Tuesday, April 10, 2012

Cats Are Plotting.

The proxy season is usually in April. It means good number of companies are having their shareholder meetings deciding important issues like how many banquets they will have this year to celebrate their board of directors.

Laugh, it’s good for your health.

Turning to our serious side, though, the proxy season is a time to better empathize with investor sentiment and gauge the future market. Usually, when the economy is good and no one has any reason to ask the tough questions, company boards walk away with menial tasks of sharpening their looks or the threat of hostile takeovers.

This year seems a bit different. Although still plenty of mergers are in the news and proxy contests are scuffling the floors, there is also a high level of shareholder activism in the mix. Apple investor demanded majority shareholder approval for any candidate to be elected in February, making visible a fundamental power shift from the board directors to shareholders that began two years ago.

In the wake of our housing crisis and the banking disaster, shareholders like the California Public Employees' Retirement System (CalPERS), the largest U.S. pension fund and Apple's biggest investor, is making demands and taking names. Board directors are now forced to engage more directly with institutional investors, (well, at least the good ones are). Technology also made this possible; Twitter and LinkedIn each have a unique incentive to promote this kind of interaction between the public, institutional investors, and boards.

The power shift would not be significant if it were not for what seems a commitment for environmental, social and governance (ESG) investing from these institutional investors. Ernst and Young released their 2012 proxy season report noting a “rising pressure” for ESG:

  • There is an increase in ongoing dialogues with shareholders on a range of corporate governance and corporate responsibility issues.
  • Large asset managers traditionally are passive on corporate governance practices are taking up a more active role in addressing letter-writing campaigns.
  • These investors are trending to issues concerning sustainability issues directly affecting growth opportunities and risk management problems concerning not just the company’s financials, but also their environmental and social impacts.
  • Since the SEC allowing shareholders to link financial risk to environmental impacts in 2009, the SEC also implemented Net Neutrality requirements in 2012.
  • High profile issues continue to dominate the media; the conversation online is maturing to include more environmental and social issues.
Another E&Y report pointed to a survey (conducted by Ernst & Young and GreenBiz) that revealed five major factors driving this investor led sustainability movement:
  1. Desire for cost reduction (from energy) 
  2. Changes in consumer demands
  3. Brand risk management
  4. Shareholder expectations
  5. Competitive threats 
Overall the survey showed more than 60% increase in sustainability related inquiries with more than two-third of those inquiries directed at reducing energy consumption and emission. An overwhelming majority (83%) of the companies already taking action or in the process of discussing future actions.

Average shareholder support level for these sustainability initiatives are also reaching the 30% threshold, forcing companies who are not taking action take notice.

I would also like to note that 2011 is the first time ever the U.S. export to China has breached the $100 Billion mark; I am surprised to note Ohio (my favorite State in the Union) is one of the top five exporter states.

Our export revenue has been on a rise ever since China opened-up, but it's not until the recent decades did we see a dramatic increase demand from its rising middle class. With its serious environmental and social problems, sustainable practices are becoming the next new thing in China. So it seems that while the off-shoring is drying up as China's market is maturing and becoming more cost prohibitive for U.S. companies to build there, it is becoming a much more lucrative place for U.S. companies to sell and turn profits. That profit meets its customers in light of a growing sustainable market place.  

This is good news. It seems that time for us, I mean US, to make a change and actualize the impossibility of a Sustainability Renaissance is near--have we ever had a American Renaissance? I wonder what would she look like?

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