The Autocorrect - ESG Data Standardization, and Common Ownership
Week Ending 15 November

Finally free of the clutches of the last earnings season of the year, we're hoping you have time to get your shopping done early, boost fourth-quarter GDP, and help out the retailers cursed by a shortened 2019 holiday season. Yes, not only do we project Halloween candy spending here at IHS Markit, you can also bake our holiday retail sales projections into whichever of your financial models need a US consumer input.  (No seasonal puns in this link, go ahead...).  We're projecting a 4.6% increase over last year to $734 billion, but if The Autocorrect's readers simply add one extra fruitcake each to their shopping lists, we think the IR community can help us crack the $750 billion mark.  5,000 IROs, $25 fruitcake...oh, never mind.

Off to the latest news then…if you’ve read the Autocorrect, you’re caught up.


Sullivan & Cromwell's piece Review and Analysis of 2019 U.S. Shareholder Activism makes for a great background read for those always keeping an ear to the ground on the topic. Data from FactSet’s SharkRepellent showed that proxy contests have made up a slightly larger percentage of announced activist campaigns so far this year (23%) compared to levels during the prior three years (19%); dissident investors are now on a pace for the highest numbers of proxy contests since 2015, when 73 were recorded.  One of the more interesting trends in the activism space is the focus on M&A. Data backs up the common theme that activists have spent more time pushing for sales or divestitures, or by interfering to break up already announced transactions. There's even strong evidence that activists remain involved after a settlement: “Almost 50% of issuers that added activist designees to their boards in 2017 or 2018 have since either sold themselves or engaged in a meaningful divestiture.” 

The involvement of traditional long-only managers in activist-related activity has been a growing trend over the last few years. S&C quotes a WSJ article: “in 2017 and 2018, active managers 'went public' with their demands 79 times and 60 times, respectively, compared to just 40 such demands in 2014.” The report went on to mention some of the larger mutual fund managers that have gone public, including Neuberger Berman, M&G Investments, Wellington Management, and T. Rowe Price. Overall, a worthwhile read to stay ahead of the curve on activism.  (David Farkas)

-You'll recognize this theme from prior Autocorrects; this WSJ piece covers a quiet lobbying campaign by Vanguard and BlackRock to get ahead of any possible concerns that common ownership concentration might be leading to anticompetitive activity from the companies they own. Both ends of Pennsylvania Avenue have recently taken up the topic in some form: the FTC is currently updating the model it uses to approve mergers, the Justice Department’s antitrust division is “following the debate” on common ownership’s effects, and presidential candidate Amy Klobuchar has introduced a bill to have the FTC look into the impact of common ownership. According to the WSJ reporting, Vanguard has recently approached SEC Commissioner Jackson on the common ownership concept, while BlackRock has been previously vocal in questioning the academic research. 

We all know that Vanguard is not telling you and all of your competitors to raise prices – Vanguard doesn’t have the structure in the first place, nor is it interested in opening itself to legal risk.  However, when politicians get a hold of a concept that plays well in front of voters or donors, the subsequent actions can go in unexpected directions; we’ll keep an eye on this going forward.

IR Best Practices 

- Plenty of excitement from last week’s SEC proposals on proxy advisory and shareholder proposals, but let’s be honest, none of those changes will affect 2020 proxy season directly, so it’s business as usual for now.  Which means we get ready for the 2020 proxy season the same way – keeping track of the changes to ISS / GL voting policy, then later reviewing each of our large investors’ voting guideline changes.  Both ISS and GL now have their policies for 2020 out, with ISS’ coming in earlier this week. 

For 2020, ISS, 1) finalizes its board gender diversity policy; it will vote against nomgov chairs and other directors “as appropriate” for non-gender-diverse boards; 2) identifies specific types of independent board chair proposals that it’s likely to support, and 3) as we referenced in the August 2nd Autocorrect, announces it will begin incorporating EVA (Economic Value Added) into its decision-making on pay-for-performance, and mentions an upcoming December white paper that will cover its use.  Davis Polk wrap on ISS’ updates is here.

For its part, Glass Lewis 2020 guidelines take on the possibility of the SEC not issuing a NOACT letter around a shareholder proposal, and notes that it will recommend a vote against the nomgov committee members for any proposals that don’t appear in the proxy without a confirmation of verbal SEC correspondence on the proposal.  It also adds details on its views on gender pay equity shareholder proposals, and adds descriptions about recommendations against directors on specific committees.  Keep these links handy as shareholder proposals come in. 

- Sometimes we see academic research that explains an outcome of an unconscious instead of a conscious decision.  We think this piece falls into this category.  Does Short Selling Potential Influence Mergers and Acquisitions Payment Choice?, from researchers at University of Manchester and University of Liverpool, starts with the assumption that the valuation offered for an acquiree is determined independently, but the type of consideration offered has other determinants; specifically, companies that are relatively easy to short sell are more likely to have a higher cash component to the deal.  The research team uses lendable shares data from some organization entitled “IHS Markit” (we’ve heard they have a good reputation) and applies it across a range of deals announced from 2002 to 2017, finding significantly higher lendable values in cash deals than for mixed or stock deals.  

While you can see some obvious biases just from the abstract, the researchers do a good job in correcting for size, relative size, deal attitude (hostile / friendly).  No, we don’t necessarily think M&A departments are basing their consideration choices entirely on our Securities Finance data set – but we do know that stock deals naturally attract a much higher percentage of arbs shorting the acquirer. Put yourself in the arb’s shoes:  arbs are much more likely to be calculating the costs of opening up a position against having to borrow a stock for a longer term than most shorts – so we might be seeing an aggregated proxy for arbs’ decision-making sitting right in front of us, in the amount of your shares available for loan.

- For a 90-minute period last week, the debate over ESG data standardization spilled into an open forum, with the SEC’s Investor Advisory Committee hosting a panel of ESG leads at major investors including Neuberger Berman, AllianceBernstein, Calvert, and SSGA.  A few sources picked up the results of the buy-side’s arguments urging the SEC to standardize ESG reporting, including Markets Media’s story, Cooley’s blog, and Davis Polk’s blog, but you already know the start of the conversation – investors want easily-comparable ESG data sets, and are concerned about companies “greenwashing” their non-financial results with no lack of standards available.   When the discussion tilted toward the available frameworks that exist today, buy-side participants responded that the voluntary nature of all of these standards means that no one standard will ever give a complete view, and “laggards don’t get involved.” Jessica Milano of Calvert Research added commentary around the lack of assurance or audit process around non-financial disclosures as well. 

We’ve heard plenty of thoughts from the existing SEC commissioners suggesting that a mandated standard for US companies isn’t likely soon (see the Davis Polk take for Chairman Clayton’s thoughts, or simply Google “Hester Peirce” +”ESG”…). However, as with other regulatory issues, the SEC would do well to hear from the issuer community to balance its view of this topic as well…the thought process of the Commission isn’t set in stone.

Questions? Comments? Really starting to feel bad for Greedo now that there's another edit of Star Wars? Reach out to your IHS Markit team, or