Kohl’s Corporation (NYSE:KSS) commitment to great deals this spring extended beyond the coupon books piling up by my mailbox; it just settled with four activists that initially sought to replace a majority of its board.
Kohl's Deal With Activists
Coming less than two months after the campaign was launched and a full month before the annual meeting at which it was due to climax, the agreement is a tidy bit of business insofar as it avoids proxy advisers Institutional Shareholder Services and Glass Lewis weighing in on the merits of the argument, protects Kohl’s CEO Michelle Gass from further attacks, and keeps the majority of the board intact.
The Wisconsin-based department store operator announced Wednesday that it would accept two of the activist nominees onto its board after the May 12 annual meeting, along with a third mutually agreed director suggested by the company. Two long-tenured directors, Chairman Frank Sica and former Safeway CEO Steve Burd, will retire before the next annual meeting.
However, there is no provision in the settlement to automatically shrink the size of the board. Although the investor group will be entitled to suggest new directors to replace the outgoing board members, the net effect is to supplement the existing oversight of management, rather than fundamentally change it. Instead, Macellum Capital, Legion Partners Asset Management, Ancora Advisors, and 4010 Capital must content themselves with increasing the size of the company’s share repurchases from the $0.7 billion remaining on the authorization to $2 billion. Whether that will be paid for through real estate sale-leasebacks, a source of contention between the two sides, remains to be seen.
Activism Seems To Be Somewhat Risible During The Pandemic
Although some of the exchanges during the short-lived proxy fight were pointed, both sides showed themselves to be open to a settlement. Kohl’s, represented by the chairman of its nominating committee, Peter Boneparth, rather than its board chair Sica, offered one or two seats even before the campaign went live. The activists dropped their demands from nine to just five of the 12 board seats on offer, a decision that would have made the campaign an easier sell at the risk of leaving control to the incumbents.
So both sides can be pleased with themselves, although the whole affair suggests activism in the wake of the pandemic to be somewhat risible. Kohl’s had already reinstated its dividend and guided on buybacks before the settlement, while the recovery of its prospects and potential for a consumer boom meant its shares are up 53% year-to-date and nearly 240% over the past 12 months. Mid-cap activists would have lauded returns like that for the ages before COVID-19.
This state of affairs cannot last forever. At some point, returns will have to return to more prosaic levels and the divergence between laggards and top performers will require more strenuous bouts of activism – perhaps even at Kohl’s if the changes are not deep-seated enough (Macellum and Legion Partners have both fought multiple proxy campaigns at single targets in the past). Activists like Starboard Value, Jana Partners, and Carl Icahn have continued to keep their teeth sharp, while mostly settling early. In an era of easy money, what’s the sense in fighting?
Josh Black, Editor-in-Chief, Insightia
Revisions To Corporate Environmental Disclosure Policies
Demands from investors for standardized climate-related disclosure frameworks are being answered in quick succession, as the U.S., U.K., and Japan have announced potential revisions to their corporate environmental disclosure policies.
U.S. President Joe Biden will reportedly issue an executive order requiring climate-related disclosure from U.S. issuers at the upcoming Leaders Summit on Climate, according to Climate Envoy John Kerry.
In an International Monetary Fund (IMF) seminar on April 7, Kerry briefly alluded to Biden’s plans to standardize issuer climate reporting, which will be formally announced on April 22 and 23, suggesting current EU rules may be used as a template for the U.S.’ ambitious new emissions targets.
"We’re the number two emitter in the world, we need to do a better job," said Kerry. "President Biden is poised to issue an executive order that will require disclosure also."
The former senator also indicated that long-term climate risk required greater consideration in investment decisions.
Reducing U.S. Carbon Emissions
Investors have wasted no time following up on this announcement, with a group representing over $1 trillion in assets under management, coordinated by Ceres and the We Mean Business Coalition, asking Biden to implement a target to reduce U.S. carbon emissions by at least 50% below 2005 levels by 2030.
In the letter, published Tuesday, investors commended the Biden administration’s commitment to federal climate action, but urged Congress to "meet this standard to ensure a smooth transition to net-zero emissions by 2050 or sooner."
Investors aren’t the only ones calling for mandatory disclosure, with tech giant Apple urging the Securities and Exchange Commission (SEC) to implement mandatory disclosure of emissions in assets not owned or controlled by companies, but indirectly impacted in an organization’s value chain, also known as Scope 3 emissions.
"Measuring and mapping carbon emissions enables companies to understand their footprint, develop strategies to reduce emissions and, ultimately, achieve decarbonization," said Arvin Ganesan, Apple’s global head of environmental and energy policy, in a statement. "Apple, therefore, believes that the SEC should use rules to require that companies disclose third-party audited emissions information to the public, covering all scopes of emissions, direct and indirect, and the value chain."
The U.K. government has similarly addressed investor concerns regarding climate-related disclosure, writing to the Financial Conduct Authority (FCA) and Prudential Regulations Committee (PRC) on March 24, urging them to take into consideration the country’s net-zero targets when evaluating current climate-related disclosure policies and supervising financial services firms.
The FCA’s strategy for the coming year highlights this new focus point, outlining accountability and transparency as "key areas of focus."
Increasing regulatory engagement relating to corporate emissions reduction targets will likely result in increased public disclosure of climate-related targets and transition plans, as the use of frameworks and policies surrounding climate-related disclosure will become both standardized and commonplace.
Standardization of environmental disclosure continues to be a priority for investors, with 20 shareholder proposals filed seeking climate and sustainability reporting in 2020, seven of which gained majority support, according to Proxy Insight Online data.
Elsewhere, Japan has published potential revisions to its Stewardship and Corporate Governance Codes, centered around climate change reporting.
Alongside tightening expectations surrounding board diversity and independence, the proposed ruling seeks mandatory disclosure of company initiatives relating to sustainability and climate-related disclosure, based on recommendations set out by the Task Force for Climate-related Financial Disclosure (TCFD) at Prime Market-listed companies. "There is a growing awareness that sustainability is an important management issue from the perspective of increasing mid- to long-term corporate value," the policy change reads. "In light of this, it is important for Japanese companies to further promote positive and proactive responses to sustainability issues."
The continued increase in support for environmental proposals filed at Japanese companies is highlighting the growing need for policies of this kind, but much work is still needed for Japanese policies and disclosure frameworks to catch up to those currently employed in the U.S. and Europe. In 2019, average support for environmental shareholder proposals at Japanese-listed companies was 4.9%, compared to 5.9% in 2020, according to Proxy Insight Online data. Clamoring for regulatory intervention seems to be an attractive strategy for investors the world over.
Rebecca Sherratt, Corporate Governance Editor, Insightia