Chamber on Corporate Governance
U.S. Chamber of Commerce
Public Pension Funds, Proxy Season, and the Changing Regulatory Environment
Thursday, November 19, 2015
Key Topics & Takeaways
- Adverse Impact of Shareholder Activism on Firm Value: Professor Woidtke of the University of Tennessee explained that public pension funds that become very active in filing shareholder proposals on social or political issues have a robust negative impact on fund valuation. The Manhattan Institute’s Copland agreed, and argued that public pension funds “need to be focusing laser-like on investment returns,” but many of them are not doing so.
- Impact of Social Investment Decisions on Fiduciary Responsibility: In reaction to Secretary of Labor Thomas Perez’s guidance encouraging funds to consider economic, social and governmental factors alongside economic performance in making investment decisions, Woidtke argued that this could erode their fiduciary obligation, which is to generate the best returns for their clients. Malanga agreed, and added that disinvestment policies as well as shareholder proposals that focus on social issues will likely conflict with the overarching aim of the fiduciary responsibility. An audience member added that Mark Carney, Chair of the Financial Stability Board, suggested that climate change could adversely impact financial stability – which is another illustration of how social agenda are being advanced in investment decisions.
- Potential Reforms: The Chamber’s Quaadman called on the SEC to be an “umpire” in dealing with shareholder proposals, and noted that there are still “significant problems” with proxy advisory firms having conflicts of interest that go undisclosed. Paredes explained that the SEC Commissioners should weigh in on these issues, since they pose fundamental questions about capital markets effectiveness rather than clarifying technical features of existing regulation. Paredes recommended: 1) focusing on materiality; 2) rethinking the 14a-8 process; 3) consider the “virtue” of private ordering as opposed to a one-size-fits-all approach; and 4) create the “right environment” for companies to focus on long term growth and value creation; among others.
Speakers
- David Hirschmann , President and CEO, Center for Capital Markets Competiveness
- Scott Kimpel, Partner, Hunton & Williams LLP
- Steve Malanga, Senior Fellow, Manhattan Institute
- Tracie Woidtke, Professor of Finance, University of Tennessee, Knoxville
- Thomas Quaadman, Senior Vice President, Center for Capital Markets Competiveness
- Jim Copland, Director and Senior Fellow, Manhattan Institute’s Center for Legal Policy
- Troy Paredes, Former SEC Commissioner and Founder, Paredes Strategies LLC
Introduction
Welcome Remarks by David Hirschmann
Hirschmann opened by stating that too often what is advocated to improve corporate governance is neither backed by empirical evidence nor good for corporate governance. He also highlighted the recent survey conducted by Nasdaq and the Center for Capital Markets Competitiveness, which summarizes public companies’ experiences during the current proxy season. Hirschmann claimed that some shareholders too often use the corporate proxy process to advance a social or political agenda, however he noted that the purpose of corporate governance is not to advance some interests at the expense of others. Hirschmann stated that the objective is to ensure accountability of management to its shareholders without picking winners and losers amongst shareholders, which would ultimately make the public company model more attractive for American businesses.
Panel 1: Where’s the Return? The Impact of Pension Fund Activism on Firm Value
Thomas Quaadman, Senior Vice President, Center for Capital Markets Competiveness
Quaadman explained that the Securities and Exchange Commission (SEC) has retreated from its gatekeeper role in the 14a-8 process and has started allowing more shareholder proposals to be considered.
Tracie Woidtke, Professor of Finance, University of Tennessee, Knoxville
Woidtke presented her empirical analysis on the effect of public pension fund activism on firm value. While noting that there are costs and benefits to public pension fund activisim, she shared that when public pension funds become very active in filing shareholder proposals on social or political issues, there is a robust negative impact on fund valuation.
Steve Malanga, Senior Fellow, Manhattan Institute
Malanga explained that public pension funds “need to be focusing laser-like on investment returns,” but many of them are not doing so. Malanga explained that defined benefit plans generally need to earn at least a 7.7 percent return every year just to prevent new debt from accruing, and funds that make investment decisions based on social factors often underperform. He explained that taxpayers, who will ultimately bear the burden of underfunded defined benefit pension plans, should demand changes in how public pension funds are governed to ensure they focus more on investment return than social factors that often lead to underperformance.
Scott Kimpel, Partner, Hunton & Williams LLP
Kimpel explained that shareholder proposals are one of the lowest-cost forms of shareholder activism, and only require shareholders to own $2,000 in shares to submit such proposals. In addition, he argued that the SEC has allowed shareholders to “do what they want,” but that the “pendulum has swung too far.” As a result, he claimed that management and directors are “wasting” too much time on these issues instead of focusing on business strategy which ultimately enhances firm value and economic growth. In addition, Kimpel explained that many of the policy changes made by the SEC on these issues – such as through Staff Legal Bulletin 20 – have been from the staff level, and that the Commissioners have not weighed in on these issues in a meaningful way.
Impact on Fiduciary Responsibility
In response to Quaadman’s reference to Secretary of Labor Thomas Perez’s guidance released earlier this year encouraging funds to consider economic, social and governmental factors alongside economic performance in making investment decisions, Woidtke explained that there are competing objectives that complicate investment decisions. Ultimately, she argued that this could erode their fiduciary obligation, which is to generate the best returns for their clients. Malanga agreed, and added that disinvestment policies as well as shareholder proposals that focus on social issues will likely conflict with the overarching aim of the fiduciary responsibility.
An audience member added that Mark Carney, Chair of the Financial Stability Board, suggested that climate change could adversely impact financial stability – which is another illustration of how social agenda are being advanced in investment decisions.
Panel 2: The Next 12 Months: Emerging Trends and Potential Reforms
Jim Copland, Director and Senior Fellow, Manhattan Institute’s Center for Legal Policy
Copland explained that a small group of shareholders file the vast majority of shareholder proposals and that, in turn, companies spend a significant amount of resources trying to counter these proposals through the SEC’s 14a-8 no action petition process. He continued that social proposals make up approximately 42 percent of all shareholder proposals, and that the majority do not receive majority support (without Board support as well). He added that it is “crazy” that ERISA (Employee Retirement Income Security Act) does not hold public pension funds to any standard on economic return.
Copland urged the SEC to consider eliminating “superfluous” social and political shareholder proposals (or at least raising the ownership thresholds necessary to submit such proposals) so that company boards and management can focus singularly on maximizing shareholder value.
Troy Paredes, Former SEC Commissioner and Founder, Paredes Strategies LLC
Paredes explained that shareholder activism often: 1) distracts the board and management from focusing on business strategy and execution, which are central to value creation; 2) creates a real risk that corporate law and federal securities laws are becoming increasingly politicized; and 3) risks dragging down economic growth. Paredes added that the issue of ‘materiality’ is central to this issue, since these filings often lead to information overload and detracts from investors focusing on material information that is essential for them to make investment decisions.
In addition, Paredes stated that that the SEC Commissioners should weigh in on these issues, considering they present fundamental questions about capital markets effectiveness rather than clarifying technical features of existing regulation. Paredes recommended: 1) focusing on materiality; 2) rethinking the 14a-8 process; 3) considering the “virtue” of private ordering as opposed to a one-size-fits-all approach; and 4) creating the “right environment” for companies to focus on long term growth and value creation; among others.
Thomas Quaadman, Senior Vice President, Center for Capital Markets Competiveness
Quaadman called on the SEC to be an “umpire” in dealing with shareholder proposals, and noted that there are still “significant problems” with proxy advisory firms having conflicts of interest that go undisclosed.
More information about this event can be accessed here.
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U.S. Chamber of Commerce
Public Pension Funds, Proxy Season, and the Changing Regulatory Environment
Thursday, November 19, 2015
Key Topics & Takeaways
- Adverse Impact of Shareholder Activism on Firm Value: Professor Woidtke of the University of Tennessee explained that public pension funds that become very active in filing shareholder proposals on social or political issues have a robust negative impact on fund valuation. The Manhattan Institute’s Copland agreed, and argued that public pension funds “need to be focusing laser-like on investment returns,” but many of them are not doing so.
- Impact of Social Investment Decisions on Fiduciary Responsibility: In reaction to Secretary of Labor Thomas Perez’s guidance encouraging funds to consider economic, social and governmental factors alongside economic performance in making investment decisions, Woidtke argued that this could erode their fiduciary obligation, which is to generate the best returns for their clients. Malanga agreed, and added that disinvestment policies as well as shareholder proposals that focus on social issues will likely conflict with the overarching aim of the fiduciary responsibility. An audience member added that Mark Carney, Chair of the Financial Stability Board, suggested that climate change could adversely impact financial stability – which is another illustration of how social agenda are being advanced in investment decisions.
- Potential Reforms: The Chamber’s Quaadman called on the SEC to be an “umpire” in dealing with shareholder proposals, and noted that there are still “significant problems” with proxy advisory firms having conflicts of interest that go undisclosed. Paredes explained that the SEC Commissioners should weigh in on these issues, since they pose fundamental questions about capital markets effectiveness rather than clarifying technical features of existing regulation. Paredes recommended: 1) focusing on materiality; 2) rethinking the 14a-8 process; 3) consider the “virtue” of private ordering as opposed to a one-size-fits-all approach; and 4) create the “right environment” for companies to focus on long term growth and value creation; among others.
Speakers
- David Hirschmann , President and CEO, Center for Capital Markets Competiveness
- Scott Kimpel, Partner, Hunton & Williams LLP
- Steve Malanga, Senior Fellow, Manhattan Institute
- Tracie Woidtke, Professor of Finance, University of Tennessee, Knoxville
- Thomas Quaadman, Senior Vice President, Center for Capital Markets Competiveness
- Jim Copland, Director and Senior Fellow, Manhattan Institute’s Center for Legal Policy
- Troy Paredes, Former SEC Commissioner and Founder, Paredes Strategies LLC
Introduction
Welcome Remarks by David Hirschmann
Hirschmann opened by stating that too often what is advocated to improve corporate governance is neither backed by empirical evidence nor good for corporate governance. He also highlighted the recent survey conducted by Nasdaq and the Center for Capital Markets Competitiveness, which summarizes public companies’ experiences during the current proxy season. Hirschmann claimed that some shareholders too often use the corporate proxy process to advance a social or political agenda, however he noted that the purpose of corporate governance is not to advance some interests at the expense of others. Hirschmann stated that the objective is to ensure accountability of management to its shareholders without picking winners and losers amongst shareholders, which would ultimately make the public company model more attractive for American businesses.
Panel 1: Where’s the Return? The Impact of Pension Fund Activism on Firm Value
Thomas Quaadman, Senior Vice President, Center for Capital Markets Competiveness
Quaadman explained that the Securities and Exchange Commission (SEC) has retreated from its gatekeeper role in the 14a-8 process and has started allowing more shareholder proposals to be considered.
Tracie Woidtke, Professor of Finance, University of Tennessee, Knoxville
Woidtke presented her empirical analysis on the effect of public pension fund activism on firm value. While noting that there are costs and benefits to public pension fund activisim, she shared that when public pension funds become very active in filing shareholder proposals on social or political issues, there is a robust negative impact on fund valuation.
Steve Malanga, Senior Fellow, Manhattan Institute
Malanga explained that public pension funds “need to be focusing laser-like on investment returns,” but many of them are not doing so. Malanga explained that defined benefit plans generally need to earn at least a 7.7 percent return every year just to prevent new debt from accruing, and funds that make investment decisions based on social factors often underperform. He explained that taxpayers, who will ultimately bear the burden of underfunded defined benefit pension plans, should demand changes in how public pension funds are governed to ensure they focus more on investment return than social factors that often lead to underperformance.
Scott Kimpel, Partner, Hunton & Williams LLP
Kimpel explained that shareholder proposals are one of the lowest-cost forms of shareholder activism, and only require shareholders to own $2,000 in shares to submit such proposals. In addition, he argued that the SEC has allowed shareholders to “do what they want,” but that the “pendulum has swung too far.” As a result, he claimed that management and directors are “wasting” too much time on these issues instead of focusing on business strategy which ultimately enhances firm value and economic growth. In addition, Kimpel explained that many of the policy changes made by the SEC on these issues – such as through Staff Legal Bulletin 20 – have been from the staff level, and that the Commissioners have not weighed in on these issues in a meaningful way.
Impact on Fiduciary Responsibility
In response to Quaadman’s reference to Secretary of Labor Thomas Perez’s guidance released earlier this year encouraging funds to consider economic, social and governmental factors alongside economic performance in making investment decisions, Woidtke explained that there are competing objectives that complicate investment decisions. Ultimately, she argued that this could erode their fiduciary obligation, which is to generate the best returns for their clients. Malanga agreed, and added that disinvestment policies as well as shareholder proposals that focus on social issues will likely conflict with the overarching aim of the fiduciary responsibility.
An audience member added that Mark Carney, Chair of the Financial Stability Board, suggested that climate change could adversely impact financial stability – which is another illustration of how social agenda are being advanced in investment decisions.
Panel 2: The Next 12 Months: Emerging Trends and Potential Reforms
Jim Copland, Director and Senior Fellow, Manhattan Institute’s Center for Legal Policy
Copland explained that a small group of shareholders file the vast majority of shareholder proposals and that, in turn, companies spend a significant amount of resources trying to counter these proposals through the SEC’s 14a-8 no action petition process. He continued that social proposals make up approximately 42 percent of all shareholder proposals, and that the majority do not receive majority support (without Board support as well). He added that it is “crazy” that ERISA (Employee Retirement Income Security Act) does not hold public pension funds to any standard on economic return.
Copland urged the SEC to consider eliminating “superfluous” social and political shareholder proposals (or at least raising the ownership thresholds necessary to submit such proposals) so that company boards and management can focus singularly on maximizing shareholder value.
Troy Paredes, Former SEC Commissioner and Founder, Paredes Strategies LLC
Paredes explained that shareholder activism often: 1) distracts the board and management from focusing on business strategy and execution, which are central to value creation; 2) creates a real risk that corporate law and federal securities laws are becoming increasingly politicized; and 3) risks dragging down economic growth. Paredes added that the issue of ‘materiality’ is central to this issue, since these filings often lead to information overload and detracts from investors focusing on material information that is essential for them to make investment decisions.
In addition, Paredes stated that that the SEC Commissioners should weigh in on these issues, considering they present fundamental questions about capital markets effectiveness rather than clarifying technical features of existing regulation. Paredes recommended: 1) focusing on materiality; 2) rethinking the 14a-8 process; 3) considering the “virtue” of private ordering as opposed to a one-size-fits-all approach; and 4) creating the “right environment” for companies to focus on long term growth and value creation; among others.
Thomas Quaadman, Senior Vice President, Center for Capital Markets Competiveness
Quaadman called on the SEC to be an “umpire” in dealing with shareholder proposals, and noted that there are still “significant problems” with proxy advisory firms having conflicts of interest that go undisclosed.
More information about this event can be accessed here.