Webinar on Thursday, April 17th at 2 PM ET to Review Findings.
NEW YORK, NY, April 10, 2014 –A new study finds that the level of engagement between investors and publicly traded U.S. corporations is at an all time high. Both investors and corporate officials surveyed believe the increased level of engagement is successful.
The study finds that the new requirement that U.S. companies seek shareholder approval on management compensation (“say on pay” voting) is the largest reason for the increase. “Say on pay” was credited by nearly one-half of both investors and companies as a cause for the increase in engagement. However, this issue is only part of a broader shift in dialogue. Engagement trends continue to deepen – there are conversations on more issues, discussions are more frequent, corporate directors are more involved, and companies are realizing the upsides of proactive shareholder engagement.
The study, Defining Engagement: An Update on the Evolving Relationship Between Shareholders, Directors and Executives, updates the first-ever benchmarking of engagement completed three years ago. The new report, authored by Institutional Shareholder Services Inc. (ISS) and commissioned by the Investor Responsibility Research Center Institute (IRRCi), surveyed 82 institutional investors with aggregate assets under management of more than $17 trillion, and 133 US-listed companies with an aggregate market capitalization of more than $2.3 trillion. The survey, undertaken during the fall of 2013, was supplemented with 45 in-depth interviews.
Some of the report’s key findings are as follows:
Engagement is more firmly rooted in the corporate governance landscape. Only about one-fifth of both companies (22 percent) and investors (19 percent) had not initiated any engagement in the past year. That number is down from more than one-fourth of companies (27 percent) and nearly one-half of investors (44 percent) three years ago.
The number of engagements is up. Among companies, 47 percent reported initiating more than ten engagements with investors, up from 30 percent three years ago. Among investors, 55 percent reported more than 10 engagements, up from 31 percent in the earlier study.
Corporate directors are more likely to take part in engagements today than three years ago, though such participation is still the exception. Companies reported their engagements were “usually” successful 72 percent of the time and “always” successful 11 percent of the time, compared with 44 percent of investors who said they were “usually” successful and 6 percent who said “always.” The remainder of respondents for both companies and investors said they were “sometimes” successful; no companies or investors reported that they were never successful. The results are largely consistent with the previous study, which also found success levels higher among companies.
The subject matter of engagement is varied. Both investors and companies reported frequent subject areas were executive compensation and other governance issues. Other frequent topics for investors were: social issues, environmental issues and transactions (such as mergers or acquisitions) and corporate strategy. Corporations reported frequent engagement on financial results, transactions and corporate strategy.
Both investors and companies, but particularly companies, seem to be getting more comfortable with engaging. Both investors and companies are devoting more resources to their engagement efforts.
“This is the rare instance where a regulatory reform is working as intended. No matter your views on say on pay, it has forced increased communication between public companies and shareowners – and that’s a positive outcome,” said Jon Lukomnik, IRRCi executive director. “Moreover, the conversations have expanded beyond one narrow issue. Issuers and investors now are engaging more frequently on merger and acquisition activity, environmental and social issues, board structure, director qualifications, corporate strategy and financial results.”
“Although engagement levels at an individual company will continue to fluctuate from year to year based on varied factors, evidence suggests that the upward trend will continue,” said Marc Goldstein, study author and head of engagement at ISS. “Dialogue will continue to play prominently as investors seek to mitigate risks at companies they intend to hold for the long-term, while, concurrently, issuers seek to win support for company proposals, ward off activists, and keep shareholders happily invested in the stock.”
Other findings from the report include:
A majority of survey participants reported that the number of engagements in which they had participated during the previous year has increased. Among investors, 49 percent reported that the number of engagements had increased somewhat, while 18 percent said the number of engagements had increased significantly. The remaining one-third of investors said the number of engagements had not changed, while not a single investor reported a decrease. Nearly one-half of issuers also said that the number of engagements had increased “somewhat,” while 10 percent said it had increased “significantly.” Only 2 percent of issuers reported that engagement had decreased somewhat, but no issuers reported a significant decrease.
Half of investor respondents reported that the three-year trend was for engagement to expand to cover more topics. Among issuers, 38 percent reported an expansion. Investors noted that they are engaging more on sustainability, environmental and social issues, as well as risk factors including director and management succession and industry-specific risks. Issuers noted engaging more on governance and compensation, environmental and social issues, as well as company-specific factors such as changes to the senior leadership team.
With respect to defining success, dialogue is the hallmark of a successful engagement for issuers. Some 93 percent of issuer respondents said that a constructive dialogue on specific issues of concern was sufficient to make an engagement successful; while 69 percent of issuers said that the establishment of a dialogue, even if contentious, was sufficient to constitute success. Investors were notably less likely than issuers to equate dialogue with success, although nearly two-thirds of investor respondents did say that a constructive dialogue on issues of concern would make an engagement successful. A slightly higher percentage of investors said that a commitment to engage in the future would constitute success, and 73 percent answered that additional disclosure or a change in company policies or practices would suffice to make an engagement successful.
“Clearly, engagement is not going away. Engagement is here to stay and will continue to grow. So, it seems to be in the best interest of shareowners and issuers to find ways to manage this increased engagement efficiently and productively,” Lukomnik said.
NOTE: A webinar is scheduled for Thursday, April 17, 2014, at 2 PM to review the findings. Register here.
The Investor Responsibility Research Center Institute is a not-for-profit organization headquartered in New York, NY, that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors. More information is available a the IRRCi Website
Institutional Shareholder Services Inc. (ISS), founded in 1985, is the world’s leading provider of proxy advisory and corporate governance solutions to financial market participants. ISS’ services include objective proxy research and analysis, end-to-end proxy voting and distribution solutions, turnkey securities class-action claims management, and reliable governance data and modeling tools. Clients rely on ISS’ expertise to help them make informed corporate governance decisions. For more information, please visit www.issgovernance.com.
NEW YORK, NY, September 10, 2013 – The Investor Responsibility Research Center Institute (IRRCi) today announced its third annual competition for research that examines the interaction of the real economy with investment theory. Two papers – one academic and one practitioner – each will receive the “2014 IRRC Institute Research Award” along with a $10,000 award.
Award submissions will be accepted through March 31, 2014. A blue-ribbon panel of renowned judges with broad finance and investment experience will carefully review submissions and select two winning papers. The panel includes:
Mark Anson, Chief Investment Officer, Acadia Investment Management
Collette Chilton, Chief Investment Officer, Williams College
James Hawley, Professor & Director, Elfenworks Center for Fiduciary Capitalism, Saint Mary’s College of California
Robert J. Jackson, Jr., Faculty Co-Director, Ira M. Millstein Center for Global Markets and Corporate Governance and Associate Professor of Law and Milton Handler Fellow at Columbia Law School
Erika Karp, Founder and Chief Executive Officer, Cornerstone Capital Inc.
Bill Miller, Chairman, Legg Mason Capital Management
Nell Minow, Co-founder and Board Member, GMI Ratings
Submissions may be an original work created specifically for the IRRCi Research Award, or relevant unpublished papers, or papers that have been published after March 31, 2013. Winning papers will be published by IRRCi and the Social Science Research Network. IRRCi also will distribute the winning papers to some 6,000 individuals interested in the organization’s research.
“We are pleased to again sponsor this competition,” said Jon Lukomnik, executive director of the IRRC Institute. “The 2012 and 2013 award winning papers were incredibly well received and thought-provoking for investors, academics and policymakers. That’s the standard we seek: New, innovative research that takes a critical look at the real economy in relation to portfolio & investment theory,” Lukomnik added.
Previous award winners are:
2013 Academic Award: Lucian Bebchuk of Harvard Law School, Alma Cohen of Tel-Aviv University Economics Department, and Charles Wang of Harvard Business School for Learning and the Disappearing Association between Governance and Returns. The study shows how financial markets have learned over time to appreciate the significance of certain governance provisions, and to factor these provisions into market prices and earnings forecasts.
2013 Practitioner Award: Edward Waitzer, partner at Stikeman Elliott LLP in Toronto and director of the Hennick Centre for Business and Law at York University, and to Douglas Sarro, a student at Osgoode Hall Law School forThe Public Fiduciary: Emerging Themes in Canadian Fiduciary Law for Pension Trustees. The research argues that evolving trends in fiduciary responsibility will impose public and inter-generational obligations of trustees.
2012 Academic Award: Professor Menachem Brenner and Dr. Yehuda Izhakianof New York University’s Stern School of Business for Asset Pricing and Ambiguity: Empirical Evidence, which examines how stock prices are impacted by ambiguity, the unknown probabilities that generate risk as opposed to marketplace volatility.
2012 Practitioner Award: Steve Lydenberg for research Reason, Rationality and Fiduciary Duty, which examines the ability to understand the real world implications of investment decisions rather than just short-term financial implications.
As outlined on the IRRCi web site, Modern Portfolio Theory (MPT) has dominated investment theory for a half century. This dominance has increased the focus on security selection, portfolio construction, and other financial issues rather than attention on the real economy and investing. Simultaneously, the growing importance of the private sector relative to the public sector in the real economy has increased scrutiny of private sector behavior and economic activity, leading to the rise of a ‘responsible investing’ movement. Yet, a significant focus of that scrutiny is normative. That is, the private sector entity ‘should’ act in a certain manner with minimal attention on portfolio and investment theory. Thus, the IRRC Institute Research Award encourages new research that integrates analysis of private sector behavior with investment theory.
About The Investor Responsibility Research Center Institute The IRRC Institute is a not-for-profit organization headquartered in New York, NY that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors. More information is available at the IRRCi Website
NEW YORK, NY, June 27, 2013 –Jon Lukomnik, Executive Director of Investor Responsibility Research Center Institute (IRRCi), last night was announced the winner of the 2013 International Corporate Governance Network (ICGN) Award for Excellence in Corporate Governance. He received the honor at the ICGN annual general meeting in New York, New York. Ralph Whitworth, Founder and Principal of Relational Investors, was awarded the Lifetime Achiever Award, and a special posthumous award was given to the late Michael O’Sullivan, former President of the Australian Council of Superannuation Investors.
Widely known as a thought leader in corporate governance and corporate responsibility issues for 30 years, Lukomik’s acceptance speech challenged the status quo. “Are we, as shareowners, fit for purpose?” he asked the approximately 500 ICGN delegates. “For more than a quarter of a century, I and others have called for shareholder empowerment as the antidote to the excesses of capitalism. But do we today exhibit and facilitate those same excesses? Have we morphed, in some horrible Kafkesque way, from the solution to the problem; from the hope of responsible, engaged ownership to just another short-term market participant eager to get our share without concern about the long-term health of the economy and the world?”
Lukomnik called on shareowners and organizations like the ICGN to go beyond examining individual companies to look at the financial ecosystem itself. He said, “Unless we rebuke short-term greed and act as responsible owners, we will face increased and deserved criticism, a despoiled environment, a fractured society, and the reprobation of our children. We need to replace traders with investors, and investors with owners. We need to return to investing strategies that favor real long-term growth, that improve not just our portfolios but the real economy as well.”
About The Investor Responsibility Research Center Institute The IRRC Institute is a not-for-profit organization that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors. Headquartered in New York, NY, the IRRCi funds environmental, social, and corporate governance research, as well as research on capital market context that impacts how investors and companies make decisions. More information is available at the IRRCi Website
About the International Corporate Governance Network The London-based International Corporate Governance Network (ICGN) is the leading global voice of institutional investors. Its 600 members, from 50 countries, collectively represent approximately $18 trillion (US) in funds under management. More information is available at www.icgn.org.
NEW YORK, NY, June 25, 2013 – Two seminal research papers have won the Investor Responsibility Research Center Institute’s (IRRCi) prestigious annual research competition focused on the interaction of the real economy with investment theory. One research paper highlights the financial market’s ability to learn the value of corporate governance, and the second explores evolving fiduciary responsibilities resulting from the need for long-term value creation. IRRCi Chair Linda Scott announced the 2013 prize recipients today at the Columbia University Millstein Governance Forum, Corporate Governance in the New ‘Normal’: The Impact of New Patterns of Corporate Ownership.
The practitioner award was presented to Edward Waitzer, partner at Stikeman Elliott LLP in Toronto and director of the Hennick Centre for Business and Law at York University, and to Douglas Sarro, a student at Osgoode Hall Law School. The research, The Public Fiduciary: Emerging Themes in Canadian Fiduciary Law for Pension Trustees, argues that evolving trends in fiduciary responsibility will impose public and inter-generational obligations on trustees and require that they consult with beneficiaries (or their proxies), be strategic, and collaborate with other like-situated fiduciaries. Such actions will serve the interests of beneficiaries over time better than maximizing short-term relative returns, which “has no bearing on whether such an investment will yield benefits to current or future pension beneficiaries.
“The IRRCi Award fills a vacuum by fostering critical research that integrates investment theory and the real world,” said Linda Scott, IRRCi chair. “These two winning papers will be valuable tools for investors, policymakers, academia, and other stakeholders as their findings challenge us to rethink old assumptions which may be ‘received wisdom,’ but prove false when examined objectively.” Scott presented the winners with a $10,000 award prize for each paper at the Millstein Governance Forum.
Academic award recipient Lucian Bebchuk said, “Our study contributes to resolving long-standing questions concerning the relationship between governance provisions and the value of firms. The governance provisions incorporated in the standard indices used by financial economists have an association with operating performance that has remained significant and persistent over time. Because the markets have learned to appreciate the significance of these governance provisions, abnormal profits from trading based on them were possible during the period of learning but not afterwards. Still, investors can benefit from stock price appreciation by improving the governance provisions of firms.”
The practitioner winner Edward Waitzer said, “Pension trustees face the possibility of legal challenges related to their duty of impartiality – the requirement that they balance the interests of present and future beneficiaries. This requires them to take a systemic view of markets and to collaborate with other asset managers dedicated to meeting long-term obligations. Our research shows that social expectations, which tend to be a leading indicator of the law, are rapidly evolving to reflect these ‘public’ fiduciary obligations.”
The winners of the 2012 inaugural research competition were Steve Lydenberg for research entitled, Reason, Rationality and Fiduciary Duty, and Professor Menachem Brenner and Dr.YehudaIzhakian at New York University the Stern School of Business for research entitled, Asset Pricing and Ambiguity: Empirical Evidence. More information about past winners and the award is available here.
The Investor Responsibility Research Center Institute is a not-for-profit organization headquartered in New York, NY, that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors. More information is available a the IRRCi Website
Webinar on May 3, 2013, at 2 PM ET to Review Findings
NEW YORK, NY, April 29, 2013 – Every company in the S&P 500 except one reports some form of sustainability disclosure, but fewer quantify those disclosures in terms of bottom line impacts, accordi”ng to a new report from the IRRC Institute (IRRCI) and the Sustainable Investments Institute (SI2). That report is the first to comprehensively benchmark the status of integrated reporting in the U.S.
The 285-page report analyzes sustainability disclosures on a sector-by-sector basis, and examined a total of 56,000 individual data points, across both mandated SEC filings and voluntary sustainability reports. The report examined disclosures for 2012. Looking across the entire S&P 500, the report discovered that:
499 companies made at least one sustainability related disclosure, but only 7, or 1.4% integrate financial and sustainability reporting. Zions Corporation is the only company not to include any sustainability disclosure across the various reports examined. The 7 companies which included a statement on integrated reporting were American Electric Power, Clorox, Dow Chemical, Eaton, Ingersoll Rand, Pfizer and Southwest Airlines.
Nearly three quarters (74 percent) of the companies placed a dollar figure on at least one sustainability-related initiative, though they frequently also mentioned other initiatives whose benefits/costs were not quantified.
43.4% of the companies linked executive compensation to some type of sustainability criteria.
By issue area, the study identified the following trends:
Environmental management (disclosed by 68 percent of companies)—Disclosures of capital expenditures on environmental controls were the most common. Many companies wrote about reducing overall operational risks—especially those related to employee health and safety and associated losses tied to productivity, settlements and lawsuits—as well as environmental spills and related cleanup and remediation costs, potential fines and lawsuits.
Employment (67 percent)—Most companies noted the importance of attracting and retaining talent. Many described programs to engage employees about business topics, workplace issues and job satisfaction, as well as benefits to attract and retain them, including health plans, retirement accounts, job training and continuing education. Diversity also was mentioned as a key driver of business success. Health and safety risks were common notes too, as were risks related to poor employee relations, strikes and other work stoppages.
Climate change (66 percent)—Climate change frequently was discussed in the context of potential regulation in the United States, as well as being a chief concern among key stakeholders. Many companies identified the energy efficiency of their operations and products as “low hanging fruit,” since they found investments in these areas produced returns competitive with other competing demands for capital.
Hazardous waste (63 percent)—Most companies described risks related to hazardous waste in their annual Form 10-K filings; this was the only sustainability topic discussed by a majority of companies in any one specific reporting format. Many of these disclosures related to pending litigation. Risk mitigation efforts, including environmental, health and safety management systems, also factored into disclosures for some of the companies, as did legal requirements on reporting government fines. Hazardous waste also was the area where companies were most likely to place a dollar amount on their activities.
Product formulations (54 percent)—These disclosures included product lifecycle assessments as well as the marketing of green, fair trade or other types of sustainable products. Most disclosures happened in sustainability reports.
Waste management (49 percent)—Companies primarily addressed efforts to reduce packaging and to move manufacturing operations toward producing zero landfill waste.
Water use (39 percent)—Companies viewed water principally as a cost or as a potential risk due to scarcity. Several companies with water-intensive manufacturing or other operational needs had completed or had begun to undertake assessments to review current and future demand, availability and associated operational risks.
Ethics (21 percent)—Fraud and related ethics topics were often discussed in a context of compliance with legal requirements, primarily the U.S. Foreign Corrupt Practices Act (FCPA).
Human rights (15 percent)—The issue rarest to be talked about as a business opportunity, human rights most frequently was described as a reputational risk, specifically with regard to suppliers’ use of child or forced labor or operations in conflict zones.
“As the report demonstrates, disclosure per se is commonplace today. But isolated sustainability disclosures are of limited value, both to corporate managements trying to improve the bottom line and to investors trying to gauge risks and opportunities. The challenge today is to connect the dots between sustainability initiatives and corporate earnings and then to quantify the causal relationship,” noted Jon Lukomnik, executive director of the IRRCI. “Clearly, there is a linkage. For instance, I found it intriguing that nearly half the companies consider sustainability in determining at least some portion of executive compensation. But for far too many sustainability factors, across far too many reports, quantification is lacking, leaving managers without tools and investors to wonder how carefully they are being managed.”
Report author and Si2 cofounder Peter DeSimone said, “Myriad regulations and rules on disclosing environmental contingencies, liabilities and government fines, as well as climate change and a handful of other sustainability risks are driving much of this disclosure. However, these rules are disjointed and do not offer companies or their investors a comprehensive, top-to-bottom view on how sustainability risks and opportunities are factored into corporate planning and how they are affecting financials.”
“Because companies often omitted financial estimates for the impacts of their sustainability efforts, does not mean they are not capable of doing so,” DeSimone added. “The report found numerous examples of companies offering anecdotal evidence of the links between sustainability and financial performance. In fact, the report’s data indicate that by not scaling up sustainability initiatives and coordinating them through a unified corporate strategy, many companies may be missing opportunities to improve financial results.”
The report, Integrated Financial and Sustainability Reporting in the United States, also includes a thorough review of existing regulatory requirements and an overview of current efforts to advance integrated reporting by providing frameworks and materiality guidelines, including the recent work of the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Standards Board. A full copy of the report is available at http://www.irrcinstitute.org/projects.php.
The Investor Responsibility Research Center Institute is a not-for-profit organization headquartered in New York, NY, that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors. More information is available a the IRRCi Website
The Sustainable Investments Institute (Si2) provides institutional investors with in-depth, impartial analysis of environmental and social policy shareholder resolutions filed at U.S. companies. It also is an incubator for empirical research on emerging sustainability topics and corporate and investor responsibility issues. More about Si2 is at www.siinstitute.org.
Webinar on February 20, 2013 at 1 PM ET to Review Findings; Register Here
NEW YORK, NY, February 12, 2013 – A new analysis indicates that environmental and social (E+S) shareholder proposals are gaining increased voting support from investors at U.S. public companies. From 2005-2011, average support for these proposals more than doubled, from about 10% to more than 20%. At the same time, the proportion of shareholder-sponsored resolutions on E+S matters grew by a third, from about 30% to 40%, for all proposals going to a vote. Also, the proportion of higher scoring proposals increased as indicated in the chart below.
Historical support for social/environmental proposals by threshold and overall
2005
2006
2007
2008
2009
2010
2011
>30% support
3%
9%
16%
15%
18%
27%
31%
>20% support
11%
26%
31%
30%
38%
44%
52%
>10% support
31%
39%
48%
40%
48%
52%
59%
Total average support
10%
13%
15%
14%
17%
18%
21%
The new study, Key Characteristics of Prominent Shareholder-sponsored Proposals on Environmental and Social Topics, 2005-2011, was released today by the IRRC Institute (IRRCi). Ernst & Young LLP was the primary research entity for, and the primary contributor to, the report. The full study is available here.
“Topics that command large numbers of proposals and higher votes include political spending, climate change, board diversity and energy extraction. When momentum grows behind a prominent proposal, it may be a predictor of potential changes to company practices and shifting investor priorities. In some cases, these views may become so widely shared that other stakeholders may turn to policymakers to request changes across an industry. Of course, not every topic commands broad prominence. But those that do tend to have certain shared characteristics,” Lukomnik said.
The study finds three characteristics appear to be connected with highly prominent environmental or social shareholder proposals:
Key findings of the study include:
Targeting. Proposals at companies where investors raise concerns over board performance received higher voting support. This reflects not only investor-perceived concerns over the related E+S issue, but also a perceived need for other governance-related change.
Timing. Proposals connected to current events gain prominence from their association with the headline-making events and/or related attention. Proposals also gain prominence if related to ongoing trends and developments in the regulatory, legislative and global arenas, as well as among industry-specific peers and “leading companies,” as defined by proponents.
Sponsor. Prominent proposals tend to be associated with, and supported by, two types of proponents: (1) “Socially Responsible Investors” (SRI), defined as institutions which explicitly state that they seek both investment returns and social impact, and (2) public pension funds. These investors play a leading role in shaping the shareholder proposal—and by extension, the engagement—landscape. By contrast, proposals submitted by special interest groups or individuals tend to receive lower levels of support.
In addition, proposals which call for disclosure generally received higher vote totals than those that call for a particular corporate action or change in corporate policy. By contrast, some E+S issues never seem to rise to any level of prominence. The data suggests that investors are less likely to support issues where a company credibly demonstrates it has or will sufficiently address the issue, or where the general topic may be better addressed through public policy or other non-corporate remedies.
The report offers various analyses of 24 proposal topics. Those analyses include:
Total average support: During 2005-2011, average support varied greatly for each of the proposal topics, from 3% for tobacco risks to 31% for energy extraction techniques/waste. Based on a proposal topic breakdown, half of the proposal topics have an average support of 11% or above; a quarter of the proposal topics average more than 20% support.
Growth trends in average support: A number of the highest supported proposal topics also experienced high compounded annual growth rates (CAGR) in terms of annual average support, suggesting that support builds among investors as they become familiar with the specific issue. These proposal topics include: practices at financial institutions, recycling and energy efficiency, corporate political spending/lobbying, EEO/diversity, energy extraction, renewable/sustainable energy and food and consumer safety.
Average number of proposals filed/voted: The proposal topics with the greatest the number of proposals voted appear to represent subject matter that is more “universal,” i.e., applicable to all or multiple industries. More than 60% of the total number of proposals voted are represented by only a handful of proposal topics: political spending/lobbying, human/labor rights, climate change & sustainability, EEO/diversity and animal testing/animal welfare.
The research is based on a review of the roughly 1,300 shareholder-sponsored E+S proposals, which were voted across Russell 3000 companies during 2005-2011.
The Investor Responsibility Research Center Institute is a not-for-profit organization headquartered in New York, NY, that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors. More information is available a the IRRCi Website
