Category Corporate Governance

CtW Engages Companies on Anti-Competitive Employment Practices

CtW Engages Companies on Anti-Competitive Employment Practices

On August 29, 2018, the activist investor, CtW Investment Group, kicked off a new initiative to engage 30 major companies (click HERE to see the list of companies) concerning their use of anti-competitive employment practices, including non-competes, no-poach agreements, non-disclosure agreements, and mandatory arbitration. CtW asked each company it contacted to:

  • Review its employment contracting practices, including the use of any of these provisions.
  • Report the board’s findings to shareholders before the next annual meeting.
  • Commit to increased human capital management disclosure going forward.

CtW was concerned about the potential liability and costs associated with such anti-competitive practices.  CtW also sees these anti-competitive practices as constraining the ability of individual workers to seek out new opportunities, causing an artificial limit the pool of potential matches available to employers. CtW sees the recruiting difficulties reported by many employers and attributed to “skills shortages” as more plausibly explained by the limits of workers mobility that employers themselves impose.

CtW made available several documents about its efforts (click for the source documents):

We will have to wait and see what impact CtW’s initiative has on these anti-competitive practices.  But, if my removing these impediments to worker mobility ultimately helps companies secure they need to grow their businesses, it should be a win for everyone.  However, it may take some time to get companies, management teams and Boards comfortable with the notion of forgoing these “protections” for their workforce. But, if CtW and other institutional shareholders take up this initiative, and large companies begin to comply, as with most things, it could eventually filter out to a broad swath of U.S. public companies.

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Stanford’s 2018 CEO Activism Survey

Stanford’s 2018 CEO Activism Survey

An October 2018 survey by the Stanford Rock Center for Corporate Governance sought to understand individuals’ view CEOs who take public positions on environmental, social, and political issues. The authors of the survey are David F. Larcker, the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business, and Brian Tayan, a member of the Corporate Governance Research Initiative at Stanford Graduate School of Business.

The authors found that:

  • The public is highly divided about CEOs who take vocal positions on social, environmental, or political issues.
  • The cost of CEO activism might be higher than many CEOs, companies, or boards realize.
  • People are much more likely to think of products they have stopped using than products they have started using because of a position the CEO took on a public issue.
  • When consumers don’t like what they hear, they react the best way they know how to: by closing their wallets.

Key Survey findings include:

  • The public viewpoint of CEO activism is highly mixed, with opinions varying by age and political affiliation.
  • The public is positive on environmental issues, negative on politics and contentious on social issues.
  • Americans are most likely to recall prominent CEOs speaking up about issues they agree – and disagree – with.
  • 65% of all survey respondents thought CEOs of large companies should use their position and potential influence to advocate on behalf of social, environmental, or political issues that they care about personally.
  • By age group, 71% Millennials agreed with such action, while only 63% of Gen X and 46% of Baby Boomers agreed.
  • Perhaps not too surprisingly, the survey found that Democrats viewed CEO activism more favorably than Independents or Republicans.

The survey report includes more detailed demographic information and breakouts of various questions by age, political affiliation, gender, region, race, and household income.

Link to 2018 CEO Activism Survey

https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-survey-2018-ceo-activism.pdf

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Survey Says….

On September 18, 2018, ISS announced the results of its 2018 Governance Principles Survey. ISS received responses from 638 different organizations, and includes the responses from 109 “investors.”

The Policy Survey questions focuses on:

  • Auditors and Audit Committees
  • Director Accountability and Track Records
  • Gender Diversity on Boards
  • One-Share, One-Vote Principle

Auditors and Audit Committees

ISS had asked what audit-related factors respondents considered in evaluating the independence and performance of external auditors. Significant for investors were regulatory fines or other penalties on the auditor for weaknesses or errors in audit practices. This was followed by significant audit controversies and then by the identity of the audit partner and any links he or she has to the company or management.

For non-investors, the most significant factors were: identity of the audit partner and any links e or she had to the company or its management; regulatory fines or other penalties on the company related to financial disclosure practices or weaknesses not identified in the audit report; and, regulatory fines or other penalties on the auditor for weaknesses or errors in audit practices.

The survey also asked what information shareholders should consider when evaluating a company’s audit committee. For investors the information included: skills and experience of audit committee members; significant financial reporting or audit controversies; and, the quality of the company’s financial reporting. For non-investors, the information included: skills and experience of audit committee members; quality of the company’s financial reporting; and, significant financial reporting or audit controversies.

Director Accountability and Track Records

The survey asks if a director failed in his or her boardroom oversight responsibilities at one company and this has resulted in a negative ISS vote recommendation, would it be considered appropriate and useful to note this information in the proxy research report of other companies where that director serves on the board. A significant number of investors (84%) indicated that such information would be useful to know and see on the ISS proxy reports. Only 41% of the non-investors indicated that such information would be helpful to see.

The survey then asked what types of oversight shortfalls would be relevant. Investor and non-investor responses were generally aligned and indicated that the most significant was risk oversight failures relating to fraud or other forms of corporate malfeasance.

When asked what would be an appropriate look-back period for such oversight shortfalls, investors indicated a longer time period (30% 5 years and 39% no time limit), while non-investors favored a shorter time period (44% 3 years, 13% 1 year).

Gender Diversity on Boards

In its 2017 Policy Survey, ISS asked if it was problematic if there were no female directors on a public company board. This year, ISS asked the same question to gauge year-over-year changes, if any.

80% of investors (up from 69% in 2017) thought it would be problematic. Among non-investors, over 60% indicated it would be problematic (compared to 54% in 2017). Of those Investors who thought it problematic, the most appropriate response was to engage with the board and/or management on the issue.

One-Share, One-Vote Principle

The survey asked if ISS should provide vote results where possible to show what the vote results would have been if all votes were counted equally. 92% of investors and 59% of non-investors responded in favor of this.

The survey also asked if ISS should use adjusted vote results to measure board responsiveness to shareholder votes. Investors were largely in favor (72%), but non-investors were split (42% thought it appropriate and 46% did not).

The survey also asked about an appropriate timeframe for sunset provisions on unequal voting rights. 46% of both investors and non-investors picked either “1 to 3 years” or “4 to 6 years.”

ISS Announcement with Link to 2018 Policy Survey Results

Read More

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More Information on ISS’ 2019 Surveys

Early this week ISS opened up its annual policy survey, the results of which will influence the new ISS policies and changes to existing policies for the 2019 proxy season (i.e., impacting shareholder meetings on or after February 1, 2019). Today, we will look a bit closer at the two surveys that ISS launched: the 2019 Governance Principles Survey, and the 2019 Policy Application Survey.

2019 Governance Principles Survey

There are five issues ISS is seeking input in on this survey:

  • Auditor Independence: What factors should be considered in addition to non-audit services and fees as a percentage of total fees when evaluating independence of auditors?
  • Audit Committee: What factors are important in evaluating the effectiveness of the Audit Committee?
  • Director Accountability: Is it relevant for ISS to examine directors’ controversies on other boards when evaluating directors? If so, what would be relevant and what length of look-back period should be used?
  • Board Gender Diversity: ISS here is repeating questions it asked last year on gender diversity to gauge whether it is concerning if there are no female directors on a board?
  • One-Share, One-Vote Principle: Should ISS adjust vote results to show the results if all shares had equal voting rights? If so, should these adjusted results inform ISS’s board responsiveness review? What is the appropriate time period for a sunset provision on unequal voting rights?

2019 Policy Application Survey

The questions in this survey applicable to the U.S. are:

  • Independent Chair: What factors are important when ISS determines its vote recommendation with respect to a shareholder proposal for an independent chair?
  • Minimum Stock Ownership Requirements for Bylaw Amendments: Asks what the minimum ownership thresholds above the required SEC Rule 14a-8’s $2,000 stock holding requirement should be, and should multiple shareholder be able to aggregate holding to meet such threshold?
  • Quantitative Pay-for-Performance Screens: ISS is considering supplementing or replacing the four (4) GAAP financial metrics used in its P4P analysis with Economic Value Added (EVA) for purposes of the Financial Performance Assessment. ISS is asking if the survey participant supports the use of EVA in the P4P analysis, and, if so, how it should be incorporated.
  • Non-employee Director Pay: In 2018 ISS identified non-employee director (NED) pay outliers and will begin to recommend against compensation committees where elevated NED pay persists over multiple years without compelling justification. ISS is asking survey participants what should constitute a compelling justification.
  • Board Qualifications Matrix: The New York City Pension Funds has advocated for the disclosure of a director matrix to help shareholders assess director fit and the mix of skills among all directors. ISS is asking survey participants what level of disclosure on directors skills they find most useful.

For links to these ISS surveys, please see my prior post:

ISS Releases Global Policy Survey

Survey Closing Times

  • 2019 ISS Governance Principles Survey closes on August 24, 2018 at 5 pm Eastern, and the
  • 2019 ISS Policy Application Survey closes on September 21, 2018 at 5 pm Eastern.
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