WHEB Commentary

Why we have sold our Emerson shares


There are now multiple ways in which investors can exercise their rights to influence the behaviour of companies. Investor clearinghouses, exchanges and fora have all been set up to facilitate more and better engagement between investors and companies on a range of environmental, social and governance issues. But one often repeated complaint, including most recently at a French/British seminar on engagement, is that too much of this engagement happens behind closed doors and so wider knowledge of – and interest in – engagement remains muted.

There are good reasons why much engagement remains private. Often the work is focused on sensitive issues where the glare of publicity would hamper the development of trust in relationships between investors and companies. But equally, particularly when an engagement has been completed, investors could, and perhaps should, be more open about the outcomes of their work.

WHEB’s listed equity team publishes a quarterly report on our voting and engagement work in which we cover the key engagements that we have conducted. Rarely though do we go into real depth about each one. However, one engagement which we have recently concluded and where we want to share more details, has involved the US industrial conglomerate Emerson Electric.

The team has held Emerson shares for approximately six years, first when running SRI funds at Henderson, and for the past two years while here at WHEB. The stock price over this time has broadly tracked the S&P 500 index of shares.

In recent years, however, sales growth has slowed at Emerson. According to analysts William Blair, the company’s compound annual growth rate in sales was 13% for the period from 2003-2008 and only 6% from 2010-2013[i]. Management recently confirmed its outlook for underlying sales growth of 3 to 5 percent for 2014[ii]. This slowdown may be temporary, and in other businesses displaying what we consider to be better governance, we might be tempted to hold onto our position in anticipation of a recovery. However, Emerson now stands out as a business where we have concerns over corporate governance and, in our view, has been unresponsive to investor engagement seeking changes in the way the company is governed and how it reports to investors and other stakeholders.

We are not alone in taking this view. According to ISS (Institutional Shareholder Services, the independent governance and proxy advisory service), Emerson ranks in the bottom decile of US companies for the quality of its governance[iii], board composition and practices, and also for shareholder rights. Even in audit, an area of corporate governance at Emerson that ISS rates more highly, the company has not changed its auditors for 71 years. Current legislative proposals in the EU suggest that good practice is to rotate auditors every ten years[iv].

We have attempted to engage the company on these and other issues. We have repeatedly co-filed shareholder resolutions encouraging the company to report on critical social and environmental issues facing the business. The company though has proved itself unresponsive to these concerns. At the most recent Annual General Meeting which took place in early February 2014, fully 49% of shareholders either abstained or voted in favour of a resolution calling for the company to start reporting on its performance on sustainability issues[v]. A similar resolution has now been tabled for four years running, attracting support (not including abstentions) of more than a third of those shares voted in each year. Emerson’s current reporting of environmental issues is, we consider, wholly inadequate. The company scored just nine out of 100 in the 2012 analysis of responses to the Carbon Disclosure Project[vi]. In 2013, Emerson’s response was not included because it was submitted after the deadline for responses had expired. The average score in 2013 for the industrials sector as a whole was 65.

We’ve written repeatedly to the company about these issues as well as co-filing shareholder resolutions. We’ve also worked with other investors to try and emphasise why, in our view, these issues represent commercial risks and opportunities for the business. However, after an initial meeting and exchange of views after the first resolution was filed in 2010, we have had no further opportunities to discuss these issues with the company in spite of repeated requests for ongoing dialogue.

We also have other areas of concern. In our view the CEO’s remuneration remains very high in spite of lacklustre growth in recent years[vii]. In 2013 the total package equated to over US$25m. In 2012, although the overall package was lower at US$10.4m this equated to a package that was, according to Bloomberg, 177 times the salary of an average Emerson employee[viii]. In our view this degree of pay stratification is harmful to long-term company performance.

The company has also come under pressure for poor disclosure of political contributions. A resolution requesting more information on the company’s political contributions and lobbying expenditures was also filed in 2013-14. This resolution saw over 50% of shares either voted in favour or abstained.

We have now chosen to divest our shares in the company and have written to the CEO to explain why. Ultimately this means that our engagement has been a failure. We have not managed to convince the management team to engage seriously with our concerns. This represents a relatively unusual outcome for our engagement which more typically leads to at least modest positive change. We greatly regret this. Emerson remains an interesting company in an attractive sector, albeit one that seems determined to ignore the views of a substantial proportion of its own shareholders in relation to environmental, social and governance concerns. We believe that this represents a significant flaw in the governance of the company, and for this reason we have decided to exit from our interest in the business.



[i] William Blair, Emerson Electric Co., 13 February 2014

[ii] http://www.emerson.com/en-US/newsroom/news-releases/emerson-financial-news/Pages/Emerson-Reports-First-Quarter-2014-Results.aspx

[iii] ISS Proxy Advisory Services, Emerson Electric Co., 4th February 2014

[iv] Financial Time, EU deal marks big step in auditor rotation reforms, 17 December 2013 (http://www.ft.com/cms/s/0/191f9f64-673b-11e3-8d3e-00144feabdc0.html?siteedition=uk#axzz2tmHRNlqU)

[v] http://www.sec.gov/Archives/edgar/data/32604/000003260414000012/kendleelection2014annualme.htm

[vi] https://www.pwc.com/us/en/corporate-sustainability-climate-change/assets/pwc-cdp-s-and-p-500-climate-change-report.pdf

[vii] Op. Cit. i and ii

Recent posts

  • Kingspan and the Grenfell tower fire
  • Greenwashing, regulation and sustainable investment
  • Governance of technology and COVID-19
  • The broad spectrum of healthcare technologies helping to get us out of this pandemic
  • The online mob and the sustainability transition
  • Why 2021 will be such a critical year for the climate
  • Accelerating the transition to net zero
  • A New Era for London and Brussels
  • ‘There are decades where nothing happens, and there are weeks where decades happen’
  • Building a movement: why WHEB Asset Management is becoming a Future-Fit Pioneer
  • Archive

  • April 2021 (3)
  • March 2021 (1)
  • February 2021 (1)
  • January 2021 (3)
  • December 2020 (1)
  • November 2020 (2)
  • October 2020 (3)
  • September 2020 (1)
  • August 2020 (2)
  • July 2020 (3)
  • June 2020 (2)
  • May 2020 (1)
  • April 2020 (3)
  • March 2020 (1)
  • February 2020 (2)
  • January 2020 (1)
  • December 2019 (1)
  • November 2019 (2)
  • October 2019 (3)
  • September 2019 (1)
  • August 2019 (2)
  • July 2019 (3)
  • June 2019 (2)
  • May 2019 (3)
  • April 2019 (1)
  • March 2019 (1)
  • February 2019 (2)
  • January 2019 (3)
  • December 2018 (1)
  • November 2018 (2)
  • October 2018 (4)
  • September 2018 (2)
  • August 2018 (4)
  • July 2018 (1)
  • June 2018 (1)
  • May 2018 (1)
  • April 2018 (2)
  • March 2018 (2)
  • February 2018 (1)
  • January 2018 (1)
  • December 2017 (3)
  • November 2017 (1)
  • July 2017 (3)
  • June 2017 (1)
  • May 2017 (1)
  • April 2017 (1)
  • February 2017 (2)
  • November 2016 (1)
  • August 2016 (1)
  • July 2016 (1)
  • June 2016 (1)
  • May 2016 (1)
  • April 2016 (2)
  • February 2016 (1)
  • December 2015 (1)
  • November 2015 (3)
  • October 2015 (1)
  • September 2015 (1)
  • July 2015 (2)
  • April 2015 (2)
  • February 2015 (2)
  • December 2014 (2)
  • November 2014 (3)
  • October 2014 (4)
  • August 2014 (1)
  • July 2014 (3)
  • June 2014 (1)
  • April 2014 (2)
  • March 2014 (2)
  • February 2014 (3)
  • January 2014 (4)
  • December 2013 (4)
  • October 2013 (5)
  • September 2013 (3)
  • July 2013 (4)
  • June 2013 (2)
  • May 2013 (4)
  • April 2013 (2)
  • March 2013 (4)
  • February 2013 (6)
  • January 2013 (2)
  • December 2012 (3)
  • November 2012 (1)
  • October 2012 (4)
  • September 2012 (2)
  • August 2012 (1)
  • July 2012 (3)
  • June 2012 (3)
  • May 2012 (6)
  • April 2012 (4)
  • March 2012 (5)