Heidi Welsh, Robin Young – Wednesday, March 1, 2017
This project looks at how corporations oversee and govern money spent on corporate lobbying at the state level. It establishes a baseline for that spending by a representative sampling of the biggest U.S. publicly-listed corporations. Alongside intense public and investor attention about corporate involvement in elections, institutional investors and others have increasingly called for more transparency about corporate lobbying expenditures designed to influence legislation and regulation. Since 2014, more than half the shareholder proposals at public companies which concern political activity have included requests for actions related to lobbying. Indeed, more than 40 percent of the shareholder proposals about corporate political activity disclosure have focused specifically on lobbying, rather than campaign contributions. While considerable information is available about federal political spending, including lobbying, data are not available for all the states. Even where disclosure requirements do exist they are mixed in their comprehensiveness and utility. Disclosure requirements are missing entirely in 22 states. This report explores what is known now, under current reporting rules, so that investors and the public can contemplate whether reforms are needed and if a more precise voluntary corporate lobbying disclosure code makes sense.
NEW STUDY PROVIDES COMPREHENSIVE, HARD DATA ON HOT TOPIC OF CORPORATE BOARD REFRESHMENT
S&P 1500 Benchmark Analysis Finds Progress on Board Renewal, But That Investor Concerns on Tenure and Diversity Are Warranted
Webinar on Thursday, February 23rd at 1 PM ET to Review Findings
NEW YORK, NY (January 24, 2017) – The intense focus that investors and others have placed on board refreshment has begun to pay off. But, structural trends and governance practices that encourage longer tenures could slow, or even reverse this progress over the next decade, according to a new study. Board Refreshment Trends at S&P 1500 Firms: 2008 To 2016, commissioned by the Investor Responsibility Research Center Institute (IRRCi) and conducted by Institutional Shareholder Services Inc. (ISS), shows that boards are adding fresh faces following a multi-year period of board roster stagnation in the wake of the financial crisis. Nearly one out of every ten directors was new to their boards in 2016. At a corporate level, more than one-half of S&P 1500 boards added one or more new directors to their rosters in 2016.
Download the study here. Register for the webinar here. Read the Financial Times coverage of the report here.
As a result, the average tenure of an S&P 1500 board member declined to 8.7 years in 2016 from nine years three years earlier, although median tenure held steady at seven years. However, that recent surge in renewal obscures some longer-term trends towards longer-serving and older directors. Directors with at least ten years of board service now occupy an eye-catching 38 percent of board seats and about half of those are held by directors with 15 or more years of tenure. Also, directors in their seventies and eighties have increased their share of directorships to more than 20 percent of all directorships; the average director age rose two years for the study period, from 60.5 years in 2008 to 62.5 years 2016; and the proportion of directors aged less than 50 declined, despite much corporate, media and investor discussion of the need for millennial- and technology-focused directors.
The pace of change with respect to diversity in the boardroom has been sluggish. As of 2016, women held only 17.8 percent of S&P 1500 board seats, and minority directors held slightly more than ten percent of board seats. Those directorships are far from uniformly distributed. For example, larger cap firms in the S&P 500 are likely to have more than one minority director, while the typical headcount of minority directors at small cap companies in the S&P 600 is zero. One positive change with respect to diversity was a surge in refreshment in 2016. This included 24.4 percent female and 13 percent ethnic or racial minority director nominees, more than the historic norms. “Who sits around the board table matters,” said Jon Lukomnik, IRRCi executive director. “The directors of a company are responsible for selecting the CEO, the corporate strategy and the capital structure. So it’s no wonder that board composition and refreshment are among the hottest topics for investors and issuers. The good news is that boards seem to be listening and increased refreshment recently, but it’s off a very sluggish trend line.”
“This report provides hard data – not just about age, tenure, and refreshment – but also about the effectiveness of mechanisms such as age limits, tenure limits and board evaluations. That is valuable. For example, it may be intuitive that boards that do not perform board evaluations are older and staler than other companies – and this report proves it,” Lukomnik explained.
“Our institutional investor clients put their faith in corporate directors to oversee their long-term investments, so assessing refreshment is critical to their oversight of boards,” said ISS Head of Strategic Research and Studies Patrick McGurn. “While there is no quick fix, we hope that benchmarking refreshment practices will fuel constructive engagement on the topic between shareholders and directors.”
Looking forward, S&P 1500 boards face a potential explosion in the ranks of directors with double-digit tenures as these large recent incoming classes—led by nominees in the fifties—could serve for decades and limit turnover. Rising ‘mandatory’ retirement ages (75 appears to be the new 72), the rarity of term/tenure limits (found at less than five percent of study firms), opaque board/director evaluations and the widespread retention of experienced directors to serve on key board committees all signs point toward a chronic boardroom logjam in a few years. Notably, investors may tacitly encourage such ‘staying and greying’ by rarely addressing ‘excessive’ tenure in their voting policies or when they assess nominees’ ‘independence.’” The 145-page study can be considered the most comprehensive examination of board composition at public companies in the U.S.
IRRCi and ISS will host a webinar to review the findings on Thursday, February 23, 2017, at 1:00 PM ET. Register here. The full study is available here. The report examines three key areas:
Demographic trends in the boardroom, including tenure, age, gender and ethnicity/race.
The impact of the three most common refreshment tools—retirement ages, term limits, and boardroom evaluations.
Structural issues that appear to have a significant impact on board refreshment rates including director independence, the growing importance of committees and board size shifts.
Additional key findings include:
Board tenure trends may reverse. Average boardroom tenure steadily rose from 8.4 years in 2008 to a peak of nine years in 2013 before slowly reversing course from 2014 to 2016. As a result, average director tenure at S&P 1500 firms stands at a level—8.7 years—last recorded in 2010. However, structural issues—especially rising mandatory retirement ages—could cause tenures to climb again. The report notes that “75 is the new 72,” as a 75-year age limit appears to be replacing 72 years as the new norm.
There’s a bumper crop of new directors in recent years. The pace of adding new directors to S&P 1500 boards accelerated in the latter half of the 2008-2016 study period, as the focus on “refreshment” grew. New nominees claimed less than six percent of total directorships prior to 2012, but their prevalence steadily rose over the remainder of the study period. By 2016, 9.5 percent of directors serving on S&P 1500 boards were new.
Board diversity has been sluggishly increasing. The share of S&P 1500 board seats held by women crept up to 17.8 percent in 2016 from 11.9 percent in 2008. Minority directors now fill slightly more than ten percent of the total directorships at S&P 1500 firms, but the typical minority director headcount at small cap firms is zero.
Boards have limited tools to drive refreshment. The three primary refreshment mechanisms focus on an individual director’s age (retirement policies), length of service (term limits) or absolute or relative performance (board evaluations). Each of the popular refreshment mechanisms has benefits and potential costs. Retirement ages and term limits force periodic refreshment by creating vacancies, but both may cause some directors to leave boards at a time when they are still highly-effective contributors. Reliance on these mechanical devices may allow some less productive directors to remain on boards until they reach the term or age limit. Evaluations aim to assess directors’ contributions and competence in real time, but may be ineffective in fostering the replenishment of directors’ skill sets in the absence of true boardroom succession planning.
Board independence levels continue to rise despite the growing ranks of directors with double-digit tenures. Independence levels at companies in the S&P 1500 continue to rise. The proportion of independent directors has increased by almost five percentage points to 81.5 percent over the study period.
The study examined the boardroom attributes for firms in the S&P 1500 Composite Index as of January 1, 2016, and includes director data for index constituents with annual general meeting dates through to October 12, 2016.
About IRRCiThe 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 at the IRRCi Website.
About ISS Founded in 1985 as Institutional Shareholder Services Inc., ISS is the world’s leading provider of corporate governance and responsible investment solutions for asset owners, asset managers, hedge funds, and asset service providers. ISS’ solutions include: objective governance research and recommendations; SRI data, analytics, and research; end-to-end proxy voting and distribution solutions; turnkey securities class-action claims management (provided by Securities Class Action Services, LLC); and reliable global 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.
Media Contacts: Kelly Kenneally Investor Responsibility Research Center Institute +1.202.256.1445 kelly@irrcinstitute.org Subodh Mishra Institutional Shareholder Services +1.301.556.0304 subodh.mishra@issgovernance.com
Institutional Shareholder Services – Tuesday, January 24, 2017
Board Refreshment Trends at S&P 1500 Firms: 2008 To 2016, commissioned by the Investor Responsibility Research Center Institute (IRRCi) and conducted by Institutional Shareholder Services Inc. (ISS), shows that boards are adding fresh faces following a multi-year period of board roster stagnation in the wake of the financial crisis. Nearly one out of every ten directors was new to their boards in 2016. At a corporate level, more than one-half of S&P 1500 boards added one or more new directors to their rosters in 2016.
Honorable Mention Winners Offer Insight on CEO Pay Misalignment and Value of Proxy Access
NEW YORK, NY, December 7, 2016 – Two research papers that have the potential to reshape investor thinking on the detrimental impacts of short-term investing have won the Investor Responsibility Research Center Institute (IRRCi) annual investor research competition. The winners will be presented today at the Columbia Law School’s 2016 Millstein Governance Forum, Governance, Leadership and the Future of the Corporation, in New York City. In addition, each winning research team will be presented with a $10,000 award. “The two winning research papers get at the heart of a key issue facing the economy, investors and companies – short-termism,” said Jon Lukomnik, IRRCi executive director. “Both research papers offer important contributions to the global debate on the need for businesses to maintain a long horizon focus in a short-term world, as well as the benefits of such a long-term focus for investors and companies alike. The two Honorable Mention winning papers also are significant in that they find that chief executive officer (CEO) pay is not linked to performance, and that greater shareholder input into corporate boards via increased proxy access increases company value,” Lukomnik explained.
The winning academic research, “Does a Long-Term Orientation Create Value? Evidence from a Regression Discontinuity,” is co-authored by Caroline Flammer, Assistant Professor of Strategy and Innovation at Boston University, and Pratima (Tima) Bansal, Professor of General Management and Sustainability at the University of Western University (London, Ontario). The research shows that providing long-term incentives to executives ― in the form of long-term executive compensation ― leads to increased long-horizon investments and higher business performance. Download the research here.
“The research results clearly show that corporate short-termism is hampering business success. Firms that adopt long-term executive compensation policies show a significant increase in stock market performance and higher profits in the long run,” Flammer said. “These companies also increase their engagement in innovation and corporate social responsibility. Our research findings suggest that absent long-term incentives, executives tend to underinvest in long-view projects, which is detrimental to companies, investors, society and the environment. Moreover, the findings have relevant policy implications in terms of informing executive compensation reforms currently taking place in the U.K., the U.S., and other countries,” Flammer explained.
The winning practitioner research paper, “The ‘Science’ and ‘Art’ of High Quality Investing” is co-authored by Dan Hanson, partner with Jarislowsky Fraser Global Investment Management and lecturer at UC Berkeley Haas, and Rohan Dhanuka, who previously was with the firm. The research examines the issue of “quality”. It finds that investors with a short-term focus tend to undervalue intangible assets — the kind that don’t show up on corporate balance sheets, such as the payoffs from corporate R&D spending, advertising and patent citations. Alternatively, investors and managers who take a long-term view have an opportunity to identify opportunities missed or underpriced by a world focused on the here and now. Download the research here. “It’s not just Wall Street that chases the short-term. For all the talk about ‘long-termism,’ quantitative finance still often relies on short-term mean-reversion studies. We brought the long-term stewardship perspective that we have as investors to a study of quality and environmental, social and governance (ESG) issues, and we show that—if done right—there can be alpha in a high quality, long-term, ESG approach,” said award winner Hanson. “We are honored to be recognized by IRRCi, and we are pleased to donate prize proceeds to the Global Initiative for Sustainability Ratings (GISR) and Sustainable Accounting Standards Board (SASB), both pioneers in market-driven approaches to improving ESG disclosures.”
Again this year, the submissions were of such high quality that the judges selected two papers for Honorable Mention recognition.
The papers receiving Honorable Mention recognition are:
Are CEOs Paid for Performance? Evaluating the Effectiveness of Equity Incentives by Ric Marshall and Linda-Eling Lee, both with MSCI. The paper examines whether CEO pay reflects long-term stock performance, and finds that it does not. It finds that companies that awarded CEOs higher pay incentive levels had below-median returns based on a sample of 429 large-cap U.S. companies observed from 2005 to 2015. On a 10-year cumulative basis, total shareholder returns of those companies with total summary pay below their sector median outperformed those companies where pay exceeded the sector median.
On Enhancing Shareholder Control: A (Dodd-) Frank Assessment of Proxy Access by Stuart L. Gillan with the University of Georgia, and Jonathan B. Cohn and Jay C. Hartzell, both with the University of Texas at Austin. The paper examines a key issue in corporate finance – the optimal division of control between shareholders and management. The research indicates that reforms allowing greater shareholder input via increased proxy access are associated with increases in firm value for those firms in which intervention is needed and where shareholders are more likely to seek board access.
The following panel of respected judges reviewed the submissions and selected the winning papers and honorable mentions:
Mark Anson, Chief Investment Officer, Commonfund
Robert Dannhauser, Head of Capital Markets Policy, CFA Institute
James Hawley, Professor and Director of the Elfenworks Center for Fiduciary Capitalism at St. Mary’s College
Robert J. Jackson, Jr., Professor of Law and Director, Program on Corporate Law and Policy at Columbia Law School
Erika Karp, Founder, CEO and Chair of the Board of Cornerstone Capital
Nell Minow, Governance Expert and Huffington Post Columnist
Biographies of the judges are available here. Information on past winners is available here. More information about the award is available here. Read the full body of IRRCi research here.
The IRRC 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.
Caroline Flammer, Pratima Bansal – Wednesday, December 7, 2016
In this paper, we theorize and empirically investigate how a long-term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives’ long-term incentives. Specifically, we examine shareholder proposals on long-term executive compensation that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of long-term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to i) an increase in firm value and operating performance―suggesting that a long-term orientation is beneficial to companies―and ii) an increase in firms’ investments in long-term strategies such as innovation and stakeholder relationships. Overall, our results are consistent with a “time-based” agency conflict between shareholders and managers.
Dan Hanson, Rohan Dhanuka – Wednesday, December 7, 2016
In this paper we explore the concept of “high quality investing.” First, we review the “science” of approaching quality via nancial statement and market performance measures. We review some widely known measures. We note that many of those widely known measures have been studied from an academic rather than practitioner perspective. Secondly, we further examine those widely used measures from the perspective of the long-term investor in today’s market. We test for the persistence, and long-term performance implications, of these “scienti c” measures. Thirdly, we review the “art” of approaching quality via qualitative measures including culture and ESG metrics. Finally, we propose that a combination of “science” and “art” is a promising approach for practitioners and researchers alike.
