Christine Arena 
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While bankers and politicians seem anxious to get back to business as usual, the current difficulty being faced by Bank of America suggests that “normality” is not going to return any time soon, if indeed it is permitted to do so at all.
The Securities and Exchange Commission is trying to conclude an investigation into Bank of America’s payment of $3.6 billion in bonuses to executives of the sinking ship that was Merrill Lynch upon the former’s purchase of the latter. The SEC and Bank of America have agreed a $33 million settlement – an amount that some might call (and have called) derisory.
The SEC replies that it is unfair to penalize shareholders overmuch for the actions of executives. But hang on, I thought shareholders were supposed to be owners holding risk equity? That is what is supposed to provide shareholders with the incentive to keep an eye on how executives run their business, rather than simply smile while the money comes in. If shareholders don’t end up picking up the tab for reckless risk-taking then you create a moral hazard; shareholders will be better off turning a blind eye than supervising.
Enter Judge Jed S. Rakoff, a United States District Court judge in Manhattan. Whereas most such settlements are simply waved through, he has the temerity to question whether this settlement is really in anyone’s interest. Apparently he would like to take this opportunity to exert what little influence he has to deter further behaviour of this kind.
No doubt he has his own reasons for thinking the time has come to take a stand. Judge Rakoff presided over the SEC’s case against WorldCom – as in “corporate fraud on the scale of Enron and WorldCom” – and took the step of appointing a former SEC commissioner as a Corporate Monitor to oversee the reform of WorldCom’s corporate governance. He will recall that there was much talk after Enron and WorldCom of the importance of not letting big business return to its former ways, particularly the financial and professional advisers who enabled those corporations.
They did, however, and on his watch. And he knows that his courtroom is practically the only venue where pure greed can be stopped in its tracks.
Australian investor activists are urging investors to look beyond the headline cash figure when deciding whether a firm is tying pay to performance.
Many companies have said they are freezing or cutting executive compensation in response to the downturn. The devil amy remain in variable pay elements such as short term bonuses and share options.
The real levels of compensation may not be known until next year's report and accounts. The focus now should be on ensuring a tight definition of performance to which executives can be held.
Following an investor revolt over executive pay at the oil company's annual meeting, board members are setting out on a charm offensive.
A "three strand" roadshow of directors and top executives is planned to rebuild relationships with major investors after shareholders voted 60% against the board's remuneration report. The revolt concerned the payment of £3.6 million in share awards to five top executives even though the group failed to meet the targets that would trigger such payments.
The Guardian report quotes fund managers complaining that companies have not woken up to the realities of the aftermath of the crisis. Fund managers are likely to remain activist for the foreseeable future having come in for criticism for being asleep on the job (as owners) while the crisis was taking shape.
In the weekend drama, investors also demanded the resignation of the chairman of the company's remuneration committee.
The investors' anger arises from the fact that bonuses were paid even though performance targets were not reached.
Allied Irish Bank chairman Dermot Gleeson ducked a flying egg at an EGM called by the bank to obtain shareholder approval to a government bailout.
The Irish government will take a 25% stake in the bank after the 3.5 bn euro ($4.8 bn) recapitalization, and will receive an 8% annual dividend.
The egg was thrown by a pensioner, Gary Keogh, when, according to Mr Keogh, Mr Gleeson tried to speak over another shareholder.
The share price of the major Irish bank fell by 91% over the last year, and has ceased to pay dividends. Mr Gleeson apologized to shareholders at the meeting for the "anxiety and distress" caused. He will be standing down in July.
FairPensions, the UK campaign for responsible investment, claims that funds recognise non-financial risks but have no strategy to meet them.
The report also questions whether the fund management industry is ready to meet changing needs in this area.
From the press release:
"The research, by FairPensions, includes a 'league table' of the UK's 30 largest pension funds, which together have 4.86 million members, are worth an estimated 351 billion pounds and are seen as industry trend-setters.
Scores range from 100% (USS, BT) to 0%. The average is 40%: a league table is available on request (see below).
All funds which submitted information now have statements recognising the potential impact of environmental, social or corporate governance (ESG) issues on financial performance, although a third apparently do not apply these to the instruction, selection or reporting requirements from their fund managers. Approximately half employ internal or external personnel responsible for ESG issues.
Public transparency is disappointing: almost half of the funds surveyed do not disclose their largest investments, and two thirds don't disclose their voting record (despite the government's power to force voting disclosure if voluntary disclosure is not occurring)."
Mcdonalds, the biggest potato purchaser in the US, has agreed to monitor and employ best practices to reduce pesticide use across the US supply chain.
The company's new commitment is a response to shareholder concerns about pesticide use associated with harmful effects on the environment, public health, and farm employees
As a result of the agreement shareholder resolutions will be withdrawn by Bard College Endowment, Newground Social Investment, and the AFL-CIO Reserve Fund.
According to these funds, the terms of the agreement are that:
"McDonald's has committed to: (1) survey its current U.S. potato suppliers; (2) compile a list of best practices in pesticide reduction that will be recommended to the company's global suppliers (through the company's Global Potato Board); and (3) communicate findings related to best practices to shareholders, and in the company's annual corporate social responsibility (CSR: 4.05, 0.19, 4.92%) report."
The Norwegian oil fund, following a recomendation from its Council on Ethics, has banned investment in China's Dongfeng Motor company.
The rationale is that the company is supplying trucks to the Burmese military, so supporting a military dictatorship credited with widescale human rights abuse.
German engineering company Siemens is to be placed under close scrutiny by virtue of “gross and systematic corruption the group has been involved in over many years”. The fund owns 1.34% of Siemens stock as of the end of last year.
The Council on Ethics apparently recommended divestment now, so the Siemens statement is somewhat upbeat about the fact that the recommendation was not implemented. Bloomberg reports:
"Siemens “welcomes the decision by the Norwegian Royal Ministry of Finance for the first time not to follow the recommendation of the Council on Ethics and to remain invested in Siemens,” spokesman Marc Langendorf said in an e-mail. “Siemens has now implemented comprehensive measures in the area of compliance and established a long-term compliance culture.”
The Munich-based company has been embroiled in a bribery scandal since 2006, leading to investigations in at least a dozen countries. Units of the company have been charged with paying kickbacks and bribes to win contracts in Iraq’s government in the United Nations oil-for-food program and for projects including commuter rail in Venezuela, mobile-phone networks in Bangladesh, power plants in Israel and Russian traffic control."
The oil fund announcement, however, appears to suggest that going forward even a minor infraction by Siemens could trigger divestment.
A team of consultants, academic researchers and lawyers undertook the research and prepared the report, overseen by an advisory board comprising NGO representatives, activist investors (who had submitted the shareholder resolution demanding the report to begin with), academics, and a community representative.
According to the Newmont press release, the study involved:
"The CRR process involved:
Interviews with more than 250 local community members, non-governmental organizations and other external stakeholders in five countries;
Interviews with more than 100 company personnel at the site, regional and corporate levels;
Examination of company policies, standards, procedures, and training programs;
Detailed analyses of Newmont sites, including Ahafo (Ghana), Yanacocha (Peru), Martha (New Zealand), Carlin (Nevada), Batu Hijau and Minahasa (Indonesia); and,
Country-level analyses of relationships and contexts."
The report and associated documents are available online. Clearly Newmont has some way to go in closing the gap between head office pronouncement and on-the-ground reality. Specifically they need to focus on:
"* Enhancing consistency of engagement with local communities;
* Building capacity to manage and resolve conflict and address grievances; and,
* Developing consistent global policies, standards and programs to better guide the Company's actions."
When in August 2005 the Royal Bank of Scotland took a minority stake in the Bank of China, then CEO Sir Fred Godwin was challenged on whether human rights had been a consideration. Among other concerns of human rights activists, the Bank of China was a primary financial backer of China National Petroleum Corporation's development of Sudanese oil fields. Oil revenues were and are keeping the Khartoum regime in place as it pursues genocide in Darfur.
Sir Fred's response was documented at the time by The Herald newspaper: "It's important that we don't get involved in that in China, or any other countries we do business in."
Roll on three and a half years. A Scottish National Party MSP Christine Grahame has asked the police to investigate "whether the bank fraudulently sought investment from shareholders, many of them UK pension funds, knowing that the bank was insolvent."
If there is one thing, surely, that shareholders of every persuasion can learn from this, it is that ethics is indivisible. Shareholders have every reason to watch closely whether a corporation is demonstrating respect to all those potentially impacted by its decisions, even when the money is rolling in.
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- on 27 May 2009
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