Friday, April 4, 2014

Your Next Activist Shareholder May Not Want More Money

Shareholders are driving changes in corporate policies and disclosures unthinkable a decade ago, on issues ranging from protecting rain forests to human rights. Even the threat of a proxy vote can be enough to bring company executives to the negotiating table.

So far this year, environmental and social issues have accounted for 56% of shareholder proposals, representing a majority for the first time, according to accounting firm Ernst & Young LLP. That is up from about 40% in the previous two years, and means shareholders are increasingly voting on things like greenhouse-gas emissions, political spending and labor rights.
While such proposals usually don’t grab the same headlines as changes sought by activist investors, their proponents often are effective at persuading companies to meet them halfway.
The proposals are “really meant to get the attention of the corporate leadership,” said Thomas DiNapoli, the New York comptroller who oversees the $160.7 billion New York State Common Retirement Fund. “Profitability that is at a sustainable and responsible level is very, very important to us.”
Mr. DiNapoli filed about 65 resolutions this past year, and he often succeeds in getting companies to agree to his requests before they come to a vote.
Last week, he persuaded grocer Safeway Inc. to make products with palm oil produced in ways that don’t hurt rain forests. In February, in response to proposals from Mr. DiNapoli and others, AT&T Inc. published its first “transparency report” on requests from the National Security Agency and law-enforcement agencies for customer data and phone records.
In both cases, he withdrew his proposal after the companies agreed to make changes.
Resolutions calling on companies to report their political spending and lobbying efforts are the top two shareholder proposals this year, according to EY’s review of some 700 proposals. By contrast, last year’s proposals were dominated by traditional corporate-governance topics, such as eliminating staggered terms for directors and appointing independent board chairmen.
More surprising still are the results. Nearly 80% of companies in the S&P 500 index now disclose at least some information about their political-spending policies, according to the Center for Political Accountability, a practice virtually unheard of a decade ago. Some 53% now publish sustainability reports, according to the Governance and Accountability Institute, addressing such matters as their energy efficiency and labor standards.
And, about 22% have human-rights policies, according to the Conference Board, a private research group.
Among the reasons for this year’s surge in social and environmental proposals is the strong stock market, which has left shareholders little room for complaints about performance.
“You’re not seeing the same sort of push-back on executive compensation this year,” said Wendy Hambleton, national director of the Securities and Exchange Commission practice at accounting firm BDO USA LLP.
The shareholders who push for these proposals aren’t agitating for higher returns like activists Dan Loeb and Carl Icahn but rather are long-term investors at pension funds, unions and coalitions of socially conscious shareholders.
For example, the American Federation of State, County and Municipal Employees, a labor union for public employees, has been pressuring dozens of companies to disclose their lobbying activity this year. Ceres, a nonprofit group that advocates sustainable business practices, is helping investors at many companies write environmental resolutions.
As investors win battles at some companies, they hope peer pressure will convince others to follow suit.
On Monday, Exxon Mobil Corp. issued its first carbon risk report, explaining whether changing emissions regulations might move it to abandon high-cost oil and gas reserves. Sustainability-focused investment firm Arjuna Capital had submitted a shareholder resolution seeking that information.
Exxon said it was “confident” that none of its hydrocarbon reserves would become “stranded.”
“This is helping set the standard for what companies should be disclosing,” said Danielle Fugere, president of As You Sow, a nonprofit group that worked with Arjuna on the resolution. The group is circulating the agreement as an example for other oil companies where it has similar proposals pending, including Consol Energy Inc.,  Hess Corp., Chevron Corp. and Anadarko Petroleum Corp.
Of course, environmental and social resolutions generally aren’t binding and many never make it to a vote. Companies often can exclude them on technicalities, and about 30% are withdrawn after their backers negotiate or reach deals with companies.
Typically, the environmental and social proposals that make it onto the ballot receive about 21% of shareholder votes, compared with 33% for shareholder proposals overall, according to EY.
But even failures can have an impact, especially if investors target an issue that resonates with a company’s customers. Activists often cite a 1999 vote to halt sales of wood from old-growth forests at Home Depot Inc. Around 12% of the home-improvement chain’s shareholders supported the proposal, but the retailer stopped selling that lumber.
A handful of these resolutions have garnered a majority of votes. Last year, at fertilizer maker CF Industries Inc., shareholder proposals calling on the company to disclose political contributions and publish a sustainability report each received more than 65% support.
CF Industries initially objected, saying the reports would be costly to produce and “an imprudent consumption of our resources.” But it began producing them after the shareholder votes.
CF spokesman Daniel Swenson said the engagement with shareholders has “resulted in valuable feedback” and contributed to the company’s decision making. He wouldn’t say how much the reports cost to produce.
Shareholder proposals on these issues are expected to gather steam as more companies agree to disclosures. Boston-based Walden Asset Management has submitted several political-spending disclosure proposals to companies this year on behalf of clients. According to Timothy Smith, a director at Walden:
“We’re getting to the point where companies are not just listening to a squeaky shareholder, but doing this because they believe it is a good thing to do for the company,” 

By Emily Chasan at the Wall Street Journal 

Thursday, April 3, 2014

FASB, IASB Can't Agree on Financial Instruments Accounting

YOU MIGHT have long suspected it, but now it's official: the IASB and the US Financial Accounting Standards Board have failed to develop a common financial instruments accounting standard. We have no convergence.

The reality about the lack of a single asset impairment model emerged during a 23 January IASB meeting. It leaves preparers playing piggy in the middle between the competing IFRS and US GAAP models.

Speaking at the meeting, Hans Hoogervorst, chairman of the IASB, said the two boards would meet later this year "once the two models are completely clear". Regulators, he explained, have the option of imposing "additional disclosures" in order to bridge the gap.

Hoogervorst, a former Dutch securities regulator and finance minister, added: "But we cannot let the preparers pay the price for the two boards not getting completely converged."

On 20 February there was worse to come. On the parallel effort to finalise the board's approach to classification and measurement, Hoogervorst was forced to concede: "What can we say? A lot of work has been done for nothing, it seems."

IASB member Patrick Finnegan was equally blunt in his assessment: "I would just observe the same thing. I joined this board with a full expectation that there were great aspirations for global convergence in three or four major areas. ... It is a terrible disappointment, in my opinion, for global investors.

"I'm not quite sure what more we can do if the two boards continue to work the problem ... but the FASB has decided not to continue with the current IFRS 9 proposed work plan that we developed, and unfortunately that's the way it is."

The board also voted to fix a new effective date for IFRS 9, Financial Instruments, of 1 January 2018. IASB members were reluctant to delay the standard, or make further changes to it, pending decisions on the linked insurance contracts literature.

Later that same meeting, staff reported that the FASB will almost certainly reject two central features of the IFRS 9 classification and measurement approach - the business model and the contractual cash flow assessments for amortised cost.

So how did it come to this? The IASB embarked on its project to replace IAS 39 in early 2009. It is possible to distill any number of motivations and drivers for the project: to respond to the financial crisis; to reduce complexity; to address the too-much too-late criticism of the IAS 39 incurred-loss impairment model.

The project began under the chairmanship of Sir David Tweedie, and glancing back at an official IASB project summary document from 2009, a fully-fledged classification and measurement, impairment and hedging model was supposed to be in place by the final quarter of 2010.

As is now plain to see, the board failed. In 2009, it issued the first completed phase of IFRS 9, which dealt with the classification and measurement of financial assets. It followed this in 2010 with a further module addressing financial liabilities and the fair value option.

In its 2013 iteration, the standard has acquired a new hedging model. This approach to hedging is something of a marmite experience. On the one hand, its supporters claim it will make hedge accounting available in more situations; its critics point to its complexity.

Also in 2013, the board put out proposals to add a new category - fair value through OCI [other comprehensive income] - to IFRS 9. Redeliberation of those proposals is now complete and the IASB has confirmed it will include the FVOCI category alongside fair value and amortised cost.

Since 2009, the standard has also featured a presentational option that allows entities to book gains and losses on fair value holdings of equity investments in OCI. And impairment? Well, the board published its first proposals in November 2009 and followed this with a so-called supplementary document in January 2011. The 2011 document marked the high-water mark of the convergence drive with the FASB.

From that point onwards, what was supposed to be a convergence effort degenerated into a religious war. If the pre-crisis years had been marked out by the clash of fair value and amortised cost, the new battle lines were between 12-months initial loan loss allowance and the FASB's preference for full lifetime expected losses on initial recognition.

And it was here that the convergence effort truly floundered. But as insurmountable though the technical challenges of two competing financial instruments models might appear, there is a much bigger issue: politics.

In recent weeks, the European Parliament has shown an increased willingness to challenge the IASB, even going so far as to propose linking funding for the IASB's activities to specific outcomes.

Separately, the G20 nations have urged the two boards to come up with a single financial instruments model. At some point in time, Hoogervorst is going to have a very awkward conversation with his political masters.

by Stephen Bouvier at Financial Director