Wednesday, June 25, 2014

Peter MacKay: Pale, Male and Stale

Peter MacKay’s recently revealed Mother’s Day and Father’s Day greetings to his staff clearly demonstrate the extent of institutionalized gender stereotyping by decision makers in Canada.

Here’s what he had to say to mothers, “By the time many of you have arrived at the office in the morning, you’ve already changed diapers, packed lunches, run after school buses, dropped kids off at daycare, taken care of an aging loved one and maybe even thought about dinner.”

And fathers? “I wish to take this opportunity to recognize our colleagues who are not only dedicated Department of Justice employees, but are also dedicated fathers, shaping the minds and futures of the next generation of leaders.”

(Read the full text of both messages here.)       

Gender diversity on boards and in the C suite is an important issue for socially responsible investors. We have been working tirelessly, engaging management and sometimes bringing resolutions in an attempt to increase the number of women on corporate boards, and in senior management, in Canada.

In an article discussing Britain’s efforts to get more women on Boards, Jacey Graham, co-author of The Female FTSE Board Report 2014, comments on equality, ‘It will not be easy, for while there is a "lot less outright sexism, there's still a huge amount of unconscious bias".’
The idea that systemic biases exist, or that there is an ’old boys network’ that prevents women from moving onto boards is frequently dismissed. However humiliating this most recent episode is for Mr. MacKay, he has added immeasurably to the debate by bringing this latent sexism into the open.
Often, when quotas or results based legislation is discussed, the response is either that there are not enough qualified women available, or that we are moving in the right direction and it is only a matter of time before we achieve gender parity.

A Globe and Mail editorial discussing the OSC ‘s new rules on board diversity lauds the voluntary guidelines stating “unlike quotas, it’s a reasonable step”. However, that purported reasonableness is undercut by the fact that “Women make up just 12 per cent of directors on the boards of major publicly traded companies in Canada, a number that has climbed painfully slowly from about 9 per cent a decade ago.“

Discussing gender quotas, The Economist suggests they are becoming more popular due to both the “glacial pace of voluntary change” and that Norway’s quota law (requiring 40% of directors be women)  “has not been the disaster some predicted.”  

“The average number of women on Canadian boards is about 14 percent, which reflects a complete failure to draw on the deep female talent pool that is out there.” Peter Dey, Canadian Director as quoted in Women on Boards: A Conversation with Male Directors.

Quotas. It’s time.

Tuesday, June 17, 2014

SRI fundcos take active ownership role

Mutual funds with a responsible investment mandate are taking an active ownership role, opposing management resolutions far more often than non-RI fund groups, and supporting ESG shareholder resolutions. That’s the conclusion of the Canadian Mutual Fund Proxy Voting Survey, released this week by the Responsible Investment Association

The survey covers the 2013 proxy voting season, examining the voting patterns of 25 Canadian mutual fund families.

The three SRI-branded fund families (NEI, Meritas and Inhance) voted against compensation-related (say on pay) resolutions put forward by management 92% of the time at Canadian companies and 97% at U.S. companies, compared to 13% at both Canadian and U.S. companies by their mainstream counterparts.

On resolutions concerning executive stock incentive compensation plans, the RI funds voted against management 84% of the time, as opposed to 26% of the time by mainstream funds.

The RI fund groups were also more likely to support climate-related shareholder resolutions, voting in their favour 92% of the time versus 39% by non-RI fund groups.

"Voting against management recommendations is of course not limited to the RI funds -- a number of the non-RI fund groups surveyed supported multiple ESG issues and appear to be ready to take a long-term view," the study says.

Along with NEI, Meritas and Inhance, Desjardins, PH&N and CIBC were highlighted as  being the most critical of the status quo and most vigilant with their proxy voting.

Overall, the survey found that Canadian mutual funds side with management on the vast majority of resolutions brought to vote at TSX companies -- around 95% of the time, in most cases. In contrast, the three RI-branded funds voted with management on their resolutions only 56% of the time, and virtually none of the time in the case of "say on pay" resolutions.

"Not all mutual funds accept the status quo," the study concludes. "There are a handful of fund families, specifically those with an orientation towards responsible investment, who take a more active stance in challenging management recommendations. They tend to oppose more management-sponsored resolutions and support more ESG-related shareholder resolutions than their mainstream counterparts."


Friday, May 9, 2014

Passive Investment, active ownership

Catching up on my reading I found this excellent article from April's Financial Times...

Passive investment, active ownership
 Sometimes it seems as if passive investors have the worst of all possible worlds. Invested across the market, they are exposed to every corporate scandal, disaster or anti-business trend that comes along – and unlike investors pursuing an active strategy, they cannot even sell their shares if companies do something awful.
Investors with shares in companies beset by controversy sometimes say there is nothing they can do to change the company’s behaviour, as they are only invested in them because they belong to a particular Index in which the investor owns every share.
So is it possible for a passive investor to engage effectively with the companies in its portfolio without the ultimate sanction of divestment? John Wilcox, chairman of Sodali, a New York-based investment consultancy, and former head of corporate governance at TIAA-CREF, one of the world’s largest pension funds, says it is.
“Having a passive investment strategy has nothing to do with your behaviour as an owner. It is very clear from stewardship codes around the world that there are ownership responsibilities to owning shares, no matter how you got there,” he says. “At TIAA-CREF a large part of the portfolio was indexed but that had nothing to do with our decisions about whether to examine the companies in our portfolio.”
Being a “permanent” owner is not an excuse not to engage, it is a reason to engage, Mr Wilcox adds. “If you are a permanent owner, you want to make sure those assets perform well.”

Despite being unable to divest, passive investors still have a lot of influence over the companies they invest in, says Jane Welsh, head of indexation research at Towers Watson, the consultancy.
“They are generally such large investors and have such large positions that their vote is worth a lot. The last thing companies want is to have big investors vote against them,” she adds. “It is embarrassing and, on top of that, the company has to go back to the drawing board and start again.”
In addition, Mr Wilcox says, proxy advisory firms and organisations such as the UN’s Principles for Responsible Investment and the Carbon Disclosure Project do half the job for passive investors by highlighting the issues that need attention.
Rakhi Kumar, head of corporate governance at State Street Global Advisors, says there is a big difference between passive investment and passive ownership.
“As an asset manager with one of the world’s largest passive offerings and a near-perpetual holder of index constituents, active ownership represents the tangible way in which SSgA can positively impact the value of our underlying holdings,” he says.
“Our size, experience and long-term outlook provide us with corporate access and allow us to establish and maintain an open and constructive dialogue with company management and boards. The option of exercising our substantial voting rights in opposition to management provides us with sufficient leverage and ensures our views and client interests are given due consideration.”

Some active managers will sell out if they are concerned with the risks a company is running, Ms Welsh says, but not all of them will. Some active managers, particularly those with a long-term approach, act more like passive investors by identifying the risks and working with the company to address them over the long term.
“I have some sympathy with the typical pension fund; they are exposed to everything because they are invested in the entire index,” says Aled Jones, head of responsible investment for Europe, the Middle East and Africa at Mercer, the consultancy. “But it does not mean they should not be asking questions about specific issues.”
If anything, when it comes to engaging with a company’s management, being a passive investor is an advantage, he suggests. “Active investors often have a high turnover of shares in their portfolios so they do not hold the shares long enough to have an influence. For really meaty issues in areas such as environmental, social and governance issues, it can take a year or two of engagement to make progress.”
Because they are invested across the entire market (they are also known as universal investors), passive investors have an interest in raising standards everywhere, not just in individual companies, Mr Jones points out. As a result, they can engage at the market level by talking to regulators and stock exchanges or by focusing on sector leaders in the hope that the rest of the market will follow.
“We do not consider the objectives of raising governance standards at individual companies and the market as a whole to be mutually exclusive, and both serve to enhance the value of our portfolios,” says Mr Kumar.
“SSgA adopts a two-pronged approach, whereby issuer-specific engagement is complemented by ongoing dialogue with market regulators.”
Passive investors are not completely powerless when it comes to exiting poorly managed companies. Funds can alter their mandates to exclude certain investments. The Norwegian Government Pension Fund is currently waiting to hear whether the government will order it to divest from fossil fuel companies. The fund has also sold out of palm oil companies because of fears over deforestation and dropped individual companies such as Walmart and Vedanta for failing to meet its investment guidelines.
There are a number of indices that focus on the best performers in areas such as environmental performance, such as the FTSE4Good, the Dow Jones Sustainability index and MSCI’s global sustainability indices.
In addition, argues Lorne Baring, founder of wealth manager B Capital, “passive investors do exit poor companies. Badly managed companies lose value and soon drop out of the index that the passive fund tracks. As an example, a FTSE 100 company that is underperforming the market will probably be ejected from the FTSE 100 and replaced by a stock that is performing well. The investor is passive, the fund is passive, however the mechanics of the tracker deselect companies that are underperforming.”
Copyright The Financial Times Limited 2014.

Friday, May 2, 2014

U.S. firms lagging on sustainability issues, report says

U.S. publicly traded firms are making some progress on sustainability issues, however the speed and scale of those changes are insufficient, according to a new report from Ceres and Sustainalytics.

 “Incremental progress in tackling global climate change and other sustainability threats is simply not enough,” the report, called Gaining Ground, states.

The report finds that while more than two-thirds of the companies evaluated (438) have activities in place aimed at reducing greenhouse gas emissions, only 35% (212) have established time-bound targets for reducing such emissions. And although 37% of companies have implemented a renewable energy program, only 6% have quantitative targets to increase renewable energy sourcing.
Fifty-eight percent of companies (353) have supplier codes of conduct that address human rights in supply chains, and one-third (205 companies) have some activities in place to engage suppliers on sustainability performance issues.
Fifty-two percent (319 companies) are engaging investors on sustainability issues, up from 40% in 2012, when a similar survey was conducted.

Companies with the vision and strategies for integrating sustainability principles into all facets of operations are more likely to generate long-term shareholder value than those that do not,” the report says. “In fact, investors are increasingly integrating sustainability criteria into investment decisions, and are rewarding companies who engage shareholders on sustainability issues.”

A growing number of companies are incorporating sustainability performance into executive compensation packages, the report notes: 24% of companies (147) link executive compensation to sustainability performance – up from 15% in 2012.
Ceres and Sustainalytics assessed more than 600 U.S. publicly traded companies, tracking their performance on 20 key metrics, including greenhouse gas emissions, governance, disclosure and labour standards.

“The findings of this report should inspire companies to examine their own progress and identify where they stand on the path to sustainability,” said Michael Jantzi, CEO and Founder of Sustainalytics. “This is about more than how companies stack up against their peers – it’s about how innovation is driving performance from the corporate boardroom throughout the entire supply chain.”