Strange times indeed…

Around this time every year, our Responsible Investment team starts getting ready for the busy equity proxy voting season. Around 60% of all annual general meetings (AGM’s) we analyse and vote at occur in the three-month period of April-June. Engaging with these companies ahead of deciding how to vote is resource-intensive.

And of course, this year appeared no different at first. In the UK, many companies are seeking shareholder re-approval for their remuneration policy (required every three years under UK law with the majority falling in the same year). As such, the team had been busy with in-depth engagements on the structure of remuneration at multiple companies. But clearly things have changed radically and quickly for all of us.

As we all know, travel restriction and limits on mass gatherings mean that organising any sort of meeting has become challenging. Not least one that often requires a company’s representatives, shareholders and other stakeholders to be physically present. In many countries, company law and corporates themselves are simply not set up to hold virtual AGM’s. However, these meetings must go ahead; there are resolutions that need to be passed to enable companies to function. This includes, for example, the appointment of a new CEO (as is the case with our parent company, AEGON), the payment of dividends (if appropriate/allowed and under normal circumstances which investors expect) and the setting of remuneration policy.

AGMs have historically also provided a public forum for investors and other stakeholders, who may not necessarily have the opportunity otherwise, to voice their opinions (and have a biscuit or two). As a large institutional shareholder, access to companies isn’t generally a concern for Kames, but it is for small retail shareholders who deserve the right to be heard. Companies are a part of our society, so many NGOs also use AGMs as a platform to raise awareness of a company’s activities in the context of important issues like climate change or diversity. For these reasons, the idea of virtual AGMs has therefore mostly been frowned upon. Until now.

Whilst there have been a few postponements, governments and their lawmakers have moved rapidly to address these extraordinary circumstances. For instance, in France and Italy, there have been emergency decrees passed to allow for virtual meetings. Switzerland is allowing “closed door” meetings to take place, whilst Australia is allowing an extension of the permitted time between a company’s year-end and its AGM. In the UK, we are currently waiting to see what the government decides.

So these are strange times. We are all having to rise to a multitude of challenges in the face of Covid-19. Dealing with the peculiarities of having to hold an AGM is obviously somewhat down the priority list behind keeping staff safe and protecting the wellbeing of the most vulnerable members of our society. However, society also needs business to continue to function to prevent things getting worse.

About the author

Miranda is a member of Aegon Asset Management’s Responsible investment Team, where she is responsible for ESG integration, voting and engagement. Her role involves overseeing the environmental, social and governance screening process for ethical and sustainable funds. She also provides corporate governance screening and research for all equity investments across the group and conducts research into wider ESG issues. Miranda is responsible for the monitoring and engagement of the ESG approaches and performance of investee companies in line with our responsible investment policies. She leads engagement activities with public policy makers and investee companies on issues such as board structure, remuneration, environmental impact and social practice. Miranda joined in 1994 as a research assistant in the UK equity team and has 26 years’ industry experience. She studied Chemistry at Napier University in Edinburgh and has the IMC professional qualification.

*As at 30 April 2020.

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Hold on a SEC

Recent press articles would have you believe the Proxy Voting Agencies, such as ISS and Glass Lewis are hugely powerful entities determined to bring the corporate world to its knees(!) by forcing institutions to vote against director reappointments and pay for no reason.

As a result of such press and lobbying, including from the Business Roundtable in the US. The SEC are now planning to implement some restrictions on the reports published by the agencies and also the mechanism for shareholder resolution submissions. The changes are:

  1. Prior to a General Meeting, the agencies will potentially have to submit the voting advice report for review by the companies twice prior to it being released to their clients.
    The problem with this? Discussions between institutional investors and corporates can often occur right up to the deadline for votes to be cast. Time is critical. The proposals will slow the process down considerably, which is an issue during the busy proxy season when significant numbers of companies hold their AGMs.
  1. Shareholder resolutions currently can be resubmitted to the AGM if they have gained support of 3% of the shareholder base, rising to 6% in year 2, and 10% in year 3. The SEC propose to raise these thresholds to 6%, 15% and 30% respectively. If a resolution fails to reach that level of support then it cannot be resubmitted for 3 years. 
    So what? While this doesn’t sound terribly onerous, previous resolutions on matters such as climate change have typically started with very low support but eventually gained significant support to effect change over a matter of a few years (e.g. at Royal Dutch Shell).

Like many other institutional investors, we are not comfortable with these changes; time can be tight during the busy proxy voting season and we believe the focus on the agencies is misplaced.

While we can only comment on how ISS works (as that is the agency we use), we understand that others function in a generally similar manner. And whilst potential conflicts of interests between these agencies and the companies they issue reports on, can arise, these conflicts appear to be adequately managed.

The Proxy Voting Agencies policies and approach should simply reflect the requirements of their underlying clients. For instance, ISS undertake a comprehensive institutional questionnaire and engagement programme with investors annually. This is to ensure that their research is focussing on the right issues and that the voting recommendations are aligned with their client’s opinions. As a result and unsurprisingly, their recommendations correlate with the voting outcome at meetings!

As best we can tell, the Proxy Voting Agencies appear to be trying their best. If there is a fault with the system, it is with those institutions that blindly follow voting recommendations. This is where the SEC should be focussing their efforts.

We use Proxy Voting Agency research as one of the inputs into our decision making process. In 2019 Kames voted at 480 company meetings and we disagreed with the ISS voting recommendation 22% of the time. Each meeting we vote in is considered on a case-by-case basis and we come to our own conclusions. Quarterly reports are provided to clients so that they can be comfortable (or not) with our approach. As we have previously written, we take our stewardship responsibilities very seriously and this includes not shying away from voting against company management regardless of what the Proxy Voting Agencies tell us.

About the author

Miranda is a member of Aegon Asset Management’s Responsible investment Team, where she is responsible for ESG integration, voting and engagement. Her role involves overseeing the environmental, social and governance screening process for ethical and sustainable funds. She also provides corporate governance screening and research for all equity investments across the group and conducts research into wider ESG issues. Miranda is responsible for the monitoring and engagement of the ESG approaches and performance of investee companies in line with our responsible investment policies. She leads engagement activities with public policy makers and investee companies on issues such as board structure, remuneration, environmental impact and social practice. Miranda joined in 1994 as a research assistant in the UK equity team and has 26 years’ industry experience. She studied Chemistry at Napier University in Edinburgh and has the IMC professional qualification.

*As at 30 April 2020.

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Is it all smoke and mirrors?

Public Health England have said that using E-cigarettes (vaping) is 95% better than smoking. But is this claim a bit premature? If vaping has only been mainstream since around 2007 in the UK and US, can anyone say they know the long-term effects of usage?

There have been 48 deaths and a further 2,290 people made seriously ill as a consequence of vaping this year.”

 

Source: Centre for Disease Control and Prevention (CDC)

For those who aren’t familiar with the process- vaping devices heat up liquid to an aerosol state that is inhaled by the user. The liquids usually contain nicotine but also a number of other substances such as heavy metals and possible carcinogens – albeit in smaller amounts than in traditional cigarettes.

Two recent studies in the US that have found the damage to hearts is similar in vapers and “traditional” smokers but the research samples were quite small. These aren’t the only studies- there are a number of academic studies happening all over the world, so can expect more results from those over the next few years. With research fairly limited at the moment, there is still uncertainty surrounding health effects on users or those who are exposed to their exhalations.

According to the Centre for Disease Control and Prevention (CDC) in the US, there have been 47 deaths and a further 2,290 people made seriously ill as a consequence of vaping this year alone. It is unclear what the cause is. The victims are spread across all states (apart from Alaska) and the number of devices and liquids used are widely varied, albeit around 75% have added THC (the ingredient in marijuana that provides the high) to their vaping devices, and there is some evidence that an additive to thicken THC for vaping devices is causing the lung damage in 29 of the most recent cases. At the moment the problem doesn’t appear to have spread outside of the US, which could be because there are a high number of counterfeits in the US market.

That said, marketing to minors has also been aggressive by some players. Companies like Juul have been questioned over their marketing techniques and variations that would appear to be targeting children. Last year, an estimated 3.6m children in the US used a vaping device and a separate study in the UK claimed the figure was around 12% of 11-16yr olds. President Trump is currently contemplating raising the minimum age for vaping to 21 and banning the flavoured devices altogether in an effort to curb this “epidemic”.

As we have previously written, it can be very difficult to transition an already established business to a more sustainable alternative.  The tobacco industry faces these challenges. E-cigarettes have been positioned as a less-harmful alternative to traditional cigarettes, but we shouldn’t forget that similarly positive narratives were also used by the tobacco industry in the past.

About the author

Miranda is a member of Aegon Asset Management’s Responsible investment Team, where she is responsible for ESG integration, voting and engagement. Her role involves overseeing the environmental, social and governance screening process for ethical and sustainable funds. She also provides corporate governance screening and research for all equity investments across the group and conducts research into wider ESG issues. Miranda is responsible for the monitoring and engagement of the ESG approaches and performance of investee companies in line with our responsible investment policies. She leads engagement activities with public policy makers and investee companies on issues such as board structure, remuneration, environmental impact and social practice. Miranda joined in 1994 as a research assistant in the UK equity team and has 26 years’ industry experience. She studied Chemistry at Napier University in Edinburgh and has the IMC professional qualification.

*As at 30 April 2020.

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The drugs don’t work…

For the 3rd year in a row the life expectancy in the US has declined. Why? A major contributor is the opioid crisis. In the past 20 years it has claimed 400,000 lives in the US and now, in the UK and the US, the odds of dying from an opioid overdose far exceed the odds from dying in a vehicle crash.

Overdose deaths in preceding 12 months

Source: CDC

How has this happened and what can be done about it?
The perfect conditions have been created: Pharmaceutical companies have been using aggressive marketing techniques, mix that with the enthusiasm of certain medical professionals to prescribe, and add in a lack of reporting of suspicious orders by representatives and pharmacies. Suddenly it’s simple to see why ordinary people are becoming addicted to these powerful drugs. For many, what starts as a genuine need for pain relief escalated into full blown addiction and a progression to harder illegal drugs. This is not the first time the pharmaceutical industry has got into hot water over its sales strategies (e.g. see recent article on Insulin prices, here and here.)

What is happening about this?
Currently in the US there are 22 opioid makers, distributors and pharmacies trying to negotiate settlements with 2000 municipalities pursuing them. It is expected that one of the cases being brought in Ohio by means of a “negotiation class” in October will have a significant impact on those negotiations and future legal actions.

Some well-known names have been caught up in all this. Johnson and Johnson was recently ruled as a “public nuisance” by an Oklahoma judge and ordered to pay $572mequivalent to a year’s worth of services needed to combat the epidemic in Oklahoma. Reckitt Benckiser agreed to pay a $1.4bn settlement with the Department of Justice and the Federal Trade Commission over the way a subsidiary marketed a painkiller.

Until recently, you probably wouldn’t have heard of Purdue Pharmaceutical. But as the manufacturer of OxyContin, Purdue is one of the biggest players in this whole situation. The company previously settled with the Department of Justice over aggressive marketing techniques in 2007. Unfortunately, it seems the leopard did not change its spots. Purdue is accused of continuing to market OxyContin as having lower addiction risk than other opioids, with drug salespeople aggressively remunerated.  Purdue owners, the billionaire Sackler family, have found their philanthropic activities increasingly in the spotlight.

A few weeks ago Purdue filed for bankruptcy and established a framework agreement with 27 states to set up a new company that will continue to sell OxyContin but with all proceeds going to the plaintiffs. The Sackler family themselves will have to contribute $3bn cash with the entire settlement being worth somewhere in the region of $10-12bn… albeit with no admission of wrongdoing.

The sums are enormous. But still small in comparison to the estimated total “economic burden” of prescription opioid misuse in the United States.

The estimated cost of Opioid misuse in the US currently sits at a staggering $78.5 billion a year, including the costs of healthcare, lost productivity, addiction treatment, and criminal justice involvement.

About the author

Miranda is a member of Aegon Asset Management’s Responsible investment Team, where she is responsible for ESG integration, voting and engagement. Her role involves overseeing the environmental, social and governance screening process for ethical and sustainable funds. She also provides corporate governance screening and research for all equity investments across the group and conducts research into wider ESG issues. Miranda is responsible for the monitoring and engagement of the ESG approaches and performance of investee companies in line with our responsible investment policies. She leads engagement activities with public policy makers and investee companies on issues such as board structure, remuneration, environmental impact and social practice. Miranda joined in 1994 as a research assistant in the UK equity team and has 26 years’ industry experience. She studied Chemistry at Napier University in Edinburgh and has the IMC professional qualification.

*As at 30 April 2020.

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‘Just call me Paul….’

I went to a conference recently where a member of one of the UK security agencies was speaking – he couldn’t give his name, no photographs were allowed, no mention on social media and he could not be further than 6 feet away from his laptop at any time. My interest was piqued!

It was like something out of Spooks! Immediately I envisioned shifty characters skulking around in the shadows trying to steal official secrets from hapless civil servants – however, the reality is far from it. While some well publicised leaks come from carelessly leaving laptops in public places, or being photographed with sensitive data on clearly visible paperwork, that’s not the biggest danger. What is? Sophisticated cyber-attacks.

“Paul” regaled us with tales of poor passwords and cyber snooping through family member’s social media along with people plugging in dropped memory sticks to computers. I know, you’ve heard all this before, but there are instances of companies in a takeover process being completely stripped of their intellectual property before a deal is done!

You only have to open the paper to see it. The press is full of worrying data breaches at well-known companies – in the past year we have seen this everywhere, from the financial sector to airlines to supermarkets to the London Tube – investors therefore need to address cyber security with the companies they invest in.

In fact, it’s estimated that sophisticated techniques used by hostile states pass down into organised crime in around 6 years. So it makes sense to listen to the security agencies when they advise us on what we should be asking boards of investee companies. Cyber security is being addressed at a national level both in the UK and US – most recently the US has introduced the US Cybersecurity Disclosure Act requiring listed companies to disclose (in public filings) whether any of the board members are considered to be a cyber security expert.

The discussions we have with boards of the companies we invest in include: how they identify their most valuable assets whether that be physical or intellectual, how they identify the threats to those assets and how they adapt a risk management programme to deal with those threats. We are interested at what level within the organisation these issues are considered at, whether there is sufficient expertise on the board to understand them and how often the company tests their defences and how they learn from incidents.

It’s not perfect; we aren’t able to attend board meetings. However, by addressing this issue with companies when we have the opportunity, we hope it encourages them to start having serious discussions around the board table.

About the author

Miranda is a member of Aegon Asset Management’s Responsible investment Team, where she is responsible for ESG integration, voting and engagement. Her role involves overseeing the environmental, social and governance screening process for ethical and sustainable funds. She also provides corporate governance screening and research for all equity investments across the group and conducts research into wider ESG issues. Miranda is responsible for the monitoring and engagement of the ESG approaches and performance of investee companies in line with our responsible investment policies. She leads engagement activities with public policy makers and investee companies on issues such as board structure, remuneration, environmental impact and social practice. Miranda joined in 1994 as a research assistant in the UK equity team and has 26 years’ industry experience. She studied Chemistry at Napier University in Edinburgh and has the IMC professional qualification.

*As at 30 April 2020.

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