Get Ready for Greater Scrutiny of Corporate Governance
With new 13F filings coming out, most companies have experienced the largest new buying of their shares from institutional investors they don’t meet with. Passives are up, actives are down. Last year investors pulled $340 billion from active managers in the U.S. and allocated $504 billion to passive alternatives. BlackRock, Vanguard, State Street, Dimensional Fund Advisors and Invesco were the biggest beneficiaries.
The trend toward passive investing will not have the positive corporate governance implications to companies that they expect;
- Some believe if more and more of the industry is owned by passive investors who are only trying to replicate the index, there is no oversight from a corporate governance point of view. The good news for companies in the short term is that Vanguard last year emerged as one of the most lenient investors when it comes to voting on company resolutions – 99% of the time they supported pay proposals, with BlackRock coming in at 97% of the time.
- That could be changing, however. In January, Vanguard, along with 15 other very large investment managers, announced a Framework of six corporate-governance principles they have agreed to endorse, including bans on dual-class shares and staggered boards. Greater direct communication with a company’s board is also on their agenda. The Framework, by the Investor Stewardship Group, goes into effect on January 1, 2018, so public companies can prepare and possibly adjust their proxies for this new entrant in the world of corporate governance.
How will the new Administration’s Economic Policies Affect Corporate Profits?
Most Fortune 500 companies see a net short-term positive to President Trump’s agenda. The biggest concerns are over the outcome of trade policies with the fate of the alphabet soup of trade pacts now seemingly up in the air. And they are talking about it in their outlooks for 2017. Goldman Sachs has an interesting chapter in its quarterly Beige Book publication on how managers of Fortune 500 companies are feeling about the four key pillars of the Trump Administration’s agenda: tax reform, regulation, fiscal spending and trade policy.
- Tax reform: Managements are optimistic about the potential in corporate tax reform. Lower corporate taxes represent a possible tailwind to corporate earnings and will make U.S. companies more competitive in world markets. They are concerned, however, about the controversial border-adjustment tax. Inevitably, there would be winners and losers with importers, such as apparel retailers getting socked with import taxes and manufacturers of machinery and other equipment getting tax credits as their products leave the U.S. While the net effect would be neutral to Treasury revenue, according to economists, profits of consumer-goods companies could get squeezed.
- Regulation: Hopes for widespread deregulation and improved regulatory clarity are increasing confidence among some management teams. There is a generally positive opinion about the dismantling of Dodd-Frank, particularly among financial companies, although no one really understands its direct link on corporates. Speculation is that lending standards could ease, making credit easier, thereby giving companies easier access to capital for investment.
- Fiscal spending: Managers of industrial firms are enthusiastic about potential infrastructure spending and a possible end to the defense sequester. President Trump proposed a $1 trillion infrastructure plan in his presidential campaign, but most expect the actual spending package will be $25 billion per year.
- Trade policy: Management views are mixed on whether President Trump’s trade proposals will be constructive or will lead to damaging retaliation from U.S. trade partners. All of them agree that President Trump’s key issue is trade. Last week he tweeted on the topic: “Countries charge U.S. companies taxes or tariffs while the U.S. charges them nothing or little.” Hallmark promises of his campaign were the renegotiation of NAFTA, opposition to the Trans-Pacific Partnership (TPP), and the imposition of targeted tariffs on China and Mexico.
Just about any change in economic policy creates winners and losers. Time will tell how much of President Trump’s agenda will come to fruition. Managements need to be ready to communicate to their shareholders how developments, as they become clearer, will affect the outlook of their companies.