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What's New
ISS on the block as criticism mounts
ESG reporting poses challenges Editor's Corner: The continuing disconnect between Main Street and Wall Also Noted: News scan: Health care costs; BlackBerry's non deal; and much, much more and much more... News From the Fierce Network:
1. SAC settlement to be inked Monday
2. Pensions fare well with private equity over long-term
3. Shareholder activism going global
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The continuing disconnect between Main Street and Wall
The stock market has hit a five-year high, a mark that puts the financial crisis and ensuing recession in the rear-view mirror, far enough, certainly, to make one think the economy is firmly back on solid ground. But that is not the case, as the Financial Times reminded us on Sunday with a sobering chart. It shows that U.S. business investment is still below 1991 levels, even though it has rebounded from even lower depths. How can the U.S. prosper with such underinvestment in capital stock? The fact is it can't. To be sure, some observers think it's just a matter of time before capital investment returns to normal levels. A paper recently posted on vox.eu goes so far as to argue that U.S. multinationals' investment abroad produces so much synergy that it will lead to more hiring and investment at home. For example, the research finds that multinationals that increase their employment at foreign affiliates by 10 percent also increase domestic research and development spending by 5.4 percent, domestic capital investment by 4.3 percent and domestic employment by 3.9 percent. General Electric and Caterpillar offer up two good examples. According to the paper, GE's German MRI lab has produced research innovations that are being incorporated into equipment designed and produced at the company's New York campus. Similarly, Cat's Indian R&D campus allows its Peoria, Ill., operations to run in two shifts rather than three, cutting labor costs and enabling the company to hire more U.S. engineers, the paper says. But the aggregate data in the FT chart suggests these synergies are hardly enough to make a difference to the overall economy. And economist Dean Baker agrees. Baker insists that the problem is the overvaluation of the U.S. dollar, which puts companies that operate in it at a comparative disadvantage. Said Baker, co-director of the Washington-based Center for Economic Policy and Research, in an email to us: "There are probably cases whereby getting cheaper inputs allows a company to keep some of its market that it would otherwise lose. I have always thought the real issue is relative prices." Of course, critics of the Federal Reserve's easy money policies contend they are debasing the dollar. But from Baker's perspective, they are not doing enough to reduce its value. Yet the fiscal impasse in Washington, D.C., allows for no other moves to stimulate investment. And that's a fact that current stock market valuations ignore. - Ron Read more about: Capital investment, stocks
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Today's Top News ISS on the block as criticism mounts
Whither Institutional Shareholder Services (ISS)? A growing backlash against proxy advisory firms may force ISS to trim its sails in order to retain its influence. As disclosed last week, the proxy advisory arm of MSCI is once again up for sale, for the fifth time since 2000, according to the scorekeeping of corporate governance expert Broc Romanek. This time, the process may take longer than it has before, even under the expert guidance of Morgan Stanley and legal counsel Davis Polk, because ISS is now the hottest of hot potatoes, given calls in the government and from competitors and issuers for ISS to have less influence in the shareholder proposal arena. The proxy advisory firm is accused by critics of outsize influence, because the firm effectively relieves fiduciaries of their duties; and potential conflicts of interest, because issuers may also pay for ISS's advisory services. But defenders say the complaints may simply reflect opposition to efforts to pressure corporate managers. ISS itself states on its website it does not tolerate anything less than objectivity and transparency. As recently as last week, in fact, the SEC was calling for reform of the big two proxy advisory firms, ISS and Glass Lewis. "I believe that the Commission should fundamentally review the role and regulation of proxy advisory firms and explore possible reforms, including, but not limited to, requiring them to follow a universal code of conduct, ensuring that their recommendations are designed to increase shareholder value, increasing the transparency of their methods, ensuring that conflicts of interest are dealt with appropriately, and increasing their overall accountability," Commissioner Daniel M. Gallagher said during a speech given at a Georgetown University Center for Financial Markets and Policy event, in New York. Meanwhile, however, business continues as usual for ISS, just in time for proxy season, and there is even evidence that the proxy advisory firm is working on at least one of the SEC's recommendations, the call for a universal code of conduct. "The senior ISS management team is very supportive of MSCI's decision and confident about the future prospects of the business," said ISS President Gary Retelny, in a press release. "I expect the current ISS management team to remain in place and fully dedicated to the business." Case in point, comments are due tomorrow, November 4, on proposed changes to ISS's proxy process, including how the firm evaluates board responses to majority-supported shareholder proposals, and changes to its pay-for-performance screen. And, it's working with its competitor here in the U.S., Glass Lewis, as well as proxy advisory firms in Europe, on agreeing on best practices, in answer, perhaps, to one of the SEC's recommendations. Last week, a public comment period opened for Best Practice Principles for Governance Research Providers, under the auspices of The Best Practice Principles for Governance Research Providers Group. "Global principles are a smart idea since a global perspective should help us to better understand what is good governance," Broc Romanek said via e-mail. Meanwhile, another voice in corporate governance called for the focus to be not on ISS itself, but on the work that ISS is supposed to do. "The problem is that opposition to these firms comes from concerns with the message they're delivering," said Charles Elson, Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "And it's a pretty universal message, based on a universal standard. Don't shoot the messenger, focus on the message." For more:
- see this website Read more about: Securities and Exchange Commission, MSCI
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ESG reporting poses challenges
More investors want companies to provide information about their business that goes beyond financial results, information that encompasses such areas as environmental and social issues and corporate governance, known as ESG. Companies are starting to provide such information, but ESG reporting can pose challenges, according to investor relations executives who spoke last week at a symposium on the topic at Baruch College in New York. Executives said issues include deciding which information to provide, collecting the data and assessing the financial value of various factors. One guideline for such reporting, from a nonprofit organization known as the Global Reporting Initiative (GRI), provides a list of key performance indicators ranging from what climate change could mean for the company's finances, the ratio of the remuneration of women to men by employment category, whether the company has operations that could have "negative impact" on local communities and how many of the company's units have been analyzed for risks related to corruption. It's up to each company to decide which of the indicators are relevant for its business. Friederike Edelmann, vice president of investor relations at Coty, said companies have "a lot of material factors that aren't financial," and cited customer satisfaction and employee satisfaction. "The hardest part is probably for companies to sit down and decide what is material, and then collect the data," she said. "In many cases, you don't have systems set up to collect all the data." Edelmann cited her experience at a previous job, at enterprise software company SAP, as it started to look at factors beyond financial data. For example, as SAP began to assemble data on the extent to which positions were filled by men or women, it realized that many of its units didn't even track whether employees were male or female, she said. Once the company collects the data, it has to figure out how to put a number on how the various factors affect the company's bottom line, Edelmann added: "What does it mean if your customer satisfaction increases 10 basis points?" Prudential Financial issued a consolidated report that included financial information from the annual report and sections on environmental, social and governance issues, for the first time last year. Mary O'Malley, Prudential's vice president of environment and sustainability, noted that companies have to deal with differing definitions of materiality. For example, while the Securities and Exchange Commission's definition involves what matters to a "reasonable investor," GRI says companies should consider other "stakeholders" as well. O'Malley also pointed to the difficulty of boiling down all the relevant information into a document that's not too long. "Another practical challenge is how to do this in 30 to 40 pages," she said. "Because is anybody going to read anything more than that? I don't think so." For more:
- see Prudential's 2012 consolidated report
- see this Bloomberg Businessweek story
- see this Deloitte report Read more about: social and governance (ESG), Global Reporting Initiative (GRI)
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Also Noted >> Human Capital: No wonder U.S. health care is so expensive
Pharmaceutical companies will continue to be able to shift much of the cost of brand-name drugs to insurance companies, which critics say will pass along their portion to consumers through higher premiums, thanks to a decision by the Obama administration to allow the practice of subsidizing copayments for prescription drugs under the Affordable Care Act. The industry spent about $4 billion on such subsidies in 2011. Health plans and pharmacy-benefits managers object to the practice, which is not permitted under Medicare and Medicaid. Read more >> Capital: No deal for BlackBerry after all
Looks like all the talk about potential suitors lining up for BlackBerry was just that. The company has abandoned plans to sell itself and will now issue $1 billion of convertible debt to its principal shareholder, Fairfax Financial Holdings and other institutional investors. The stock was down 18 percent in pre-market trading. Investors had evidently bought into bankers' attempts to drum up interest from somewhere (anywhere?) for an acquisition. And we, along with the rest of the press, fell for it. Read more >> Liquidity: Risk managers ponder end of terrorism insurance backstop
With the year-end 2014 expiration of the government's terrorism insurance backstop now visible on the horizon, the debate about its renewal is revving up. Risk managers worry that if the federal backstop isn't extended, limits on terrorism insurance would go down, or the insurance might not be available at all, according to a RIMS survey. Read more >> Accounting and Tax: Weyerhauser in tax-advantaged homebuilding deal with Sternlicht
Weyerhauser is using a fancy tax maneuver to sell its homebuilding unit to a company controlled by Barry Sternlicht for $2.7 billion. The device, known as a reverse Morris Trust, allows companies to sell a subsidiary that has gained value to another company without paying tax, so long as it isn't spun off within two years. In this case, Weyerhauser will split off its homebuilding unit into a separate subsidiary that will then merge with a subsidiary of Sternlicht's firm, Tri Pointe Homes, with Weyerhauser shareholders ending up with 80.5 percent of the shares of the combined companies. Read more >> Capital: Too bad the end of "risk on, risk off" trading didn't come sooner
This Reuters article sees a return to fashion of individual stock picking. That's good news for corporate managers, as investors have begun again to pay attention to individual company performance after years of highly correlated "risk-on, risk-off" bets. Now, however, implied correlations, a measure of how closely the performance of individual stocks mirrors that of an index, have fallen to their lowest since October 2007 after peaking in 2011. But the timing of such a shift may be problematic, as some observers think the market is grossly overvalued, reminding them of the 1999 tech bubble. It will be more challenging for managers to create shareholder value in such an environment, unless of course valuations can somehow march ever upward. Read more >> Accounting and Tax: Deloitte makes tax haven hay while it can
The Big Four firm is advising clients on how to steer investments to and profits from Africa through Mauritius, where withholding tax is a mere 8 percent and capital gains rates are zero, according to the Guardian. But this is hardly news. The question, as I wrote about in Global Finance, is whether the international community will ever make good on its threat to crack down. Deloitte is clearly betting that it won't, at least not anytime soon, or that moves that beat the clock will be grandfathered. Read more >> Human Capital: Chinese labor practices, now playing in the U.S.?
Chinese electric-vehicle maker BYD denies that it's using Chinese workers to displace U.S. ones at its bus factory in Los Angeles. Labor-rights groups claim the company is avoiding U.S. minimum wage standards (as if they were onerous) by importing workers from China. But the company, which has been courted by California Governor Jerry Brown, feted by his London counterparts and financed by Warren Buffett, says its simply bringing in a few specialists on a temporary basis. Read more Briefly noted: > SAC to plead guilty to insider trading, though that won't be enough to remove the legal cloud hanging over the hedge fund firm. Article > Samsung faces investor pressure to return cash. Article > Activism goes global. Article > Chevron latest oil company to boost capex. Article > No "undue pressure" on Zurich Insurance's CFO before his suicide in August. Article > More competition in Asian trade finance is bringing lower costs, higher quality. Article > Twitter IPO has drawn "more than enough investor demand." Article > And Twitter's timing seems good, given the strong demand seen recently for IPOs. Article And finally… Pimco's Bill Gross apologizes for his wealth. > Get Subscriptions to the Leading Finance Magazines for FREE Mercury Magazines offers top Finance titles for Free to professionals. No Credit Card Required. Stay Ahead in your Industry. Sign up now. > Whitepaper: December 21st is fast approaching. Is your firm compliant? The swaps clock is ticking for mobile recording and your firm could be at risk for fines, penalties and reputational damage. Truphone is the only global provider – offering in-network mobile recording that seamlessly enables global compliance. Enable compliance at swapsclock.com | |
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