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MORE THAN 60 INVESTORS, GROUPS URGE OBAMA TO IMPROVE FINANCIAL RISK DISCLOSURE BY U.S. CORPORATIONS
President-Elect Encouraged to Work in First 100 Days to Reverse Recent SEC Roadblocks to Shareholder Proxy Resolutions Inquiring About Risks
Full text of the joint letter and complete list of signatories.
NEW: Click here for **Questions and Answers**
Coverage: Pensions & Investments
WASHINGTON, D.C. – December 11, 2008 – President-elect Barack Obama can help to avoid future market disruptions and also pave the way for a sustainable economy if he protects and strengthens investors' rights to use the shareholder resolution process to highlight corporate risk factors and press for needed remedies, according to a joint letter submitted today by 60 leading institutional investors, investment firms and investor groups.
The letter asks the help of President-Elect Obama to act within the first 100 days of his administration to reverse a five-year “pattern” at the SEC blocking shareholders from using proxy resolutions to request better disclosure of identified financial risks to a company. These risks may include marketplace, social, or environmental concerns.
The letter to Obama was signed by a diverse group that includes, among others, the Office of the Comptroller of the City of New York; noted shareholder advocates Robert A.G. Monks and Amy L. Domini; Calvert Group, Domini Social Investments, Trillium Asset Management Corporation, Boston Common Asset Management, and Catholic Healthcare West.
Leading organizations of investors also endorsed the letter, including: the Investor Network on Climate Risk (INCR), a network of 75 institutional investors and financial institutions with over $5 trillion in assets; the Investor Environmental Health Network (IEHN), whose shareholder members are concerned with financial and health impacts of product toxicity hazards, with $30 billion in assets; and the Interfaith Center on Corporate Responsibility (ICCR), representing nearly 300 faith-based investors with $100 billion in assets.
The joint letter reads, in part: “All investors need better tools to assess corporate risks and more effectively participate in corporate governance and we look to your administration and the Securities and Exchange Commission (SEC) to facilitate such reforms. From the creation of the SEC in 1934, investors have been in a unique position to monitor the companies in their portfolios, and to guard against certain risks to stock price, and to society, by encouraging responsible decision-making by management.”
The letter continues: “In particular, we believe restoring the ability of institutional investors to use the shareholder resolution process to probe companies on certain areas of investment risk is an important initial step. These include the kind of credit risks associated with the mortgage crisis, as well as an array of environmental and social issues which we believe may have large financial implications e.g., climate change and product toxicity … it is our belief that shareholders are in a very good position to help companies evaluate risk.”
However, the letter notes: “For the last five years, the SEC has gradually been closing the door to important shareholder concerns. Shareholder proxy requests that had been allowed in previous years asking for better disclosure of financial risks to companies have been stymied.”
Cheryl Smith, co-CEO at Trillium Asset Management Corporation, said: “The current financial and economic crisis demonstrates the extent to which all sectors and all participants in the market, whether companies, investors, employees, or communities, are interrelated and deeply affected by the actions of any one participant. Protecting and enhancing the rights of investors to seek and receive information from their companies about company activities improves the stability of the financial system as a whole.”
As the letter explains: “We recognize that in the early days of your administration you will be focused on shoring up the economy and helping to restore consumer confidence. As part of your strategy we urge that you help us to correct decisions that have undermined our ability to use the shareholder resolution process to probe these issues on a company by company basis.”
Calvert Senior Vice President for Social Research and Policy Bennett Freeman said: "The President-elect has made it clear that addressing climate change will be a top priority. With our record of encouraging companies to assess and manage the business risks associated with climate change, investors stand ready to work with policy-makers and corporations to tackle this monumental challenge. A change in SEC rules on risk evaluation will make us even more effective partners in this effort."
“We view shareholder resolutions as an essential part of our tool kit as a fiduciary. The SEC’s withdrawal of our right to use resolutions to probe risks that concern us has hampered our ability to monitor and enhance corporate performance and responsibility,” said Lauren Compere, director of shareholder advocacy at Boston Common Asset Management.
Sanford Lewis, counsel to the Investor Environmental Health Network noted:
"With recent product toxicity issues, such as lead in toys, many companies knew about the potent financial risks posed by chemicals in their product lines. Even though they omitted these disclosures in their financial reports, shareholder resolutions to seek better disclosure of these risks through the proxy process were also being obstructed by the SEC.”
Full text of the joint letter and complete list of signatories.
CONTACT: Patrick Mitchell, (703) 276-3266 or pmitchell@hastingsgroup.com
Thursday, December 11, 2008
Monday, September 15, 2008
A win-win solution for liability disclosure?
In August, the Financial Accounting Standards Board received an outpouring of comments for and against its proposals to expand liability disclosure requirements under its FAS 5 exposure draft. Long term investors, socially responsible investors and organizations managing, or representing beneficiaries of, trillions of dollars of marketplace investments submitted letters urging FASB to improve its 33 year old disclosure rules, which are sorely out of date given growing needs and demands for transparency and accountability.
However, many of the companies that would be required to comply with any new disclosure rules opposed FASB's for proposals strengthened disclosure. Many commenters argued that is too difficult to predict liabilities until lawsuits are either settled or judgment is rendered, and that disclosing worst case liabilities would unduly distort stock values downwardly. Some legal commenters asserted that requiring additional disclosure could undermine corporate positions in pending trials and settlement negotiations.
As a legal commenter in the investors' camp, I strongly believe that it could be possible for FASB to fashion rules that would better balance the underlying interests. One idea that could provide a win-win is our proposal to require narrative disclosure of long term, "remotely probable-severe impact" liability scenarios.
Readers may recall that the FASB draft proposed a new requirement for disclosure of "severe" impact financial loss scenarios, even if viewed as remotely probable by a company's management, but only if the underlying issue is expected to resolve in the near term, i.e. within a year.
My comments as counsel to the Investor Environmental Health Network urged that reporting entities must be required to disclose all loss contingencies that could have a severe impact even if viewed by the company as "remotely probable," and regardless of the timing of the resolution of the issue.
We proposed a compromise approach -- that for disclosures of remote, severe losses, at least those that may take more than a year to resolve, the disclosure duty could entail a narrative description of the severe impact contingency, without quantification.
I believe this could be a win-win solution because:
• Investors would be empowered by the disclosures to consider longer term issues, and gain the opportunity to inquire further where any potentially severe issues are flagged. It would make it possible for SRI investors to enhance their screens, by avoiding companies that are taking undesirable kinds of longer term "remote" risks.
• Reporting entities would not need to estimate the "remote" issues precisely but only provide a simpler "order of magnitude" characterization of the issues as "severe." They would have ample opportunity to minimize shareholder concern by explaining their judgment calls about the remoteness of risks, while still maintaining reasonable transparency. They would also face less risk of legal prejudice, because their characterization of issues as "remote" would shield against anyone reading too much into a disclosure for litigation purposes.
The history of subprime lending and the asbestos bankruptcies places one harsh lesson in bright light – reasonable investors must look closely at "severe impact" threats even if the management characterizes them as only "remote." Without an accounting rule to embody this lesson, the investing public is at the mercy of those whose judgment about the severe threats is skewed toward "improbability" and nondisclosure.
Read Investor Environmental Health Network comments to FASB
However, many of the companies that would be required to comply with any new disclosure rules opposed FASB's for proposals strengthened disclosure. Many commenters argued that is too difficult to predict liabilities until lawsuits are either settled or judgment is rendered, and that disclosing worst case liabilities would unduly distort stock values downwardly. Some legal commenters asserted that requiring additional disclosure could undermine corporate positions in pending trials and settlement negotiations.
As a legal commenter in the investors' camp, I strongly believe that it could be possible for FASB to fashion rules that would better balance the underlying interests. One idea that could provide a win-win is our proposal to require narrative disclosure of long term, "remotely probable-severe impact" liability scenarios.
Readers may recall that the FASB draft proposed a new requirement for disclosure of "severe" impact financial loss scenarios, even if viewed as remotely probable by a company's management, but only if the underlying issue is expected to resolve in the near term, i.e. within a year.
My comments as counsel to the Investor Environmental Health Network urged that reporting entities must be required to disclose all loss contingencies that could have a severe impact even if viewed by the company as "remotely probable," and regardless of the timing of the resolution of the issue.
We proposed a compromise approach -- that for disclosures of remote, severe losses, at least those that may take more than a year to resolve, the disclosure duty could entail a narrative description of the severe impact contingency, without quantification.
I believe this could be a win-win solution because:
• Investors would be empowered by the disclosures to consider longer term issues, and gain the opportunity to inquire further where any potentially severe issues are flagged. It would make it possible for SRI investors to enhance their screens, by avoiding companies that are taking undesirable kinds of longer term "remote" risks.
• Reporting entities would not need to estimate the "remote" issues precisely but only provide a simpler "order of magnitude" characterization of the issues as "severe." They would have ample opportunity to minimize shareholder concern by explaining their judgment calls about the remoteness of risks, while still maintaining reasonable transparency. They would also face less risk of legal prejudice, because their characterization of issues as "remote" would shield against anyone reading too much into a disclosure for litigation purposes.
The history of subprime lending and the asbestos bankruptcies places one harsh lesson in bright light – reasonable investors must look closely at "severe impact" threats even if the management characterizes them as only "remote." Without an accounting rule to embody this lesson, the investing public is at the mercy of those whose judgment about the severe threats is skewed toward "improbability" and nondisclosure.
Read Investor Environmental Health Network comments to FASB
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