Are Activist Investors Expecting Too Much Of Energy Companies?

Stock SectorMay 4, 201822min13
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DALLAS – MAY 28: Michele Vaughan (L) and Ashlee Whitaker, both of Dallas, protest outside the ExxonMobil annual shareholders meeting at the Morton H. Meyerson Symphony Center May 28, 2008 in Dallas, Texas. A total of 19 resolutions will be voted on today by shareholders. (Photo by Brian Harkin/Getty Images)

In the midst of presidential investigations last Christmas, the U.S. House of Representatives inconspicuously passed legislation that would curb the powers of proxy firms — the ones that give institutional shareholders advice on environmental, social and governance issues.&nbsp;

And energy companies are among those most affected, given the shareholder emphasis on climate change and sustainability. The bill, which is now before the U.S. Senate, would shine a brighter light on those proxies to ensure that their recommendations are in line with the long-term interest of stockholders: it would require them to register with the U.S Securities and Exchange Commission (SEC) to eliminate any potential conflicts of interest that they might have.

While 12 House Democrats support the proxy measure, the vast majority oppose it. They maintain that the bill would create a “costly” regulatory burden, making it more problematic to access “impartial analysis.” Therefore, it would make it harder to hold management accountable, especially on environmental issues and all at a time when the White House has de-emphasized clean air and water.

The bill “would stifle, rather than promote, competition in the industry by erecting significant barriers to entry for new proxy advisory firms,” Democrats say.

But the American Council for Capital Formation released a report that says two such proxy firms — ISS and Glass Lewis — dominate the market. They craft recommendations that tell pensions and hedge funds how to vote on investor proposals. Notably, it says, those large institutional investors follow the guidance of their proxies 80% of the time.

But the problem arises, the council adds, because the proxies also offer consulting services to the same companies: For a fee, corporations can work with separate advisors to avoid proxy fights between their boards of directors and their shareholders. Even more concerning to the council is whether the suggestions given to the large institutional shareholders actually increase value.

“The main concern is that the proxies are relatively unchecked,” says Tim Doyle, general counsel for the capital formation group, in a phone call. “Investors should know how and why the recommendations are being made. The recommendations that they are giving have to be more transparent and they should increase the values of companies.”

Doyle adds that ISS and Glass Lewis have, in effect, become “king makers” — ironic, because not too long ago they were in the business of offering “back office” services. So how did these upstarts ingratiate themselves with such powerful institutional investors as BlackRock and Vanguard? Because BlackRock voted on almost 500,000 proposals in 2017 and it only has about 30 people working on those shareholder proposals.

How it Works

The proxies will make recommendations to shareholders and how they should vote. The position could be in conflict with that of corporate management and their boards. If so, boards approach the SEC and ask it for a “no-action” letter. If the request is granted, the company does not need to hold a vote with its shareholders. But if it is refused, it must then get voted on at the annual meeting. Both sides would have the time and the space to explain their views.

Under the Trump administration, the SEC has been more sympathetic to corporate management. In prior years, the agency was more in tune with investors. Two cases illustrate the point: The first involves EOG Resources while the second involves Exxon Mobil Corp.

As for EOG, Trillium Asset Management wanted it to conform to stricter greenhouse gas rules that would have required the oil and gas explorer to gather more data and to make its findings known to shareholders. But the driller responded by saying that it already informed its stockholders and that going any further would force it to deviate too far afield from its primary business. It asked the SEC to give it a “no-action” letter and last month, the request was approved.&nbsp; That marked one of the few times that the regulator had ruled in favor of management on these climate matters.

Exxon wasn’t quite as lucky. The SEC turned down its request a year ago. It must now increase its transparency in an effort to reduce CO2 releases while also giving its shareholders full insight into the financial and technological risks it faces. BlackRock, which endorsed the plan, owns 6% of Exxon’s stock.

“EOG said that the proposal micromanages the company,” says Doyle, with the capital formation group. “It said it provides shareholders with enough information as to whether to invest in it or not.

“For investors, they should be concerned about the amount of money that Exxon will now have to spend to respond to something in which it already allocates resources,” adds Doyle. “The concern is that it will never be enough and dealing with climate change is already a fundamental part of its business model.”

Shareholder Value

The key question is whether proxies’ recommendations — and the institutional investors’ demands of corporate boards — actually increase shareholder value. Major retailers and industrials that include Walmart and Dow Chemical think there is a positive correlation between being sustainable and being profitable.

According to the Corporate Social Responsibility Newswire,&nbsp;$1 out of every $6 invested goes toward corporate sustainability. That amounts to $6.5 trillion. As long as the investment managers are meeting the standards that their governors have set forth, then they are within their right to pursue societal objectives.

“Society is demanding that companies, both public and private, serve a social purpose,” Chairman of BlackRock Larry Fink wrote to the nation’s chief executive officers. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” His company manages $6 trillion for pension and investment funds.

Without a sense of purpose, he continues, no company can achieve its full potential — and may thus lose credibility in the financial markets. In other words, succumbing to short-term profit goals will result in “subpar returns.”

In fact, many studies say that environmentally conscious-investing is improving financial performance while also driving a competitive advantage, fostering innovation and building customer loyalty. A failure to be sustainable, conversely, could impact the brand.&nbsp;

The question now for U.S. Senators who will take up the House bill that would make proxy firms become more transparent is whether doing so gives shareholders more knowledge or whether it hampers activists and thus jeopardizes sustainability efforts. The debate is certainly healthy for all stakeholders and one that may get proxies to improve their operations without legislative action.

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DALLAS – MAY 28: Michele Vaughan (L) and Ashlee Whitaker, both of Dallas, protest outside the ExxonMobil annual shareholders meeting at the Morton H. Meyerson Symphony Center May 28, 2008 in Dallas, Texas. A total of 19 resolutions will be voted on today by shareholders. (Photo by Brian Harkin/Getty Images)

In the midst of presidential investigations last Christmas, the U.S. House of Representatives inconspicuously passed legislation that would curb the powers of proxy firms — the ones that give institutional shareholders advice on environmental, social and governance issues. 

And energy companies are among those most affected, given the shareholder emphasis on climate change and sustainability. The bill, which is now before the U.S. Senate, would shine a brighter light on those proxies to ensure that their recommendations are in line with the long-term interest of stockholders: it would require them to register with the U.S Securities and Exchange Commission (SEC) to eliminate any potential conflicts of interest that they might have.

While 12 House Democrats support the proxy measure, the vast majority oppose it. They maintain that the bill would create a “costly” regulatory burden, making it more problematic to access “impartial analysis.” Therefore, it would make it harder to hold management accountable, especially on environmental issues and all at a time when the White House has de-emphasized clean air and water.

The bill “would stifle, rather than promote, competition in the industry by erecting significant barriers to entry for new proxy advisory firms,” Democrats say.

But the American Council for Capital Formation released a report that says two such proxy firms — ISS and Glass Lewis — dominate the market. They craft recommendations that tell pensions and hedge funds how to vote on investor proposals. Notably, it says, those large institutional investors follow the guidance of their proxies 80% of the time.

But the problem arises, the council adds, because the proxies also offer consulting services to the same companies: For a fee, corporations can work with separate advisors to avoid proxy fights between their boards of directors and their shareholders. Even more concerning to the council is whether the suggestions given to the large institutional shareholders actually increase value.

“The main concern is that the proxies are relatively unchecked,” says Tim Doyle, general counsel for the capital formation group, in a phone call. “Investors should know how and why the recommendations are being made. The recommendations that they are giving have to be more transparent and they should increase the values of companies.”

Doyle adds that ISS and Glass Lewis have, in effect, become “king makers” — ironic, because not too long ago they were in the business of offering “back office” services. So how did these upstarts ingratiate themselves with such powerful institutional investors as BlackRock and Vanguard? Because BlackRock voted on almost 500,000 proposals in 2017 and it only has about 30 people working on those shareholder proposals.

How it Works

The proxies will make recommendations to shareholders and how they should vote. The position could be in conflict with that of corporate management and their boards. If so, boards approach the SEC and ask it for a “no-action” letter. If the request is granted, the company does not need to hold a vote with its shareholders. But if it is refused, it must then get voted on at the annual meeting. Both sides would have the time and the space to explain their views.

Under the Trump administration, the SEC has been more sympathetic to corporate management. In prior years, the agency was more in tune with investors. Two cases illustrate the point: The first involves EOG Resources while the second involves Exxon Mobil Corp.

As for EOG, Trillium Asset Management wanted it to conform to stricter greenhouse gas rules that would have required the oil and gas explorer to gather more data and to make its findings known to shareholders. But the driller responded by saying that it already informed its stockholders and that going any further would force it to deviate too far afield from its primary business. It asked the SEC to give it a “no-action” letter and last month, the request was approved.  That marked one of the few times that the regulator had ruled in favor of management on these climate matters.

Exxon wasn’t quite as lucky. The SEC turned down its request a year ago. It must now increase its transparency in an effort to reduce CO2 releases while also giving its shareholders full insight into the financial and technological risks it faces. BlackRock, which endorsed the plan, owns 6% of Exxon’s stock.

“EOG said that the proposal micromanages the company,” says Doyle, with the capital formation group. “It said it provides shareholders with enough information as to whether to invest in it or not.

“For investors, they should be concerned about the amount of money that Exxon will now have to spend to respond to something in which it already allocates resources,” adds Doyle. “The concern is that it will never be enough and dealing with climate change is already a fundamental part of its business model.”

Shareholder Value

The key question is whether proxies’ recommendations — and the institutional investors’ demands of corporate boards — actually increase shareholder value. Major retailers and industrials that include Walmart and Dow Chemical think there is a positive correlation between being sustainable and being profitable.

According to the Corporate Social Responsibility Newswire, $1 out of every $6 invested goes toward corporate sustainability. That amounts to $6.5 trillion. As long as the investment managers are meeting the standards that their governors have set forth, then they are within their right to pursue societal objectives.

“Society is demanding that companies, both public and private, serve a social purpose,” Chairman of BlackRock Larry Fink wrote to the nation’s chief executive officers. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” His company manages $6 trillion for pension and investment funds.

Without a sense of purpose, he continues, no company can achieve its full potential — and may thus lose credibility in the financial markets. In other words, succumbing to short-term profit goals will result in “subpar returns.”

In fact, many studies say that environmentally conscious-investing is improving financial performance while also driving a competitive advantage, fostering innovation and building customer loyalty. A failure to be sustainable, conversely, could impact the brand. 

The question now for U.S. Senators who will take up the House bill that would make proxy firms become more transparent is whether doing so gives shareholders more knowledge or whether it hampers activists and thus jeopardizes sustainability efforts. The debate is certainly healthy for all stakeholders and one that may get proxies to improve their operations without legislative action.

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