2017 Lane Reports

Strategic Shareholders and Prudent Directors Come Together

The Lane Report, August 2017
Tuesday, August 1, 2017 10:00 am
by Marc J. Lane

Despite a disturbing rise in unequal voting structures and virtual shareholder meetings at public companies, this year’s corporate proxy season reflects the best of corporate boards’ growing commitment to transparency, accountability and engagement.  It’s no surprise that the savviest of corporate directors are eager to set themselves apart as reliable stewards among their peer groups in seizing the upside of the unprecedented disruption before them.

Going into 2017, directors of public companies faced a new world order, one that challenges them as they’ve never been challenged before. Political instability and shifting geopolitical and regulatory environments are tougher than ever to navigate. Internal and external cybersecurity and other existential threats call for a more nuanced approach to enterprise risk management. Technological change is increasingly empowering new competitors, recasting supply chains and lowering price points. The gender and racial diversity of human capital is now universally seen as delivering a “diversity dividend” while boards are reconstituting their own ranks to gain the benefits of the varying perspectives, knowledge and skills that diversity carries with it.

Against this dynamic backdrop, 38 institutional investors, having invested more than $20 trillion in U. S. equities, signed on to a new “Framework for U.S. Stewardship and Governance” in January which will take effect next January. The principles they embrace will affirm that boards are accountable to shareholders; that shareholders should be entitled to voting rights in proportion to their economic interest;  that boards should be responsive to shareholders and be proactive in order to understand their perspective; that boards should have a strong, independent leadership structure; that boards should adopt structures and practices that enhance their effectiveness; and that boards should develop management incentive structures that are aligned with the long-term strategy of the company.

Already, proxy access is becoming commonplace among American companies. After corporations have long resisted shareholder proposals that bylaws be amended to allow them to nominate directors, more than half of the 100+ resolutions seeking that power were accepted by management this proxy season. Now, a full 60% of S&P 500 companies have proxy access bylaws, up from 1% just three years ago. As a result we’re likely to see a growing number of boards boast that their members are recruited and assessed to ensure that they’re competent to oversee the company’s strategy and risks.

This proxy season also saw significant movement on gender diversity and pay equity. Since only 18% of S&P 1500 companies had female directors in 2016, it came as no surprise that shareholder proposals asking boards to increase their diversity were among the most numerous this year,  The shareholders of 30 high-profile companies demanded the disclosure of plans to fill the pay gap between male and female employees. Six giant tech companies agreed to report on pay equity, and most other pay equity resolutions were withdrawn after company management came to terms with shareholders.

Investors large and small – asset managers State Street, BlackRock and Fidelity among the largest – are demanding reports on sustainability, renewable energy and environmental impact issues as a low-carbon economy will likely disrupts a host of industries. This year’s proxy season also reflected shareholder awareness that, over the long term,  environmental sustainability is a critical component of risk management. Support for shareholder proposals that companies report on climate risks jumped from 7% in 2011 to 43% this year, with proposals at two major energy companies gaining more than 60% support.

Embracing inclusion and promoting climate leadership are good business. They also make financial sense.

Forbes recently reported that companies that are more diverse see an increase in return on investment—of 35% for ethnically diverse companies and 15% for gender-diverse companies. Not only are more diverse companies better able to win top talent; they also benefit from greater employee satisfaction.

And more and more company leaders are united in their understanding of the urgency to act on climate as a moral and economic imperative. They are speaking with one voice – and funding clean energy investments – like never before.

The shareholder’s role is indispensable in driving positive social and environmental change.

We strongly believe – and our research indicates – that one’s investment portfolio can be successfully aligned with his or her core convictions without sacrificing diversification or financial performance. For each of its values-based investment clients, Marc J. Lane Investment Management, Inc.’s proprietary Advocacy Investing® strategy identifies companies which not only exhibit sound business fundamentals and solid governance, but also whose policies and practices reflect and promote the client's deeply held beliefs or, in the case of an institutional investor, its mission. In that way Advocacy Investing empowers the client investor to back only those companies that are doing the "right thing," converting the investor's "passive" assets into "active" assets that actually help drive positive social and environmental change.


Marc Lane is an attorney, financial adviser and the author of Profitable Socially Responsible Investing? An Institutional Investor’s Guide, published by Euromoney Institutional Investor PLC, and Representing Corporate Officers, Directors, Managers, and Trustees, published by Aspen Publishers. We invite you to reach out to Marc in confidence and learn how Marc J. Lane Investment Management, Inc. can add value to your investment portfolio. He can be reached at [email protected] or 312-372-5000.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf

The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems.

A SIB isn't a traditional bond where investors are guaranteed a fixed return but a contract among a government agency that agrees to pay for improved social outcomes, a private financing intermediary and private investors. SIBs shift the risk of experimenting with promising but untested intervention strategies from government to private capital markets, with public funds expended only after targeted social benefits have been achieved.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system.

The government decided which goals would be supported, but exactly how those goals would be achieved was left to the private sector. It was the investors, through a bond-issuing organization, who ultimately endorsed the allocation of investment proceeds — how much would be invested in job training, drug rehabilitation and other interventions.

If the Peterborough plan eventually shrinks recidivism rates by 7.5 percent or more, the government will repay the investors' capital and share the taxpayers' savings with them, delivering up to a 13 percent return. If the target isn't hit, the investment will have failed and the government will owe the investors nothing.

Illinois' SIB effort was spearheaded by the state's Task Force on Social Innovation, Entrepreneurship and Enterprise — the governor's think tank on social issues, which I am privileged to chair — with support from Harvard University's John F. Kennedy School of Government, the Rockefeller Foundation and the Aurora-based Dunham Fund. A request for information issued by the Office of Management and Budget on May 13 yielded responses from service providers eager not only to reduce recidivism here but also to create jobs, revitalize communities, improve public health outcomes, curb youth violence, cut high school dropout rates and alleviate poverty.

Now the governor has issued a request for proposals intended to spur better outcomes for Illinois' most at-risk youth — by increasing placement stability and reducing re-arrests for youth in the state's Department of Children and Family Services, and by improving educational achievement and living-wage employment opportunities justice-involved youth most likely to re-offend upon returning to their communities.

Kudos to Mr. Quinn for bringing SIBs to Illinois. May they soon start delivering on their promise.

- See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf
The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpu

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