. The SEC’s “no action” process is a decades-old mechanism through which companies can ask for reassurance that the regulator will not act if they omit a shareholder proposal from its proxy statement by appealing to rules that govern the process. Since President Biden came into office in 2021, the balance of power has tipped towards filers and away from companies. This was crystallized with the introduction of new guidance and the proposal of new rules around “no action” letters. But consecutive record-breaking years in terms of the volume of ESG-focused resolutions filed and put to vote at U.S.-listed firms has increasingly drawn the ire of right-wing critics, opening yet another front in the war on ESG. Despite challenges to the quality of the shareholder proposals, Lewis noted that so far not a single company has sought to exclude a proposal on the ground of relevance, which is an option under the SEC's rules. “The no action process this year is also notable for the requests that are not being filed by companies,” he wrote. “Despite the politicized claims regarding irrelevance, issuers are not filing challenges to proposals on this basis.”

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5/10/2024

SEC Proxy Vote Reporting Rules Survive Court Challenge

Bloomberg Law (05/10/24) Bultman, Matthew

A federal appeals court on Friday left intact U.S. Securities and Exchange Commission (SEC) rules that boost disclosures about fund votes on ESG proposals at company annual meetings. Texas and other Republican states that brought the challenge don’t have legal standing to seek review of the rules, the U.S. Court of Appeals for the Fifth Circuit said. The court said the states didn’t show they’d be harmed by the rules. The states had argued the proxy rule was designed to discourage investing in oil companies and other businesses disfavored by environmental, social, and governance activists. “The record provides only speculation about the possibility of increased costs to investors as a result of new regulatory burdens on the funds,” the court said. At the center of the challenge was a requirement that funds also categorize each matter they voted on by type. There are over a dozen standardized categories, including “environment or climate” and “diversity, equity, and inclusion.” The SEC argues the categories are useful to investors, making it easier for them to analyze and compare funds’ actions. But Republican attorneys general in four states argued the SEC overstepped its authority and didn’t justify the rules’ costs.

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5/7/2024

As Disney Activist Fight Shows, Increased Engagement from Institutional Shareholders Is a Permanent Shift

IR Magazine (05/07/24) Roquette, Jean Benoit

Trian Partners' engagement with Disney (DIS) and its CEO Bob Iger highlights a trend with meaningful implications for listed companies that is transforming their relations with institutional shareholders. The latter, while not activist by nature, have significantly increased their engagement with companies in recent years in order to ensure the quality of their governance and to be in a position, if necessary, to request change. We are far from the time when general meetings were mere rubber-stamping chambers. This new reality originates in the 2007/2008 financial crisis and the relentless rise of passive investment. First, Royal Bank of Scotland’s bankruptcy in 2008 and its deep vulnerabilities in terms of governance were an epiphany to institutional fund managers across the world: they realized their fiduciary duty was not limited to the sole responsibility of making their clients’ money grow but also required supervision of their investee companies to ensure proper governance practices. Many institutional investors’ current behavior can be explained by this new requirement to prove to their clients that they are properly conducting their mandate. Second, the rise of passive investment led active investment managers to drastically increase their engagement with corporates as a way to justify their elevated fees (versus passive funds). This trend of heightened engagement, which is supporting a necessary modernization of governance practices at many listed companies, is happening at a time when financial, operational, social, geopolitical, sanitary and environmental crises are shooting up everywhere. The combination of these crises and institutional activism is a powerful wave impacting the financial reputation of corporates. Leaders are now repeatedly challenged, boards of directors are suddenly engaged with and under pressure, and general meetings have transformed into reputational battlefields. The first pillar of financial reputation remains the company’s financial performance and its ability to execute and deliver. This is the fundamental principle of investor relations and is behind the creation of a trustful relationship with financial markets. But there is now a second pillar based on long-term, constructive and structured engagement with shareholders’ voting teams, and not solely right before AGMs when some resolutions are at risk of not being voted. It is a demanding task that requires heavy work and commitment from many teams: IR, finance, legal, compensation, ESG, and the lead independent director. But the return on investment is real: the process tells shareholders that the company is respectful of their rights and open to their recommendations. They will remember this during hard times. As a consequence, IR teams’ responsibilities have profoundly evolved over the past years to integrate shareholder engagement, a task previously led by the legal team. Put simply, the challenge for the head of IR is not only to search for new investors and build trust but, once they have become shareholders, to look after them up to the vote at the AGM,

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5/6/2024

Focus: Denny's Faces Proxy Vote Over Pig Gestation Crate Pledge

Reuters (05/06/24) Cunningham, Waylon

An upcoming shareholder vote at Denny’s Corp (DENN) could pressure the company to set targets for reducing its use of pork from suppliers that keep pregnant pigs in tight confinement, called gestation crates. The Humane Society of the United States, a shareholder in Denny’s, filed the proposal ahead of the diner chain’s May 15 annual investor meeting. The proposal has been backed by Institutional Shareholder Services, an influential proxy advisory firm which often guides how shareholders vote on hot-button issues. The ISS said this is the first time Denny's had received a proposal regarding disclosing the percentage of group-housed pork in its supply chain, and phasing out gestation crates. The ISS said it conducted an analysis that found that Denny’s lags five rivals by failing to clearly lay out steps it is taking to reduce its reliance on pork suppliers that use gestation crates. According to ISS, Denny’s has used exceptions in its language to “significantly weaken” transparency around its commitment to phase out gestation crates from its supply chain. Known for its inexpensive breakfast menu, Denny’s in 2012 pledged to eliminate from its pork supply chain the use of gestation crates, which the Humane Society describes as solitary cages that “confine pigs so restrictively, they can’t even turn around.” But over the next decade, Denny’s reported no “meaningful progress” and made no targets for achieving its goal, putting it at odds with other chains, according to the Humane Society’s shareholder proposal. “We think it’s time shareholders step in.” In contrast, competitor Cheesecake Factory (CAKE) disclosed that 73% of its pork was gestation crate-free at the end of 2023, and that it plans to eliminate crates from its supply chain by 2025. Denny’s board recommended in an April 4 proxy filing that shareholders vote against the proposal, saying that its requirements would be redundant, unnecessary and inefficient. “Unfortunately the pork supply industry has not evolved as expected," it said. Walmart (WMT) shareholders also will be asked to vote on a similar proposal at its upcoming annual meeting. Walmart recommended that its shareholders vote against the proposal, which it said was unnecessary. "The market does not currently support a speedy transition away from the use of gestation crates," the retailer said in its April 25 proxy filing. McDonald’s (MCD) two years ago faced pressure from investor Carl Icahn to fully eliminate gestation crates from its pork supply chain. He lost his battle to win board seats and shine a light on animal welfare.

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