IRRCi, IRRCi Research
IRRC Institute, ISS – Thursday, March 17, 2016
All controlled companies are not created equal. At some companies, founders and their families, or other large investors simply own large blocks of their companies’ sole class of voting stock. At these firms, voting power remains directly proportionate to the investor’s at-risk capital. More often, controlling shareholders use multi-class capital structures to concentrate voting power without commensurate capital commitments or risk of loss. Supporters of these multi-class structures argue that control of a firm’s voting power enables management teams to minimize the impact of short-term market pressure, so as to focus on long-term business prospects. They promise higher returns over time in exchange for public shareholders’ loss of control.
IRRCi, IRRCi Research
Annalisa Barrett – Monday, February 29, 2016
Companies with successful chief executive officer (CEO) transitions were far more likely to have provided shareowners with more disclosure about their CEO succession plans, according to a new study released today by the Investor Responsibility Research Center Institute (IRRCi). Unfortunately, that is not usually the case, as the report also found that nearly a quarter of companies that changed CEOs in 2012 did not disclose anything about succession planning in the three years prior to the change. Moreover, the disclosures that were made were often inadequate, failing to even mention basic information such as which board committee is responsible for succession planning.
IRRCi, IRRCi Research
Monday, February 29, 2016
Webinar on Thurs. March 3rd at 4PM ET to Review Findings, Respond to Questions
NEW YORK, NY, February 25, 2016 – Companies with successful chief executive officer (CEO) transitions were far more likely to have provided shareowners with more disclosure about their CEO succession plans, according to a new study released today by the Investor Responsibility Research Center Institute (IRRCi). Unfortunately, that is not usually the case, as the report also found that nearly a quarter of companies that changed CEOs in 2012 did not disclose anything about succession planning in the three years prior to the change. Moreover, the disclosures that were made were often inadequate, failing to even mention basic information such as which board committee is responsible for succession planning.
The new study, Does CEO Succession Planning Disclosure Matter, was conducted by Annalisa Barrett, founder and CEO of Board Governance Research LLC. The study examined CEO transitions taking place in 2012, allowing for an analysis of proxy statement disclosures made in the three years prior to a transition and the outcome of a CEO change in the years following the transition. The study is available here. A webinar will be held on Thursday, March 3, 2016, at 4 PM ET to review the findings and respond to questions. Register at no charge here. “The lack of disclosure of a process for CEO succession planning by nearly a quarter of companies is fairly shocking,” said Jon Lukomnik, IRRCi executive director. “Choosing a CEO is one of the core responsibilities of corporate directors. One would think directors would not only want an appropriate succession planning process in place, but also would see the value of disclosing that a process exists.”
Some key findings of the study are as follow:
- Corporate disclosure regarding CEO succession planning is lacking. Nearly a quarter (24 percent) of the companies studied provided no disclosure regarding succession planning during the two years prior to the 2012 CEO change.
- Even when disclosure was provided, it did not include the information sought by investors. Only two percent of companies (2 percent) described the board of directors’ process to identify CEO candidates, or how the directors are exposed to high-potential executives within the company. Only ten percent noted how often the board reviewed succession planning. And only about half (52 percent) of companies even disclosed which board committee had responsibility for CEO succession planning, or if it was the responsibility of the board as a whole.
- Companies that did not execute a successful CEO transition were significantly more likely to have provided less information regarding CEO succession plans in the proxy statements filed in the years prior to the transition by a 63 percent to 37 percent margin.
- By contrast, companies that executed a successful CEO transition were more likely to have provided shareowners with stronger disclosure regarding the CEO succession plan in the years prior to the leadership transition by a 56 percent to 44 percent margin. Successful transitions were considered those which met all or all but one of the following conditions: the new CEO is still serving, a new CEO was named expeditiously, there was no interim CEO, and the CEO was an inside candidate.
- Of the 137 companies naming a permanent CEO in 2012, 20 percent had to undergo another chief executive transition within two years.
- Most (56 percent) of the CEOs studied were promoted from inside the company, often moving to the role from the chief operating officer (COO) position. Some 37 percent of incoming permanent CEOs were hired from outside the company while seven percent of new CEOs served previously as a director.
- Fewer than one in ten (8 percent) of the companies mentioned the existence of an emergency plan addressing what to do if there is an unexpected immediate need for a new CEO, such as in cases such of incapacitation or death.
“Investors know from experience that even well-managed, successful CEO changes are intense and can be distracting, while failed CEO transitions can wreak havoc and cause lasting damage for a company. So it makes sense that investors seek assurance that the board is paying attention and engaged in succession planning,” Lukomnik explained. “No one expects a company to make public a list of CEO candidates. But, some simple disclosures – what board committee has responsibility for the process, how the board gets exposure to potential candidates, and whether or not there is there an emergency plan – could provide that assurance.”
“We were surprised to find so many companies that did not address CEO succession planning at all in their proxy statements,” Barrett said. “When we combine this overall lack of disclosure with the fact that those companies that provide more information about succession plans are more likely to have a successful CEO transition, we can conclude that the calls for increased disclosure are warranted.”
The report presents the results of a study of CEO succession planning disclosures made by the Russell 3000 companies that had a CEO transition during 2012. Data provided by Equilar Inc. was used to identify the 205 Russell 3000 companies that had a CEO transition during 2012 for companies headquartered in the U.S. that had a CEO departure due to a resignation, termination, retirement or medical reason. Not included in the analysis are departures triggered by a merger or acquisition transaction or change in control of any type.
Download the full study here.
Register for the webinar 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. Follow IRRCi on Twitter at @IRRCResearch.
Board Governance Research LLC provides independent research on corporate governance practices, board composition and director demographics. For more information, contact Annalisa Barrett at annalisa@boardgovernanceresearch.com. Follow Board Governance Research on Twitter at @Annalisa_BGR
IRRCi Media Contact: Kelly Kenneally | +1.202.256.1445 | kelly@irrcinstitute.org
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IRRCi, IRRCi Research
Thursday, January 21, 2016
Webinar on Tues., Feb. 9th to Review Findings, Respond to Questions
NEW YORK, NY, January 21, 2016 – Corporate risks disclosed by public companies in Securities and Exchange Commission (SEC) filings often are generic and do not provide investors with clear, concise and insightful information that is company-specific. A new analysis of risk factor disclosures in annual reports finds that they typically are vague, repetitive and “boilerplate,” offering investors little actionable insight into the risks facing companies. The findings are contained in a new study, The Corporate Risk Factor Disclosure Landscape, published today by the Investor Responsibility Research Center Institute (IRRCi). Ernst & Young LLP (EY) was the primary research entity and contributor to this report. The study examines the risk disclosures of 50 large companies, including the five largest publicly traded companies in ten different industries with an aggregate market capitalization of approximately $8 trillion.
The study is available here. A webinar will be held on Tuesday, February 9, 2016, at 12:00 PM ET to review the findings and respond to questions. Register at no charge here.
“The reason for required risk factor disclosures is to inform investors and others of the risks faced by individual companies. Instead, we see corporate disclosures that read like a laundry list of generic risks couched in legalese and lacking meaningful specificity. This is not helpful for investors trying to understand corporate risks, and it certainly does not enable investors to distinguish between the relative risk profile of different companies or the relative importance of the risks on the laundry list,” said Jon Lukomnik, IRRCi executive director.
“The one ray of hope, interestingly, is that cybersecurity is one area where companies are providing more robust information on the extent, impact and management of cyber risks,” Lukomnik said. “Cybersecurity disclosure may serve as an example of the direction companies could take in terms of disclosing and explaining risk. But there is still so much more that can be done across all areas of disclosure.”
“As the SEC reconsiders the risk factor disclosure requirements as part of its disclosure effectiveness initiative, we are hopeful that the IRRCi study provides helpful insights into current practices as well as opportunities for improvements,” said Kellie Huennekens with the EY Center for Board Matters.
The report finds a need for companies to streamline language around common risk factors and to offer more insightful, company-specific information such as descriptions of how the nature, intensity and likelihood of key risks have changed or might change along with explanations of how significant risks can affect a company’s business. The report also indicates that companies could enhance disclosure by describing their risk mitigation efforts.
The key findings are as follows:
- Competition, global market factors and regulatory matters are the most common risks cited by all companies but are often discussed generically. This suggests an opportunity for companies to reconsider existing generic discussions.
- Disclosures generally are lengthy, and companies with a lower risk profile in particular have opportunities to reduce the extent and number of generic risk factors disclosed.
- When companies do use specific language to discuss risk mitigation efforts and/or changes in the nature of the risk, those disclosures tend to be minimal (e.g., a couple of words or a sentence) and are overshadowed by the prevalent use of vague, boilerplate language throughout the risk factor disclosures.
- The disclosures may serve as an indicator of what a broad base of companies view as emerging risks. Attention to non-traditional risks such as cybersecurity and climate change is evident from the review.
- Cybersecurity is one area where companies have responded to recent concerns expressed by investors and policymakers with disclosure that discusses the extent, effects and management of cyber risks.
Download the full study here. Register for the webinar 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. Follow IRRCi on Twitter at @IRRCResearch.
IRRCi Media Contact: Kelly Kenneally | +1.202.256.1445 | kelly@irrcinstitute.org
IRRCi, IRRCi Research
IRRC Institute – Thursday, January 21, 2016
Risk factor disclosures provided by companies in their Form 10-K and other Securities and Exchange Commission (SEC) filings are supposed to serve an important role in the capital markets by offering investors an understanding of the risks faced by the individual companies. Instead, we find in our review of the risk factor disclosures of 50 large companies that disclosures often are generic and do not provide clear, concise and insightful information. The disclosures typically are not tailored to the specific company. Instead, they tend to represent a listing of generic risks, with little to help investors distinguish between the relative importance of each risk to the company. In addition, the language is often repetitive and written with legal language and a compliance-oriented approach (instead of using plain English to help investors better understand and evaluate company-specific risks).
IRRCi, IRRCi Research
Thursday, December 10, 2015
Seven Papers Selected for Honorable Mention Recognition
NEW YORK, NY, December 10, 2015 – Two research papers that have the potential to reshape investor thinking on fossil fuel divestment and how passive investors influence corporate governance and performance have won the Investor Responsibility Research Center Institute (IRRCi) annual investor research competition. The winners will be recognized today at the Columbia Law School’s 2015 Millstein Governance Forum, The Board-Centric Model in the Array of Shareholders, in New York City. Each winning research team will be presented with a $10,000 award.
The winning practitioner research paper, 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. The research is authored by a team of researchers at MSCI – Remy Briand, Linda-Eling Lee, Sébastien Lieblich, Véronique Menou and Anurag Singh. Download the research here.
The winning academic research, 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. The authors include Ian R. Appel, Ph.D., assistant professor of finance at the Carroll School of Management at Boston College; Todd A. Gormley, Ph.D., assistant professor of finance at The Wharton School; and Donald B. Keim, professor of finance and director of the Rodney L. White Center for Financial Research at the Wharton School, University of Pennsylvania. Download the research here.
“The two winning papers were selected because they offer fresh thinking on key issues confronting investors. Climate change is a systemic investment challenge for institutional investors. And, the fund flow to index funds begs the question of what influence that will have on the real economy. These two research papers will be valuable tools for investors, policymakers, academia for rethinking assumptions, testing conventional wisdom and helping to understand those two key questions,” said Jon Lukomnik, IRRCi executive director.
Linda-Eling Lee, global head of ESG research at MSCI, said, “We are honored to be recognized by the IRRCi with this prestigious award. Looking ahead past the recent climate change conversations in Paris, the Beyond Divestment research is particularly important as it highlights the favorable characteristics of a low carbon approach, which aims to reduce exposure to carbon intensive companies while limiting short term risk against a benchmark. We are thrilled to announce that we are donating our prize money to CDP, a pioneer in encouraging carbon disclosure.”
“Institutions that offer passively managed funds, like Vanguard and State Street, are an increasingly important component of U.S. stock ownership, and the impact of their growth on firm-level governance is widely debated,” said Ian R. Appel, assistant professor of finance at the Carroll School of Management at Boston College. In contrast to arguments that such institutions might be lazy investors that do not monitor managers, our evidence suggests they successfully influence firms’ governance choices in ways that improve long-term, firm-level performance.”
For the first time in the IRRC Institute Award’s four-year history, the judges selected multiple research papers for Honorable Mention recognition. The judges said the superb quality of the 2015 award submissions mandated the change. Several of the honorable mention papers likely would have won the award in other years, the judges indicated. The papers receiving Honorable Mention recognition are:
- Does Hedge Fund Activism Lead to Short-Termism? Evidence from Corporate Innovation by Alon Brav (Duke University), Wei Jiang (Columbia University), Song Ma (Duke University) and Xuan Tian (Indiana University).
- Active Ownership by Elroy Dimson (London Business School; University of Cambridge), Oguzhan Karakas (Boston College) and Xi Li (Temple University).
- Investment Implications of Environment, Social, and Governance Sustainability: Evidence from Short Selling by Archana Jain (Rochester Institute of Technology), Pankaj K. Jain (University of Memphis) and Zabihollah Rezaee (University of Memphis).
- Hedging Climate Risk by Mats Andersson (AP4), Patrick Bolton (Columbia Business School), and Frédéric Samama (SWF Research Initiative)
- Public vs Private Provision of Governance: The Case of Proxy Access by Tara Bhandari (U.S. Securities and Exchange Commission), Peter Iliev (Pennsylvania State University) and Jonathan Kalodimos (Oregon State University).
- Does Voluntary Disclosure Of Climate Change Risk Signal Overall Firm Risk? Evidence From Financial Reporting Quality And Firm-Level Investment Activity by Shira Cohen, (Temple University).
- Valuing the Vote: The Impact of Proxy Voting on SBA Portfolio Holdings by the Florida State Board of Administration.
The following panel of respected judges reviewed the submissions and selected the winning papers and honorable mentions:
- Mark Anson Chief Investment Officer, Acadia Investment Management
- Collette Chilton, Chief Investment Officer, Williams College
- 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 Faculty Co-Director, Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School
- Nell Minow, Governance Expert and Columnist, Huffington Post
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. Follow IRRCi on Twitter at @IRRCResearch.
IRRCi Award Contact: Jon Lukomnik | +1.212.344.2424 | jon@irrcinstitute.org
IRRCi Media Contact: Kelly Kenneally | +1.202.256.1445 | kelly@irrcinstitute.org
MSCI Media Contact: Kristin Meza |+1.212.804.5330 | Kristin.Meza@msci.com
Wharton Media Contact: Peter Winicov | +1.215.898.8036 | winicov@wharton.upenn.edu
Boston College Media Contact: Sonia Furtado | +1 617.552-3350 | sonia.furtado@bc.edu
