Results Indicate Progress, But Much Room for Improvement
Few Corporate Boards Have Relevant Expertise, CEO Compensation Rarely Linked to Food Safety, Food Companies Often Lack Disclosure Consistency
Webinar on Tuesday, August 2nd at 2 PM ET to Review Findings
NEW YORK, NY, July 12, 2016 – Amid growing concerns and incidents related to food safety, a new report indicates that progress has been made among many companies, but there are critical risks and opportunities as the industry undergoes a large-scale, rapid transformation. The report, Food Safety: In a State of Transformation, was conducted by Cornerstone Capital Group (Cornerstone) and commissioned by the Investor Responsibility Research Center Institute (IRRCi). It examines food safety of some 60 publicly traded U.S. companies, as well as 30 companies that offer food safety solutions. From a corporate governance standpoint, the report shows there are significant food safety disclosure differences among the various companies. The research also indicates that executive compensation rarely is linked to food safety goals, and that there currently is little food safety expertise present on most food company boards.
A webinar is scheduled for Tuesday, August 2, 2016, at 2 PM ET to review the findings and respond to questions. Register at no charge here.
“We commissioned this research because food safety-related recalls represent a risk for investors, as evidenced by recent high-profile contamination issues facing companies like Chipotle,” said Jon Lukomnik, IRRCi executive director. “There are increasingly complex and global supply chains and changing patterns of eating out and buying ready-made meals. As a result, companies are under pressure to evolve and meet these new demands. This report enables investors to gauge which companies are proactive and at the forefront of food safety best practices, testing and technology – and which are lagging.” “This kind of systematic analysis of pivotal issues facing an entire sector of the global economy is a matter of understanding excellence, or lack thereof, in corporate governance. It’s also a matter of extraordinary importance to gaining predictive insight into long-term investment results,” said Erika Karp, Cornerstone founder and chief executive officer. “Our research reveals that a company’s food safety performance cannot be defined by a single factor. Instead, investors must consider a complex series of elements and we provide a framework for them to do so,” said Michael Shavel, report co-author and global thematic analyst at Cornerstone. The research highlights three areas of food safety innovation including 1) food testing and analysis; 2) supply chain technology; and 3) automation and robotics. Importantly, the analysis identifies five emerging trends that present food safety opportunities and challenges:
There is a growing preference for organic, antibiotic- and preservative-free, and locally sourced food in the developed world. As these products capture market share, they require food safety practices to adapt. For instance, Cargill says that it has been asked by some customers to remove additives to processed meat despite the fact that those additives inhibit Listeria growth. Also, the demand for raw/unpasteurized milk has grown, but raw milk products are 150 times more likely to cause health issues than their pasteurized counterparts.
The shift toward two-earner families and busier lifestyles in developed markets and some developing markets means that fewer meals are being cooked at home. Spending on pre-packaged and ready-to-eat foodstuffs is increasing. However, this category of food is most affected by recalls. Ready-to-eat meals require complex production processes with numerous ingredients from various suppliers coming together on a “just in time” basis. Consumers are also allocating a larger share of their food budget to “eating out” instead of at home.
Consumers are becoming increasingly aware of food safety issues, and are demanding increased transparency from companies. In both developed and developing markets, a number of high-profile food safety incidents have led to heightened consumer awareness. The proliferation of mobile devices and social media means that the ability of companies to control the information around a food safety incident is greatly diminished.
Rising incomes in developing markets is driving growth in demand for animal protein and dairy. These products are resource-intensive and will put additional pressure on local supply chains. One implication is that bacteria found in animals may potentially cause more foodborne illness. Moreover, increasing global demand for animal protein has led to the rise of certain farming practices, which may more easily allow the transmission of foodborne parasites.
As populations in developed markets continue to age, more people will be at risk for foodborne diseases. Due to weaker immune systems, infants and older adults are particularly vulnerable to illnesses, including those caused by foodborne pathogens. For many pathogens, incident rates and/or the probability of severe outcomes tend to increase with age.
Regulation is also changing the food safety landscape, at least in the U.S. The passage of the Food Safety Modernization Act in 2011 means that government can be more proactive in mandating recalls and that companies have reoriented their food safety measures to emphasize prevention, rather than monitoring and reaction. Download the full study here. Register for the webinar at no charge here. Funded by IRRCi, the report is authored by Michael Shavel, Sebastian Vanderzeil and Dehao Zheng, all with Cornerstone Capital Group.
The Investor Responsibility Research Center Institute is a nonprofit research organization that funds academic and practitioner research enabling 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
Cornerstone Capital Group is a financial services firm that applies the principles of sustainable finance across the capital markets enhancing investment processes through transparency and collaboration. Cornerstone works with asset owners, corporations and financial institutions to promote new research in the field of Environmental, Social and Governance analysis and facilitates capital introductions for organizations around the world. More information is available here.
Dehao Zheng, Michael Shavel, Sebastian Vanderzeil – Tuesday, July 12, 2016
A number of highly publicized food scares have swept through the global food chain in recent years. Headlines include the outbreaks of E. coli and norovirus at Chipotle, Salmonella linked to Foster Farms poultry, melamine adulterated infant formula in China, and Salmonella-contaminated peanut butter leading to the imprisonment of the former CEO of Peanut Corporation of America. These events highlight vulnerabilities in the food safety chain that present opportunities and risks for investors. To this end, the food industry is undergoing a transformation as it addresses food safety risks in an increasingly global, complex supply chain. Food safety encompasses the practices and conditions promoted across a food supply chain with the intention of ensuring food quality and preventing contamination and foodborne illness. In this report, we examine major food safety events that have affected publicly traded US companies over the last 25 years. We identify the behavioral/demographic, regulatory, and technological factors acting as catalysts for the food industry’s transition towards increasingly proactive and innovative food safety strategies. To assess the opportunities and risks associated with this transition, we evaluate the food safety practices of nearly 60 companies throughout the food supply chain. Data is aggregated at each level of the supply chain and key findings are discussed. We highlight three areas of food safety innovation for investors wishing to gain exposure to the food safety theme: 1) Food testing and analysis; 2) supply chain technology; and 3) automation and robotics. We present a list of 30+ companies that offer food safety solutions and rate their level of exposure. We also offer industry-level observations that may lead to additional avenues of inquiry.
Two Winners Will Receive $10,000 and Present Research at the 2106 Columbia University Millstein Center for Global Markets and Corporate Governance Forum
Practitioner and Academic Submissions Accepted Until October 7, 2016
New York, NY, June 9, 2016 – The Investor Responsibility Research Center Institute (IRRCi) today opened its fifth annual competition for research that examines the interaction between the real economy and investment theory. Practitioners and academics are invited to submit research papers by October 7, 2016, for consideration by a blue-ribbon panel of judges with deep finance and investment experience. Two research papers – one academic and one practitioner – each will receive the 2016 IRRCi Research Award along with a $10,000 award. The winning papers will also be presented at the December 7, 2016, forum of the Millstein Center for Global Markets and Corporate Ownership at Columbia University in New York, NY. The panel of world-class judges includes:
Mark Anson, Chief Investment Officer, The Commonfund
Robert Dannhauser, Head of Capital Markets Policy, CFA Institute
James Hawley, Professor & Director, Elfenworks Center for Fiduciary Capitalism, Saint Mary’s College of California
Robert 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. “In its fifth year, the IRRCi research competition continues to be a prominent award for academic and business leaders who offer original thinking on complex investment issues,” said Jon Lukomnik, IRRCi executive director. “For example, last year’s two winning papers were selected because they offer fresh ideas on two key issues confronting investors – climate change and the fund flow to index funds. The two research tested conventional wisdom and, as a result, investors are re-thinking their strategies,” he said.
Submissions may be an original work created specifically for the IRRCi Research Award, or relevant unpublished papers, or papers that have been published after July 1, 2015.
Winning papers will be presented at the Columbia University Millstein Center’s conference, published by the IRRCi on its website, and distributed to some 6,000 individuals interested in the organization’s research.
As noted on the IRRCi web site, Modern Portfolio Theory (MPT) has dominated investment theory for a half century. MPT focuses on security selection, portfolio construction, and other financial issues rather than the intersection of 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.
The IRRCi Research Award encourages new research that analyzes how investments interact with real world economic activity. More information regarding the award process, submission guidelines and calendar is available here, along with the award submission form and Frequently Asked Questions.
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.
NEW YORK, NY, April 14, 2016 – Utilities are taking widely varied paths to meet climate change business challenges – from new approaches that will guarantee reliable energy supplies to litigation to protect the status quo. These findings are contained in a new report, The Top 25 U.S. Electric Utilities: Climate Change, Corporate Governance and Politics, from the Investor Responsibility Research Center Institute (IRRCi) and the Sustainable Investments Institute (SI2). Download the full study here. “Whatever your opinion of climate change, it is a reality that regulation and societal pressure is changing the business landscape for utilities,” said Jon Lukomnik, IRRCi executive director. “Some utilities are taking proactive approaches to ensure ample and dependable energy supplies that reduce regulatory and legal risk. But other utilities are digging in their heels while looking backwards to maintain business as usual. Rather than changing the energy mix or seeking innovation that can reduce capital costs, some utilities are deploying their resources toward court battles and political influence.”
Lukomnik added, “This report offers a new multi-perspective framework to help stakeholders understand each utility’s climate change business strategies. Investors, in particular, can use this report to better evaluate which companies are deploying forward-thinking approaches and better equipping themselves for the business challenges ahead by improving their board expertise and management incentives.” “The tension between long-term planning needs and short-term profit taking comes out clearly in the report,” said report lead author Sara E. Murphy. “We’ve tried to connect the dots between the most pressing issues on which investors say they want action—climate change and corporate political activity transparency—for a sector that will be hard hit if it doesn’t adapt.”
This comprehensive, 117-page study offers a new framework as outlined below with 12 key metrics for investors, companies and others to measure the nation’s 25 largest public utilities’ climate change orientation.
Energy Mix: Among the 20 companies that generate their own power, six rely on coal for more than 75 percent of their fuel cost including AES, Ni-Source, DTE Energy, Ameren, CMS Energy and American Electric Power. Conversely, coal makes up none of the fuel mix for two companies—PG&E and Sempra Energy.
Advanced Metering: Advanced Metering Infrastructure enables two-way communication between utilities and customers, helping to reduce energy demand. Leaders using this technology for grid modernization are CenterPoint Energy, Edison International, PG&E and Sempra Energy, Duke Energy, Consolidated Edison and PPL in Pennsylvania and Florida.
Return on Capital Relative to Capital Expenditures (RoC:CapEx): The report explores how effectively utilities deploy capital while considering climate risks. CenterPoint Energy, Eversource Energy and DTE Energy have the strongest ratios, while Dominion Resources, Duke Energy, Exelon, FirstEnergy, NRG Energy and Southern have the weakest ratios.
Stranded Carbon Asset Risk: Stranded carbon asset risk measures the potential that a utility’s assets can never be used if global warming is to be limited to two degrees Celsius. Data available for 12 of the 25 companies show that AEP, NRG Energy, Ameren and DTE Energy face the highest stranded carbon risk. Duke Energy, FirstEnergy, Southern and PPL have the lowest risk.
Emissions Intensity: This shows each company’s contribution to the U.S. carbon footprint. The most carbon-intensive utilities are NiSource, NRG Energy, CMS Energy, Xcel Energy, DTE Energy, American Electric Power and AES. Those with the lowest intensity are PG&E and Exelon.
Emissions Transparency: While required emissions disclosure rules cover all 25 utilities, 15 also provide more extensive, voluntary reporting.
Potential Legal Liability: The Clean Power Plan, the primary vehicle through which the United States has pledged to implement the Paris climate accord, could impose financial penalties on greenhouse gas emitters. According to a Michigan Technical University analysis, Southern, NextEra Energy and AEP face the biggest potential liability. PG&E, Exelon and PSEG have the least risk.
Board Climate Change Oversight and Expertise: Among the utilities examined in this study, three firms—Ameren, Exelon and PG&E— currently have specifically articulated climate change board oversight responsibilities.
Environment and Climate Change Management Incentives: Few compensation incentives concern the environment and/or climate change. When these issues are mentioned in incentive discussions, there is a heavy emphasis on legal compliance, but little else. An exception is Xcel Energy, which has stronger and more specific disclosures on the subject. When these issues are mentioned in incentive discussions, there is a heavy emphasis on legal compliance, but little else. An exception is Xcel Energy, which has stronger and more specific disclosures on the subject.
Political Activity Spending and Public Policy Position Disclosure: The 25 utilities in the study have together spent more than $400 million on federal lobbying and in federal and state elections in the last five years. NRG Energy, FirstEnergy. Southern and AEP are among the highest spenders. On the low end of the intensity scale are AES, Consolidated Edison, ONEOK and PPL.
Corporate Political Activity Governance: The Center for Political Accountability’s Index shows that Edison International, Exelon, PG&E, Ameren and Entergy score highly, while CenterPoint Energy, AES, NRG Energy, FirstEnergy, Eversource Energy, ONEOK, NextEra Energy and NiSource score poorly.
Litigation: A number of utilities are taking legal stands for or against the Clean Power Plan. NextEra Energy and PG&E stand out for their legal support of the CPP, while Southern is the most active company opposing the CPP. AEP, Ameren, DTE Energy, Duke Energy, Entergy, NRG Energy and PPL are also active in their opposition to the CPP.
Download the full study here. See below for state specific findings:
The Investor Responsibility Research Center Institute is a nonprofit research organization that funds academic and practitioner research enabling 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
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.
Sustainable Investments Institute – Wednesday, April 13, 2016
This study examines in depth the current climate orientation of the boards of the 25 largest U.S. investor owned utilities by revenue. It aims to help investors and others evaluate these boards. It also compares and contrasts the utilities and their boards using a variety of metrics designed by the Sustainable Investments Institute (Si2) with input from investors, governance experts and utility economists. The resulting body of data can be used by investors who want to assess how the sector is responding to the challenges posed by climate change and a changing regulatory landscape, with an eye to how these changes will affect portfolio companies. It also allows companies to compare their board members’ orientation to peers. The project consolidates and integrates data derived from studies of company sustainability reporting, corporate political activity and lobbying expenditures and the extent of climate risk disclosure and performance.
NEW YORK, NY (March 17, 2016) – Controlled companies generally underperformed non-controlled firms over all periods reviewed in terms of total shareholder returns, revenue growth, and return on equity, according to a new study. The study also finds that average chief executive (CEO) pay is significantly higher at controlled companies with multi-class stock structures: three times higher than that at single-class stock controlled firms and more than 40 percent higher than average CEO pay at non-controlled firms. In addition, director tenure typically runs longer, board refreshment is generally slower, and boardrooms are less diverse at controlled companies. The study, Controlled Companies in the Standard & Poor’s 1500: A Follow-up Review of Performance & Risk, was commissioned and funded by the Investor Responsibility Research Center Institute (IRRCi) and conducted by Institutional Shareholder Services Inc. (ISS).
IRRCi will host a webinar to review the findings on Thursday, March 31, 2016, at 1 PM ET. Register here. The full study is available here.
Most U.S. companies feature “one share, one vote” governance provisions. That creates voting power directly proportional to an investor’s capital at risk. For some companies, however, voting power is concentrated through the use of different share classes to allow insiders or founders to control board of director elections. Similarly, at other companies, a single shareowner or group owns so much of the company’s single class of stock that it effectively controls the company. The study results challenge the notion that controlled companies and companies with multi-class voting structures automatically benefit a company and its shareowners over the long term.
This new study follows up on a 2012 study that is available here. “While the findings are directional conclusions and there are exceptions, the results challenge claims by advocates of controlled firms that such structures ultimately benefit all shareholders by insulating management from market pressures,” said Jon Lukomnik, IRRCi executive director. “Some controlled companies do function as benevolent dictatorships, but for other controlled companies, the adage about the corrupting qualities of absolute power rings true. In these cases, self-dealing, poor strategic planning and ossified boards result in underperforming companies.”
“But the real issue is that when such behavior does occur, external shareowners have little recourse, particularly at controlled companies that feature multi-class governance. The upshot for outside investors in controlled companies is to understand both the structures of the company and the motivation and history of the controlling owner,” Lukomnik added.
“Given the diminished pervasiveness of poison pills and other traditional defenses for corporate control, unequal voting rights have been transformed from a seldom-seen defense to one of the most effective ways to cement control,” said Edward Kamonjoh, study author and U.S. head of strategic research and analysis at ISS. “The findings of our study show that while the prevalence of unequal voting structures has declined over the past three years, the impact of those structures on shareholders remains problematic.”
The findings show that not all controlled firms are created equal. At least in the United States, the control mechanism matters. Controlled companies featuring multiple classes of stock generally underperformed on a broad swath of financial metrics over the long term, are perceived as having more financial risk and offer fewer rights to unaffiliated shareholders than dispersedly owned firms. By contrast, firms in which the controlling party’s voting power and economic power are aligned outperform other controlled companies in some respects and offer unaffiliated shareholders comparatively more rights.
Key findings of the study are summarized below:
Controlled Company Prevalence Drops: The number of controlled firms in the S&P 1500 fell by approximately 8 percent from 2012 to 2015.
Controlled Companies Concentrated in Three Sectors: Nearly 70 percent of all controlled companies cluster in three sectors: Consumer Discretionary (40 percent), Industrials (16.2 percent) and Consumer Staples (12.4 percent).
Controlled Companies Generally Tend To Underperform on Metrics That Affect Un-affiliated Shareholders: Controlled companies underperformed non-controlled firms over all periods reviewed (one-, three-, five- and 10-year periods) with respect to total shareholder returns, revenue growth, return on equity, and dividend payout ratios. However, controlled companies outperformed non-controlled firms with respect to return on assets. Results for returns on invested capital were mixed: controlled companies outperformed marginally (by less than a percentage point) for most time periods, but underperformed over the 10-year period.
Related Party Dealings at Controlled Companies Remain Elevated: The frequency of related-party transactions (RPTs) at controlled firms declined over the study period but continues to exceed the incidence at non-controlled firms.
Director Tenure Runs Longer at Controlled Firms: The proportion of controlled firms where board members averaged at least 15 years of board service is more than 17 percentage points higher than at non-controlled firms. Almost 80 percent of controlled firms have no new nominees on their board – roughly 10 percentage points higher than at non-controlled companies.
Controlled Firms’ Boardrooms Are Less Diverse: Women and minority directors are less common at controlled companies compared with non-controlled firms. The proportion of controlled firms with no female representation on their boards is almost 4 percentage points higher than at non-controlled firms, and the percentage of firms with two women on the board is almost 7 percentage points lower. The prevalence of controlled firms with no minority representation on the board is 20 percentage points higher than at non-controlled companies, and the proportion of firms with two minorities on the board is lower by almost 11 percentage points.
Average CEO Pay Is Significantly Higher at Controlled Companies with Multi-class Stock Structures: Average CEO pay at multi-class controlled firms outstrips that at both non-controlled companies and controlled entities with a single class of stock. Average CEO pay at controlled companies with a multi-class capital structure is three times higher (by some $7.2 million) than that at single-class stock controlled firms and is more than 40 percent ($3.3 million) higher than average CEO pay at non-controlled firms.
The study examines firms in the S&P 1500 Composite Index as of July 31, 2015. Other portions of the study include a survey of institutional investors on questions germane to controlled entities and feedback from a number of institutional investors and investment banks to provide context for the study’s findings.
About IRRCi 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 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.
