Last week, Insightia launched its latest product feature – corporate governance scores for Russell 3000 and FTSE companies.
Q1 2021 hedge fund letters, conferences and more
Corporate Governance Scores
The scores, which give companies a point for each shareholder-friendly governance provision and board structure feature, will allow users of our governance module to quickly cross-reference directors with the quality of governance on the boards on which they serve and might help form a quick assessment about how easy a shareholder will find engaging with a board for changes. Standardized categories, ranging from "poor" to "excellent" allow users to compare corporate governance across sectors and indeed, countries.
We believe we’ve achieved something quite unique. The board structure element covers issues like diversity, how long-tenured chairmen are, and committee independence. Governance can include the takeover defenses prevalent in the U.S., and whether companies follow corporate governance codes or have high levels of dissent, the two elements we use in the slimmed down governance part of the score for U.K. companies, although a government-sponsored review of the London Stock Exchange’s listing requirements may change that in time.
Partially as a result of the U.K.’s more standardized governance regime, fully 81% of FTSE 350 companies have "excellent" or "good" corporate governance – the two highest levels – compared with 42% for the Russell 3000.
Above Average Sectors
More pointed is the gulf between different sectors of the U.S.’ Russell 3000. Four sectors rank above average – basic materials, industrials, utilities, and real estate. Those are perhaps surprising for activists who have had run-ins with miners or real estate investment trusts but perhaps the low scores for technology companies – almost one-third of which were below average – will ring true at entrenched founder-led firms.
Links between governance and vulnerability to activism may prove to be harder for issuers and their advisers to figure out. Some of this year’s biggest campaigns, including at Kohl’s, Exxon Mobil, and GlaxoSmithKlein, are at companies with good corporate governance. But that doesn’t preclude winning.
Josh Black, Editor-in-Chief, Insightia
Investors Are Not United On Voting Strategies
As the first "say on climate" proposals are subjected to shareholder votes, it is clear that investors are less united over their voting strategies than the lightning quick rollout of the initiative suggested.
While some early adopters of the annual resolutions, such as Canadian Pacific Railway and Nestlé, have scored high approval rates for their climate transition plans, divided stances on key votes, as well as skepticism over the whole initiative from some quarters, threaten to overshadow the first year of "say on climate" proposals’ widespread adoption.
For instance, the New York State Common Retirement Fund this week warned the campaign could "insulat[e] the board from acting accountable for climate oversight," and expressed concerns over investors "validating a company’s plans and actions that really may be lacking," simply because it has been put to a vote.
One company not having an easy time of it, however, is Royal Dutch Shell. The oil supermajor’s climate transition plan has been subject to extensive discussion this past week, with the Australasian Center for Corporate Responsibility (ACCR), Follow This, ShareAction, Greenpeace, Reclaim Finance, and Oil Change International writing to the Church of England Pensions Board and Robeco, urging them to oppose the Dutch utility firm’s climate strategy on the grounds that it "undermines the world's chances to limit global warming to 1.5°C."
Concerns Regarding Shell's Investment In Upstream Oil And Gas
The signatories express concerns regarding Shell’s plans to continue to invest "billions of dollars in upstream oil and gas," while excluding petrochemicals from its targets altogether, "despite their significant climate impact."
And while the Church of England Pensions Board announced its support for Shell’s climate transition plan on April 15, commending the Dutch energy firm for "break[ing] ranks and acknowledg[ing] their responsibility" toward addressing the climate crisis, The Children’s Investment Fund (TCI) certainly won’t be. In a seminar on April 21, "say on climate" founder Chris Hohn announced his opposition to both Shell’s and Total’s climate transition plans, encouraging shareholders to "call out those investors who fail to do this since it’s greenwashing and hypocrisy."
That is not to say that, having hit its first iceberg, the campaign is destined for a watery grave. Despite uncertainties shared by investors regarding the "say on climate" initiative, many still believe the votes provide investors with a valuable tool to encourage boards to engage with climate concerns, especially at a limited number of important targets.
"It is something where we need to be focused on which companies matter," said Anne Simpson, managing investment director, board governance & sustainability, at California Public Employees’ Retirement System (CalPERS). "Moody’s, for example, is putting forward a vote – but Moody’s, as an organization, is not what we would consider a systemically important carbon emitter. The 100 companies [Climate Action 100+] identify are the focus group of companies responsible for 85% of industrial emissions, so having hundreds of companies making hundreds more votes could mean we take our eye off the ball."
"It is clearly not perfect, but ["say on climate"] puts a climate plan on the board’s agenda and it does provide an opportunity to weigh in. So, at the right company, it is hard for me to see that as a negative," said Adam Kanzer, head of stewardship Americas at BNP Paribas Asset Management. "If you don’t like this tool you have to pick up some other tool and use that tool effectively, don’t sit back and wait for the perfect solution."
Rebecca Sherratt, Corporate Governance Editor, Insightia
