Pension Funds Improving Corporate Governance?
Overseers of government worker pension funds pressed JPMorgan Chase & Co. to strip chief executive Jamie Dimon of his additional title of chairman after the London Whale fiasco, renewing a proxy battle the bank won only narrowly last year.You can read AFSCME's press release here. Does it make sense for pension funds to go after powerful bankers and strip them of their titles to improve corporate governance? You bet it does and many individual investors will cheer them on.
Pension funds, including that of the American Federation of State, County and Municipal Employees (AFSCME), said on Wednesday they filed a shareholder resolution that says the bank would be better run if the chairman and CEO jobs were held by different people.
Backers cited in a statement what they called “mounting investor concerns with the board’s oversight” following more than $6-billion (U.S.) of losses last year from bad derivatives trades linked to a London-based trader – known as the London Whale for his outsized bets.
The group also cited other problems such as the cease-and-desist orders the bank received from regulators last month that require it to improve its internal controls, which Mr. Dimon oversees.
“It is impossible to imagine how board oversight of the company’s affairs will be strengthened while CEO Jamie Dimon leads the very board that is charged with overseeing his own shortcomings,” said Denise L. Nappier, the Connecticut Treasurer who oversees the Connecticut Retirement Plans and Trust Funds, which are part of the group.
Other filers of the proposal include those overseeing the pension assets of New York City teachers, police and firefighters, according to their joint statement.
The issue of splitting the chairman and CEO jobs has become a staple argument of shareholder activists and reformers.
Proponents say having the roles filled by a single person concentrates too much corporate power and can lead to conflicts of interest. Many companies defend the practice, however, saying it can be more efficient and that other measures can assure the board’s independence and oversight.
AFSCME last year filed a similar resolution that won 40 per cent support from JPMorgan shareholders. Later filings showed backers of the resolution included mutual funds sponsored by American Funds, which before had voted with management on a similar resolution.
JPMorgan spokesman Mark Kornblau declined to comment.
Last year the bank argued the split was not necessary because other directors were independent. AFSCME filed, then withdrew, a similar proposal last year at Goldman Sachs Group Inc. after the bank agreed to appoint an independent lead director.
AFSCME last week said it has filed similar proposals this year calling for independent chairs to be named at companies including General Electric Co., Lazard LLC and Wal-Mart Stores Inc.
Another backer of the resolution at JPMorgan this year is Hermes Equity Ownership Services, an adviser owned by BT Pension Scheme, which operates pension funds for British Telecom employees.
In the wake of the financial crisis, corporate governance will be a dominant theme. Just look at Citigroup which bowed to shareholder pressure, overhauling its pay:
Citigroup Inc (C.N) said on Thursday it has overhauled an executive pay plan that shareholders rejected last year as overly generous, revising it to tie bonus payments more closely to stock performance and profitability.And it's not just pension funds that are pressing for better corporate governance. John Carney of CNBC reports, World's Biggest Fund Blasts Corporate Governance Rules:
The company also said it will pay new Chief Executive Mike Corbat $11.5 million for his work in 2012, in line with remuneration for his peers at other major banks.
The new plan was crafted after board Chairman Michael O'Neill and other directors met with "nearly 20" shareholders representing more than 30 percent of Citigroup stock, Citi said in a filing.
"At first blush, the package appears to be responsive to a number of the issues we raised," said Michael Garland, an assistant comptroller overseeing corporate governance matters for the City of New York.
New York City's pension funds, which own about 7.4 million shares of the bank, met O'Neill in August to discuss senior executive pay, Garland said.
Citigroup's previous pay plan was rejected by shareholders in a non-binding vote at the company's annual meeting in April last year, in what was seen as a stinging rebuke to the bank's management and directors, and helped hasten departure of then-chief executive Vikram Pandit.
Compensation analysts had criticized the plan for giving directors too much discretion to set pay, and for setting the bar too low for bank executives to receive high payouts.
Under the previous profit-sharing plan, Citigroup would pay millions to executives if Citigroup earned more than $12 billion before taxes over two years, a figure the company easily topped in 2010 and 2011.
Under the new plan, 30 percent of the bonus for top executives will be paid in cash based on how much the company earns on assets and on total shareholder return compared with peers over three years through 2015. Another 40 percent will be a simple cash bonus and the final 30 percent will be deferred stock.
TICKING BOXES
Still, elements of the bank's proposed pay package could be better, said Paul Hodgson, a corporate governance analyst in Camden, Maine.
For example, the pay plan would ideally reward executives more for their performance. But too much of the stock bonuses are awarded mainly for the employee staying with the company, Hodgson said.
There were positives, including the fact that the bank needs to show stronger performance over the longer term than before, Hodgson said.
"They have done enough to check the boxes, basically," Hodgson said.
Charles Elson, director of a corporate governance center at the University of Delaware, said the new pay plan could be followed by other banks because it reduces the discretion of the board, a sore point for bank investors.
"At a lot of these financial institutions, people distrust the board, so moving away from discretion makes some sense," Elson said.
The 2012 pay for Corbat, who was named CEO in October, was based partly on the new pay plan.
Corbat's $11.5 million payment was based on his work as CEO and on his prior performance as head of the Europe, Middle East and Africa region, the company said. The board's compensation committee noted that Corbat had quickly moved as CEO to finalize the 2013 budget, including a restructuring plan to save $1.2 billion a year.
Of the payment, $1 million is base salary, $4.18 million is cash bonus, $3.14 million is deferred stock and $3.14 million is in new "performance share units" which deliver cash payments depending on profits and stock performance compared with peers.
Pandit, who was pushed out as CEO in October, received a symbolic $1 in 2010 and $128,741 in 2009, far less than rivals, after the company received more than $45 billion of government bailout money over three rescues during the financial crisis.
Pandit was paid $15 million in 2011.
Citigroup did not disclose pay for other top executives. It did, however, say that "performance share units" valued at $3.14 million had been awarded to Manuel Medina-Mora, the co-president, and that $1.95 million of the units had been awarded to CFO John Gerspach.
For 2012, JPMorgan Chase (JPM.N) Chief Executive Jamie Dimon received $11.5 million, and Bank of America's (BAC.N) Brian Moynihan was paid $12.1 million.
Norway's gigantic $650 billion sovereign wealth fund has just published an important note on what it expects in terms of corporate governance from the companies it invests with.Indeed, Norway is way ahead of of its peers when it comes to improving corporate governance. Large global pension and sovereign wealth funds need to exercise their collective power to shape and improve corporate governance.
The sheer size of the fund, the world's largest sovereign wealth fund, makes its "expectations" influential. Its equity portfolio is worth $380 billion. The fund is a minority shareholder in more than 7,000 companies world wide. It says it is among the 10 largest shareholders in 2,400 companies and among the five largest in 800 companies. So when Oslo-based Norges Bank Investment Management—the groups that manages the fund—speaks, you can be sure people are listening.
NBIM is interested in protecting minority shareholder rights and board accountability, of course. But what makes the note so interesting is that it questions the popular idea of formalizing good governance into regulatory or legislative codes. Or even of attempting to apply a voluntary code of good governance across all companies.
"Such a perspective has led the firm to question the basis for the near-universal consensus in support of features appearing in corporate governance codes, given that NBIM finds gaps in academic evidence for many of them," writes Gavin Grant, the fund's head of active ownership, in an introduction to the NBIM note for the Harvard Law School Forum on Corporate Governance and Financial Regulation.
In other words, NBIM recognizes that codes cannot substitute for judgment, in part because different companies face a diversity of challenges that can justify a wide variety of governance structures.
From the note (emphasis mine):
The original 1992 UK code of good governance (by informal tradition referred to as the "Cadbury Code"), on which many subsequent national and international codes have been based, was not intended to lay down the law on how companies should be governed. It was, explicitly by design, a statement of recommended good governance practices. It was then for boards to implement in ways which made sense to them and to their shareholders. Corporate governance would then be correctly positioned as a contract between a company and its investors.
In the intervening twenty years, these well-founded best-practice recommendations have been somewhat corrupted – first into principles and then into hard and fast rules. This has largely occurred for reasons of expediency and convenience. It is also an outcome of international portfolio diversification and a tradition of global standards and benchmarks in other important areas of investment: accounting, financial reporting, financial ratio analysis etc. A separate corporate-governance lexicon has been created which is now technical and perhaps largely impenetrable to the generalist investor.
It almost goes without saying that this corruption from best practices to principles to hard and fast rules describes exactly the direction of corporate governance in the United States for the last decade or so. From Sarbanes-Oxley to say-on-pay, we've increasingly mandated and federalized corporate governance rules. Indeed, many self-styled corporate governance experts appear to regard "progress" in this area as synonymous with homogenization.
Norway's dissent from this movement is a welcome development.
Below, the California State Teachers' Retirement System (CalSTRS) wants Disney to strip its CEO Bob Iger of his chairman status. Jack Ehnes, CalSTRS CEO, discussed this on CNBC's Closing Bell.
And as pension funds look to strip Jamie Dimon of his additional title of chairman and overhaul bankers' pay, a group of mothers in Spain are stripping down to save school bus. Now that's what I call taking matters into their own hands! Enjoy your weekend. :)