Archive for the ‘Institutional Investors’ Category

ESG Risks and Opportunities Facing Investee Companies

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday November 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Rakhi Kumar, Head of Corporate Governance at State Street Global Advisors, and is based on an SSgA publication; the complete publication is available here.

As part of our active ownership process, State Street Global Advisors (“SSgA”) considers environmental, social and governance (“ESG”) matters while evaluating and engaging with investee companies. SSgA believes that ESG factors can impact the reputation of companies and can also create significant operational risks and costs to businesses. Conversely, well-developed corporate social responsibility (“CSR”) programs [1] can generate efficiencies, enhance productivity and mitigate risks, all of which impact shareholder value.

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Global Banks at a Strategic Crossroad

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday November 28, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Rakhi Kumar, Head of Corporate Governance at State Street Global Advisors, and is based on an SSgA publication; the complete publication, including appendix, is available here.

In Q1 and early Q2 2014, SSgA actively engaged with 15 global banks ahead of the proxy voting season. These engagements were conducted jointly with members of SSgA’s investment and governance teams. Our engagement addressed specific governance issues at each bank and also encompassed a wider discussion on the changing regulatory landscape and its impact on business strategy, capital requirements, operations and risk management, and the bank’s global footprint. Below we have provided the perspectives and insights gleaned from our engagement activities with banks this year.

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Weather-Induced Mood, Institutional Investors, and Stock Returns

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday November 19, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from William Goetzmann, Professor of Finance at Yale University; Dasol Kim of the Department of Banking and Finance at Case Western Reserve University; Alok Kumar, Professor of Finance at the University of Miami; and Qin Wang of the Department of Accounting and Finance at the University of Michigan at Dearborn.

Studies showing that weather patterns in major financial centers influence stock index returns provide suggestive evidence that investor mood influences asset prices (Saunders, 1993; Hirshleifer and Shumway, 2003). Individuals may misattribute mood induced by weather as information when making assessments about objects that should be otherwise unrelated (Schwarz and Clore, 1983), leading to mood-congruent judgments. For example, sunnier days may induce good moods amongst investors, generating overly optimistic beliefs regarding their investments and congruently influencing their trading decisions. Despite strong evidence of the weather effect on stock index returns, establishing plausibility in mood-based explanations relies in part on distinguishing which group of investors drives the weather effect, and directly confirming mood effects in their judgments.

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ISS Details Governance QuickScore 3.0 Updates

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday November 15, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Yafit Cohn, Associate at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

Institutional Shareholder Services Inc. (“ISS”) has released a technical document detailing the factors and scoring methodology of Governance QuickScore 3.0, which ISS plans to launch on November 24, 2014. [1] Corporate issuers may verify, update or correct the data used to calculate their scores, via ISS’s data verification site, through 8:00 p.m. EST on November 14.

…continue reading: ISS Details Governance QuickScore 3.0 Updates

ISS, Share Authorizations, and New Data Verification Process

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday November 9, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from John R. Ellerman, founding partner of Pay Governance, and is based on a Pay Governance memorandum by Mr. Ellerman.

Publicly traded companies are required by the SEC and the stock exchanges to obtain shareholder approval when such companies seek to implement a new long‐term equity plan or increase the share reserve pursuant to such plans.

Companies comply with this requirement by seeking shareholder approval through the annual proxy process. Institutional Shareholder Services (ISS), the large proxy advisory firm retained by many institutional investors for proxy voting advice, offers its services to institutional clients by evaluating such proposals. One of the tools used by ISS in developing its voting advice is a financial model referred to as the Shareholder Value Transfer (SVT) Model that attempts to assign a cost to each company’s equity plan. ISS’ proprietary SVT model contains numerous hidden values and algorithms a company cannot readily replicate. If the SVT Model results in an assigned cost that falls outside the boundaries of what is acceptable to ISS, ISS will submit a negative vote recommendation.

…continue reading: ISS, Share Authorizations, and New Data Verification Process

Opacity in Financial Markets

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday October 23, 2014 at 9:17 am
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Editor’s Note: The following post comes to us from Yuki Sato of the Department of Finance at the University of Lausanne and the Swiss Finance Institute.

In my paper, Opacity in Financial Markets, forthcoming in the Review of Financial Studies, I study the implications of opacity in financial markets for investor behavior, asset prices, and welfare. In the model, transparent funds (e.g., mutual funds) and opaque funds (e.g., hedge funds) trade transparent assets (e.g., plain-vanilla products) and opaque assets (e.g., structured products). Investors observe neither opaque funds’ portfolios nor opaque assets’ payoffs. Consistent with empirical observations, the model predicts an “opacity price premium”: opaque assets trade at a premium over transparent ones despite identical payoffs. This premium arises because fund managers bid up opaque assets’ prices, as opacity potentially allows them to collect higher fees by manipulating investor assessments of their funds’ future prospects. The premium accompanies endogenous market segmentation: transparent funds trade only transparent assets, and opaque funds trade only opaque assets. A novel insight is that opacity is self-feeding in financial markets: given the opacity price premium, financial engineers exploit it by supplying opaque assets (that is, they render transparent assets opaque deliberately), which in turn are a source of agency problems in portfolio delegation, resulting in the opacity price premium.

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APG Asset Management Issues Remuneration Guidelines

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday October 17, 2014 at 9:06 am
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Editor’s Note: The following post comes to us from David Shammai, Senior Governance Specialist and Martijn Olthof, Senior Portfolio Manager, both at APG Asset Management. APG’s remuneration guidelines are available here.

One of the world largest fiduciary asset managers, APG recently issued remuneration guidelines that will be applied to its portfolio of European listed companies. APG believes that the innovation in the new guidelines is twofold. First in that they are based on its practical experience of company engagements and therefore reflect an integrated investment and governance outlook. More specifically, the guidelines place a clear emphasis on value creation. By issuing the guidelines APG is aiming to make its ongoing discussions with companies around pay more effective, thus freeing up time for it to focus on other important corporate governance areas such as board structure, succession and nominations.

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The Recent Evolution of Shareholder Activism

Editor’s Note: Matteo Tonello is vice president at The Conference Board. This post relates to a report released jointly by The Conference Board and FactSet, authored by Dr. Tonello and Melissa Aguilar of The Conference Board. The Executive Summary is available here (the document is free but registration is required). For details regarding how to obtain a copy of the full report, contact matteo.tonello@conference-board.org.

Proxy Voting Analytics (2010-2014), a report recently released by The Conference Board in collaboration with FactSet, reviews the last five years of shareholder activism and proxy voting at Russell 3000 and S&P 500 companies.

Data analyzed in the report includes:
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Influence of Public Opinion on Investor Voting and Proxy Advisors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday September 25, 2014 at 9:07 am
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Editor’s Note: The following post comes to us from Reena Aggarwal, Professor of Finance at Georgetown University; Isil Erel of the Department of Finance at Ohio State University; and Laura Starks, Professor of Finance at the University of Texas at Austin.

In our paper, Influence of Public Opinion on Investor Voting and Proxy Advisors, which was recently made publicly available on SSRN, we address the question of how public opinion influences the proxy voting process. We find strong influence of public opinion on the evolution in both investor voting behavior and proxy advisor recommendations. Therefore, our results suggest that an additional channel through which the public can communicate with corporate management (and potentially influence corporate behavior) is the proxy voting process. We provide new evidence that media coverage can also influence firm behavior through the voting channel. This channel is important because media coverage captures the attention of proxy advisors, institutional investors and individual investors, and is thus reflected in recommendations and votes.

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Outsized Power & Influence: The Role of Proxy Advisers

Posted by Daniel M. Gallagher, Commissioner, U.S. Securities and Exchange Commission, on Friday September 5, 2014 at 9:00 am
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Editor’s Note: Daniel M. Gallagher is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Washington Legal Foundation working paper by Mr. Gallagher; the complete publication, including footnotes, is available here.

Shareholder voting has undergone a remarkable transformation over the past few decades. Institutional ownership of shares was once negligible; now, it predominates. This is important because individual investors are generally rationally apathetic when it comes to shareholder voting: value potentially gained through voting is outweighed by the burden of determining how to vote and actually casting that vote. By contrast, institutional investors possess economies of scale, and so regularly vote billions of shares each year on thousands of ballot items for the thousands of companies in which they invest.

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