Dual class structure: are we aligned?

The dual class structure is one of the topics that is repeatedly commented due to the Facebook, Alphabet (Google) and other tech companies' exposure in the media. But they are not the only ones.

We would like to share with our readers a recent article by Anita Anand, University of Toronto – Faculty of Law. We have found the article is very educational about the dual class share structures and its pros and cons.

In a typical public company, shareholders can elect the board, appoint auditors, and approve fundamental changes. Firms with dual class share (DCS) structures alter this balance by inviting the subordinate shareholders to carry the financial risk of investing in the corporation without providing them with the corresponding power to elect the board or exercise other fundamental voting rights.

This article fills a conspicuous gap in the scholarly literature by providing empirical data regarding the governance of DCS firms beyond the presence of sunrise and sunset provisions.

The summary data suggest that the governance of DCS firms is variable. A large proportion of DCS firms have no majority of the minority voting provisions and no independent chair. By contrast, almost half of the DCS firms have a sunset clause and a majority of independent directors. Finally, just under one-third of DCS firms have change of control provisions over and above existing law.

On the basis of this evidence, this article argues against complete private ordering in favor of limited reforms to protect shareholders in DCS firms including: mandatory sunset provisions, disclosure relating to shareholder votes, and buyout protections that would address weaknesses inherent in DCS firms.

We also share a short article published at Bloomberg, which we find relevant as displays a couple of charts about the evolution of this capital structure during the last decades. We hope you find this information useful.

Alembeeks Group is an independent proxy advisor. Institutional investors need a proxy advisor that can help them effectively and efficiently make informed voting decisions and record keep all their votes.


ESG Ratings - Another way to build up and show a portfolio

More and more asset managers are using ESG values to create universes where they can invest in a sustainable and financially efficient way. The inclusion of these factors has proven to be effective in mitigating risks derived from reputational aspects.

There are currently numerous ESG data providers, a summary of each of which is beyond the scope of this post, but some well-known third party ESG report and ratings providers include: Bloomberg ESG Data Service; Corporate Knights Global 100; DowJones Sustainability Index (DJSI); Institutional Shareholder Services; MSCI ESG Research; RepRisk; Sustainalytics Company ESG Reports; and Thomson Reuters ESG Research Data.

From Alembeeks Group we encourage the reading of the following research, published on Harvard Law School Forum, regarding the return on investment in ESG initiatives. It identifies and analyses five pillars of the business case for corporate sustainability:

  1. Corporate investment in ESG enhances market and accounting performance
  2. Corporate investment in ESG lowers the cost of capital
  3. Corporate investment in ESG is a means of engagement with key shareholders
  4. Corporate investment in ESG improves business reputation
  5. Corporate investment in ESG channeled to product innovation fosters new revenue growth

 

Find below an interactive chart showing the ESG scores of each of the companies in a given European Equity portfolio. These values are courtesy of Sustainalytics.


Note on Corporate Governance and Institutional Investors

Some months ago Observatorio de Divulgación Financiera (ODF), think tank linked to the Institut d’Estudis Financers (IEF) in Barcelona, proposed us to write a note on Corporate Governance and Institutional Investors.

The note come out this month. Find the link to the publication in Spanish.

More than 800 professionals of the economic and financial sector are subscribed to the ODF newsletter, which has also other interesting publications available.

From Alembeeks Group, we are always pleased to contribute to the promotion of corporate governance applications which foster a better context for the development of business activities and societies.


Why asset managers avoid shareholder engagement, so far

Shareholder engagement is still one of the greatest unknown for the fund industry. The substantial growth of assets managed by institutional investors during the last decades has also meant that this type of investors has become, as a group, the larger shareholders of main listed companies.

Several academics argue that it is the lack of incentives that leads institutional investors to passivity in relation to their role of shareholders in the corporate governance of quoted companies.

The nature of the asset management industry itself leads to a number of reasons that creates low incentives for fund managers to have a greater involvement in the corporate governance of companies or to carry out belligerent actions by voting against of the proposals promoted by the management. That is why, in case of not agreeing with the management of the management, the first option of the institutional investors is the divestment. In the slang of corporate governance, selling a company's shares for discrepancies with the management team is what is known as "voting with the feet."

Their first reason to vote with the feet is because carrying a belligerent activity with the management of a company involves dedicating resources that can benefit many other passive shareholders, thus causing scenarios of "rational apathy" (when private costs exceed to private profits) and the opportunist problem (when shareholders avoid incurring costs in expectation of other shareholders assuming that cost), especially since many asset portfolios are highly diversified by the number of invested companies.

Second reason, the costs of coordination between shareholders are higher when the shareholders are more diversified.

Third reason, belligerent actions may make it difficult for fund managers to gain access to managers, and they may have conflicts of interest in the case of managing pension funds of certain companies or be related to entities with which the companies can have another type of activity.

Fourth, fund managers are specialized in selecting the best investments instead of entering the day to day aspects of corporate governance of companies.

In order to correct this lack of commitment to corporate governance by institutional investors on 17 May 2017, Directive 2017/828 of the European Parliament and of the Council amending Directive 2007/36/ EC with regard to promoting the long-term involvement of shareholders. It proposes a series of measures to be carried out by shareholders, asset managers and intermediaries.

In the next post, I will write about these measures. In Alembeeks VotingLab we help institutional investors to improve their shareholder engagement and to vote in a coherent and informed way according to an ad-hoc voting policy for each manager.


Panelists in Barcelona reporting conference

We were invited to contribute as panelist in the conference on "How to communicate the true value of a company using financial and non-financial information" at the Col-legi d'Economistes the 22nd June, in Barcelona.

The conference was shared by the Managing Director of Caixa d'Enginers Gestió, one of the asset manager companies leading the SRI investment in Spain, and the Head of Investor Relations of Fluidra, a listed company developing sport, leisure and therapeutic applications for the sustainable use of water.


Alfi London Conference 2017

A representation of Alembeeks Group attended the 22nd and 23rd of May at the ALFI London 2017 conference held in Central Hall Westminster.

It was a great opportunity to find most of Luxembourgish service providers, a representation of UK investment managers and listen to top speakers.

Once again, ALFI organization created the perfect environment to match two countries, UK and Luxembourg, with a deep expertise in the asset management industry.


Five Tribes Of Institutional Investors

Since I started in the corporate governance advisory field to institutional investors, I have met fund managers, compliance officers and the many C-suites within asset management companies in Europe. All of them are totally distinct from one another, with their different investment strategies, different ties and different hobbies. Apparently, no special pattern could describe them as a group. None?

Not really. One paradigm I have been able to identify: to which tribe those institutional investors belonged to when it comes to their relationship with Corporate Governance.

In these days, most professionals in the sector tend to neglect that quoted companies are mainly in the hands of institutional investors. As shown in the chart provided by ProxyPulse, the institutional ownership represents more than 62% of the total ownership in those companies where they invest. However, when we speak about their responsibility as shareholders most of them tend to look the other way. Not always, though. To me, this is the moment when asset managers start to reveal their tribal features.

Indeed, as I like to say and inspired by Schumpeter, there are 5 tribes of institutional investors when it comes to corporate governance, each with its own interpretation of what being a shareholder is. The 5 tribes are following:

  • Governance Deniers,
  • Governance Soft-Tickers,
  • Governance Hard-Tickers,
  • Governance Ambassadors, and
  • Governance Sharks.

Governance Deniers, as the name unveils, deny everything. First, they deny their will of being shareholders. They are prone to being known as speculators and generally tend to manage small portfolios. They do not make special distinction between a company, a commodity or an index. For them, a company is just a means to get a gain for their funds. Just a price blinking in a screen, a candle in a chart. Moreover, they surprisingly deny the existence of a legislation when it comes to voting rights despite being regulated! Indeed, they are sure that they have no obligation at all and sleep soundly thinking that it is a responsibility of the custodian to manage “these things”. Fortunately, they are only a few.

The next tribe is an illustrated version of the previous one. Governance Soft-Tickers still consider companies only as an instrument to make their profit. But in this case, they know there are a set of rules for asset managers that mention something about the exercise of voting rights of the companies in which they are investing. For them, these matters are a mere tick in a check list of the auditor. Nevertheless, as the auditor has never asked them about it, they are not interested in corporate governance matters, so far.

Governance Hard-Tickers are generally old Soft-Tickers with either enthusiastic compliance officers or detail-oriented auditors. Most European asset managers place themselves in this group. Hard-tickers know their legislation well. They have prepared their Voting Policy and Voting Guidelines. They publish in their websites information to their investors with regard to the exercise of the voting rights, and vote in some of the main companies they hold their funds in. Of course, they do it just for the record, for the tick in the audit check list. Notwithstanding, in this case, they do comply with the current legislation.

The first tribe that feels comfortable with the shareholder status are the Governance Ambassadors. They know current legislation well and push for improving future legislation. In some cases, like Warren Buffet or Capital Group among others, they are extremely big players, and selling their position (or voting with the feet as known in the governance jargon) wouldn’t be possible, argue naysayers. In other cases, they are forced to invest in certain companies, which is the case of passive indexing managers like Vanguard or BlackRock. However, all of them understand that “the health of public companies and financial markets is critical to economic growth and a better financial future for workers, retirees and investors”, as they claim in the letter where they introduce their “Commonsense Corporate Governance Principles”. Another group of institutional investors within this Governance Ambassadors tribe is comprised of asset managers that have found a gold mine being active and sensitive to ESG, ISR and corporate governance issues because it has been a positive driver for their business in terms of investment strategy and brand positioning, like the Dutch Robeco. Governance ambassadors are in a privileged position. Their size grants them a more direct return in their efforts of acting as active shareholders; but some small and middle sized asset managers are also benefiting from their diligent ownership activity in a social context where investors a more demanding.

Finally, we find the Governance Sharks tribe of institutional Investors. Commonly known as activist hedge funds. They find themselves in their natural habitat when it comes to corporate governance aspects. Their large-size and low-diversified portfolios allow them to gain significant weight in their targeted companies. In this manner, they typically reach to appoint directors or mobilize other shareholders towards the goals they promote within the companies (check this interesting link). In some cases, they have left some skeletons in the way and this explains part of their bad reputation, but in other cases they have improved the results of mismanaged companies where sleepy shareholders didn’t act.

The corporate governance aspects are generally forgotten by institutional investors because the liquidity of the stocks where they invest in allows them to vote with the feet easily. Moreover, the costs of following the governance matters is thought to be too high for the benefits.

However, history has taught us a different lesson many times. The price of not caring about the governance of companies has allowed and encouraged fraud from managers, costing huge amounts of money to investment funds and investors. However hard we analyse the accounts and statements of a company, if the management is not aligned with the shareholders, these accounts could be utterly manipulated, like the Toshiba scandal in 2015, and all our efforts would make no sense.

That’s why, from an institutional investor point of view, caring about corporate governance is not a complement but an important pillar for the safety and growth of the asset management industry.

 


 

Alex Bardaji is Director at Alembeeks Group.

Alembeeks VotingLab it is the division within Alembeeks Group that helps institutional investors to participate and track their activity with regard to the voting rights of the companies they hold in portfolio.

Moreover, Alembeeks VotingLab analysts generate ad-hoc reports for each Shareholders' Meeting according to voting guidelines of each client. These reports are the perfect guide to face a Shareholders' Meeting with all the necessary information.

This research service and the consulting services of drafting the Voting Guidelines and Voting Policies are the perfect complements of the VotingCloud platform provided at Alembeeks.

The VotingCloud platform is the platform that allow institutional investors to keep track of their voting activity, one of the currently demands by the internal and external auditors.


Why Corporate Governance Is Important For Economic Growth?

With this post, we would like to share what some of the biggest names in American business published in 2016.

Warren Buffett, Jamie Dimon, and more signed on to a list of suggested changes for companies to adopt, titled "Commonsense Corporate Governance Principles." From Alembeeks, we encourage institutional investors to read the letter.

The group said that companies need to change the way they are managing their boards of directors, reporting earnings, and interacting with major investors.

"Our future depends on these companies being managed effectively for long-term prosperity, which is why the governance of American companies is so important to every American," the group wrote in the letter.

"This diverse group certainly holds varied opinions on corporate governance," they wrote. "But we share the view that constructive dialogue requires finding common ground — a starting point to foster the economic growth that benefits shareholders, employees and the economy as a whole."

Here's the full list of people signing on to the letter:

  • Warren Buffett, CEO of Berkshire Hathaway
  • Jamie Dimon, CEO of JPMorgan Chase
  • Larry Fink, CEO of BlackRock
  • Mary Barra, CEO of General Motors
  • Jeff Immelt, CEO of GE
  • Mary Erdoes, CEO of JPMorgan Asset Management
  • Tim Armour, CEO of Capital Group
  • Mark Machin, CEO of CPP Investment Board
  • Lowell McAdam, CEO of Verizon
  • Bill McNabb, CEO of Vanguard
  • Ronald O'Hanley, CEO of State Street Global Advisors
  • Brian Rogers, chairman and CIO of T. Rowe Price
  • Jeff Ubben, CEO of ValueAct Capital

While the group includes the head of a major bank, industrial leaders, and an activist investor, the letter says they all believe governance needs reform.

From Alembeeks Group, we fully support this dialogue and our Alembeeks VotingLab division helps asset managers to exercise their portfolios' voting rights and own fiduciary responsibilities according to the best practices.


Asset Managers And Active Ownership In Spain

The well-regarded magazine Fundspeople published Alex Bardaji’s opinion on the increasing activity of Spanish asset managers in relation to their active ownership.

Alembeeks VotingLab acts as an external research department specialized in corporate governance matters for asset managers based mainly in Luxembourg and Spain.

Legislators identified the flaws in corporate governance of the European quoted companies during the euro crisis, and they have devised new measures to propel the responsibility of asset managers, the main shareholders as a whole in this field.

Indeed, according to Alex Bardaji, director at Alembeeks Group, this new legislation has already borne fruit before being published and some asset managers are already leading their fiduciary responsibility towards higher standards of practice and transparency.

 


Directors Remuneration

Glance at the 2 Remuneration Maps:

  • Directors Remuneration Analysis - Spanish Companies 2016 - 2015
  • Directors Remuneration Map - Spanish Companies 2016

Created by our Alembeeks VotingLab unit in relation to the main quoted Spanish Companies (data published by the own companies in the Annual Report on Directors' Remuneration).