IRRCi, IRRCi Research
Anurag Singh, Linda-Eling Lee, Remy Briand, Sébastien Lieblich, Véronique Menou – Thursday, December 10, 2015
Beyond Divestment: Using Low Carbon Indexes, provides an actionable roadmap for institutional investors trying to navigate a financially viable path for managing carbon risk. The research provides a new framework for evaluating ways to reduce exposure to both current and potential future carbon-related assets. Currently, most approaches are focused on divesting assets from companies in the fossil-fuel sector based on current emissions only. More specifically, the research compares a selective divestment strategy with two approaches that use re-weighting and optimization to increase exposure to more carbon-efficient companies and decrease exposure to large current and future emitters, thus aiming to reduce long-term portfolio risk. Both approaches also use optimization techniques to reduce short-term risk against the benchmark.
IRRCi, IRRCi Research
Donald B. Keim, Ian R. Appel, Ph.D, Todd A. Gormley, Ph.D. – Thursday, December 10, 2015
Passive Investors, Not Passive Owners demonstrates that while passive investors – such as those that invest through index funds – are not active owners in the traditional sense of accumulating or selling shares so as to exert influence over managers and their choices, they are far from passive owners. Instead, the research finds that passively managed mutual funds, and the institutions that offer them, use their large voting blocs to exercise voice and exert influence on firms’ governance. The research finds that ownership by passively managed mutual funds is associated with significant governance changes such as more independent directors on corporate boards, removal of takeover defenses and more equal voting rights. These governance changes, in turn, are shown to improve firms’ long-term performance.
IRRCi, IRRCi Research
Monday, September 28, 2015
Webinar on October 5th to Review Findings at 11 a.m. ETNEW YORK, September 29, 2015 – A new research report finds that the use of so-called “poison puts” – agreements that allow bondholders the right to redeem their bonds if a change in control occurs – have become more prevalent in bond agreements, especially among sub-investment grade issues. The research shows a dramatic increase in the use of poison puts – in 2012, some 57 percent of all bonds issued included poison put provisions. By contrast, poison puts were included in only about eight to 27 percent of debt issued in the 1990s. Poison puts are controversial. In theory, they serve as a contracting tool by lenders to protect against increases in risk resulting from highly levered transactions or from acquisitions by firms with lower debt ratings. In recent years, however, it is said that poison puts also entrench management or thwart shareholder activists and hostile takeovers.
In a new research paper, “Poison Puts: Corporate Governance Structure or Mechanism for Shifting Risk?” the authors found no evidence that poison puts were associated with weaker governance features. Authored by Frederick Bereskin, University of Delaware assistant professor of finance, and Helen Bowers, University of Delaware associate professor, with support from the Investor Responsibility Research Center Institute (IRRCi), the research also indicates that firms with bonds that feature the indentures have higher levels of institutional ownership and are less likely to have poison pills and are equally likely to have classified boards. The research also found other features about the bonds that would be consistent with the efficient contracting theory including shorter maturities, higher interest costs spread to treasuries, and other covenants that are consistent with lenders exhibiting concern and attempting to minimize risk. Moreover, the research indicates that change in control provisions are most common in lower rated bonds. However, the authors note the de facto entrenchment power of poison puts: firms which issue bonds with poison puts are less likely to be either acquirers or targets, even though those firms are more likely to be in industries with acquisition activity.
Download the research here.
Register here for a webinar to review findings on Monday, October 5, 2015 at 11:00 a.m. ET.
“It is important to examine how poison puts relate to firms’ underlying governance structure given their increasing use and prominence, as well as the unique way that poison puts have the ability to entrench management through contractual arrangements,” said Bereskin. “Our finding that these firms typically do not have weaker governance can be interpreted either as a sign that poison puts substitute for other means of entrenchment, or that they are less related to governance than bondholders’ contracting concerns,” he explained.
“Much of our evidence is consistent with poison puts – as with other covenants – being largely driven by the unique contracting environment of these firms,” said Bowers. “It is not surprising that firms more vulnerable to potential risk-shifting, for example, are particularly likely to use poison puts. Of course, an unintended consequence of these covenants may be that management can entrench themselves. The extent of entrenchment can be enhanced depending on the covenants’ terms. However, it is important to recognize that even though poison puts can have an entrenchment effect, their use may be driven by firms’ contracting environment and bondholders’ legitimate risk-shifting concerns,” she explained.
“The corporate governance relationship between lenders and shareowners is quite complex and only occasionally in the spotlight. This research helps shed some light on this opaque relationship,” said Jon Lukomnik, IRRCi executive director. “
For example, the study notes a paradox: firms which issue poison puts have reasonable shareowner protections, yet the bond indentures themselves may serve to entrench through discouraging merger and acquisition activity. Another paradox is that the prevalence of poison puts actually may be driven by improved shareowner rights as lenders may be concerned about shareowners forcing companies to take uncomfortable levels of risk. And, of course, poison puts are one of the few types of potentially entrenching corporate governance devices which do not get voted on by shareowners,” Lukomnik explained.
Other key research findings are as follows:
- The prevalence of poison puts varies significantly by industry. Change in control provisions were included in only 10 percent of bond issues in the financial industry, but in 76 percent of healthcare firms’ issues.
- Poison puts gained in popularity beginning in 2007. From 1990-2006, only about a quarter of bond issues, at most, featured the indentures, and from 1995-2005 only from 7 – 17 percent had them. Beginning in 2007, the range was from 47 – 57 percent.
- Firms with higher credit ratings rarely use poison puts. Firms with credit ratings of A or higher included poison puts in their bonds only 10 percent of the time. By contrast, firms with credit ratings of BB+, BB, or BB-included poison puts in 73 percent of their bond issues.
- Companies tend to either include poison puts in their bonds or not. Only 17 percent of studied firms sometimes issued bonds with poison puts. Most firms either never issue bonds with poison puts (42 percent), or always include poison puts in their bond indentures (42 percent) after the first issue with a poison put.
Poison puts also are referred to as proxy puts, change in control provisions or event risk covenants. Typically, these covenants give bondholders a put option requiring the issuer to offer to purchase all of the bonds – usually at 101% of par – when one or more of the following events occurs: 1) any person or group acquires 50% or more of the issuer’s voting stock; 2) any time the majority of the board of directors ceases to be those who were directors at the time of issuance or directors whose election was approved by a majority of the continuing directors; 3) the merger or consolidation of the company into another entity; 4) the sale, in one or a series of related transactions, of all or substantially all of the company’s assets; or 5) the adoption of a plan to dissolve or liquidate the company. Some poison put covenants include a “double trigger” where the change in control event must be associated with a ratings downgrade.
The Investor Responsibility Research Center Institute is a nonprofit research organization that funds academic and practitioner research that enables investors, policymakers and other stakeholders to make data-driven decisions. IRRCi research covers a wide range of topics of interest to investors, is objective, unbiased and disseminated widely. More information is available at the IRRCi Website.
Contact: IRRC Institute| Kelly Kenneally | 202.256.1445 | kelly@irrcinstitute.org
IRRCi, IRRCi Research
Frederick L. Bereskin, Helen Bowers – Monday, September 28, 2015
In a new research paper, “Poison Puts: Corporate Governance Structure or Mechanism for Shifting Risk?” the authors found no evidence that poison puts were associated with weaker governance features. Authored by Frederick Bereskin, University of Delaware assistant professor of finance, and Helen Bowers, University of Delaware associate professor, with support from the Investor Responsibility Research Center Institute (IRRCi), the research also indicates that firms with bonds that feature the indentures have higher levels of institutional ownership and are less likely to have poison pills and are equally likely to have classified boards.
IRRCi, IRRCi Research
Monday, August 17, 2015
New CFA Institute survey highlights board accountability, human capital and executive compensation as important issues
Webinar on Wednesday, August 26th at 10 AM ET to Review Findings
Almost three-quarters of investment professionals worldwide (73 percent) take environmental, social, and corporate governance (ESG) issues into consideration in the investment process, according to the CFA Institute ESG Survey, a new survey of CFA Institute members created by CFA Institute and the Investor Responsibility Research Center Institute (IRRC Institute). In addition, 64 percent of survey respondents consider governance issues, 50 percent consider environmental issues, and 49 percent consider social issues in investment decisions. Only 27 percent do not consider ESG issues.
“CFA Institute believes that every investment analyst should be able to identify and properly evaluate investment risks, and ESG issues are a part of this,” said Paul Smith, CFA, president and CEO, CFA Institute. “Our exam curriculum emphasizes risk management, and our members are increasingly interested in continuing education materials on ESG. This survey demonstrates how serious investment professionals are considering these issues and how practice and methodology are evolving.”
“Overall, the survey creates a robust data baseline for investors, companies and ESG data providers,” said Jon Lukomnik, IRRC Institute executive director. “But, most importantly, this survey digs deeper than the simple question of, ‘Is ESG important?’ The nuances are important and provide much needed insight on how investors and analysts actually use ESG data and what data is most relevant. For example, the survey findings not only tell us that investors generally want external assurance about ESG data, but also about the preferred level of assurance, and about how much investors are willing to pay for ESG assurances.”
Key survey findings are summarized in ESG Issues in Investing: Investors Debunk the Myths, and are highlighted below:
- Risk evaluation: Sixty-three percent of survey respondents said they consider ESG in the investment decision making process to help manage investment risks, 44 percent say that their clients/investors demand it and 38 percent said ESG performance is a proxy for management quality.
- Top three issues in decision-making: Survey respondents ranked board accountability, human capital, and executive compensation as the issues most important to investment analysis and decision-making.
- Regional breakdown: A high proportion of CFA Institute members in the Asia-Pacific region considered ESG issues (78 percent), followed closely by members in the Europe, Middle East, and Africa (EMEA) region (74 percent). Respondents in the Americas region were the least likely to use ESG information in their decision-making process, but, even there, a solid majority (59 percent) do use ESG factors.
- ESG integration in the investment process: Fifty-seven percent of respondents integrate ESG into the whole investment analysis and decision-making process, while 38 percent use best-in-class positive alignment; 36 percent use ESG analysis for exclusionary screening.
- ESG disclosures: Sixty-one percent of survey respondents agreed that public companies should be required to report at least annually on a cohesive set of sustainability indicators in accordance with the most up-to-date reporting framework. In addition, 69 percent of these respondents say ESG disclosures should be subject to independent verification. Furthermore, of these, 44 percent believe that verification at a high level of assurance, similar to an audit, is necessary. Another 46 percent believe limited verification, or a lower level of assurance, is necessary. When this group was asked how much should be spent on independent verification, responses varied from 10 percent to 100 percent of the cost of an audit of financial statements.
Download CFA Institute ESG Surveyhere. Download ESG Issues in Investing: Investors Debunk the Myths ESG Issues here.
Methodology An online survey was conducted from 26 May to 5 June 2015. Some 1,325 members of CFA Institute who are portfolio managers or research analysts responded to the survey for a response rate of 3 percent. The margin of error for the survey was +/- 2.7 percent. Regional Breakdown: 68 percent from Americas, 21 percent EMEA, 11 percent APAC. Primary Asset Base: 41% primarily deal with institutional clients, 31 percent private clients, 16 percent both, and 12 percent not applicable. These survey results will help inform a new CFA Institute ESG guide for investors, due to be published in late 2015.
Webinar A webinar is scheduled for Wednesday, August 26, 2015, at 10:00 AM ET to review the findings. Register here or at https://attendee.gotowebinar.com/register/6575443840963984129.
CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has more than 132,000 members in 151 countries and territories, including 124,700 charterholders, and 145 member societies. For more information, visitwww.cfainstitute.org. CFA Institute offers members and investors many resources on ESG issues to better educate themselves at www.cfainstitute.org/ESG. ESG reading materials are also included in the CFA Institute curriculum to ensure that the next generation of financial professionals understands current global investment practice. CFA believes that every financial analyst conducting investment analysis should have knowledge of the risks and opportunities of environmental, social, and governance (ESG) issues in investing.
The Investor Responsibility Research Center Institute is a nonprofit research organization that funds academic and practitioner research that enables investors, policymakers, and other stakeholders to make data-driven decisions. IRRCi research covers a wide range of topics of interest to investors, is objective, unbiased, and disseminated widely. More information is available at the IRRCi Website.
IRRC Media Contact: Kelly Kenneally +1.202.256.1445 | kelly@irrcinstitute.org
CFA Institute Media Contact: Alliccia Hernandez +1.212.705.1739 | alliccia.hernandez@cfainstitute.org
IRRCi, IRRCi Research
Monday, August 17, 2015
This article is available at Pensions & Investments.
