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
[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)
[vii] Op. Cit. i and ii