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The United Brotherhood of Carpenters (UBC) pension program, since its inception in the 1920’s, has had a simple, but compelling, goal: Provide UBC members with a fair and secure retirement benefit after long years of demanding work in the construction and allied industries. Today, UBC members throughout the United States and Canada participate in nearly one hundred pension funds (Carpenter Funds or Funds) that remain steadfast to this commitment.
Sound Fund governance and prudent investment practices have been the foundation of the work to provide participants and their families a secure retirement benefit. This work has been complemented by the Funds’ diligent and effective exercise of the ownership rights and responsibilities associated with their corporate stock ownership.
The Funds’ three decades of corporate ownership advocacy has been an important component of the commitment to safeguard members’ retirement security. With the focus on investment value protection and enhancement, the Funds have advanced corporate governance and executive compensation reforms designed to optimize long-term Fund and corporate value. As market investors with a patient capital perspective, the Funds have set their sights on fostering a corporate governance environment that encourages and enables corporate directors and executives to optimize long-term corporate value.
Effective corporate governance systems are those that incentivize boards and managers to develop and implement corporate strategies to build growing and innovative companies. The basic premise of the Fund’s ownership activism has been that effective corporate governance systems need accountability mechanisms that rely more on active monitoring by patient owners of capital and less on the workings of the corporate control market. These systems necessarily include governance and executive compensation accountability mechanisms that enable owners to focus boards and managers on the effective development and implementation of strategic initiatives. To this end, responsible shareholder activism plays an important role in establishing corporate governance systems that promote both corporate long-term success and the health of the broader economy.
The Carpenter Funds embrace their corporate ownership responsibilities, closely monitoring portfolio companies, exercising their corporate voting rights in an informed manner, and advocating for governance and executive compensation reforms. Their advocacy has incorporated the entire range of actions envisioned by U.S. Department of Labor pronouncements, including the implementation of proxy voting guidelines, participation in collective share owner advocacy efforts, Fund- initiated dialogue with corporate board members and senior executives, and the submission of shareholder proposals for a vote of corporate shareholders. The blend of actions undertaken is often dependent on the nature of the issue and scope of the reform initiative.
The Funds’ activism, along with that of other institutional investors, has generally produced positive outcomes: corporate governance processes are more democratic; corporate boards are more independent; corporate directors are more accountable to owners; executive compensation excesses have been spotlighted, and companies have been forced to confront irresponsible behavior. These responsible ownership activities and the resulting corporate governance enhancements have served to protect and enhance corporate and investment value.
However, the underlying premise of much of today’s share owner activism remains the promotion of an active market for corporate control. Much of this activism has exacerbated the market’s pressure and urgency to generate short-term “shareholder value.” Unfortunately, the daily stock price and other short-term financial performance measures have come to define “shareholder value” and corporate success. Short-term “shareholder value” is all too often “value” extracted from the corporation or stakeholders vital to the corporation’s long-term success. The price of a corporate strategy designed to produce short-term earnings or stock price performance can be measured in many ways: A failure to modernize and reinvest in new capacity; workplace practices and policies that suffocate employee morale and commitment; poor product quality and an abandonment of innovation; lost market share opportunities; a spoiled environment; regulatory and community opposition, and a vulnerable stock price.
Carpenter Funds and other private and public sector pension funds engaged in shareholder activism for the first time during the fast-paced hostile corporate takeover days of the 1980’s. Attractive “takeover premiums” promised by the hyper-active takeover market combined with and responsive corporate defensive measures that threatened investor access to these “premiums” gave birth to institutional shareholder activism.
While strong and early opponents of board entrenchment tactics, the Carpenter Funds questioned the value of an activism agenda designed to make the hostile corporate takeover market the preferred method of board and management accountability. The active takeover market encouraged short-term stock speculation and stimulated defensive corporate strategies to boost short-term stock price to the detriment of optimizing long-term enterprise value.
The Carpenter Funds’ activism in the 1990’s advanced a governance model that balanced board and management responsibilities to develop and implement a strategic business plan, with the rights of shareholders to hold boards and executives accountable for their performance. Advocacy issues included the extension of the “one-share one-vote” principle, confidential shareholder voting, and new board and key board committee independence standards. Broader institutional shareholder advocacy remained squarely focused on advancing an active takeover market as the preferred method of board and management accountability. Initiatives against management takeover defenses such as staggered boards and “poison-pill plans” consumed the energy of many institutional investors.
With the active market for corporate control as the favored model of board and management accountability, the short-termism jump-started in the 1980’s became contagious, with boards, managers, and investors fixated on short-term stock price performance and quarterly earnings estimates.
With considerable shareholder advocacy experience, the Funds began the new century with a heightened focus on advancing a corporate governance model that encouraged and rewarded sustained long-term corporate value creation. The Funds operated with a heightened interest in the core issues of corporate accounting integrity, pay-for-performance executive compensation practices, and effective board and management accountability practices that comported with the Funds’ goal to encourage sustainable long-term corporate value growth.
An advocacy style that includes persistence, as reflected in multi-year campaigns, and reasonableness, as reflected in the goal of achieving measured progress on important issues, has produced a decade-plus of solid governance reform successes. Since the turn of the century the Carpenter Funds have been the nation’s most active institutional shareholders as measured by the level of corporate engagements initiated by the submission of shareholder proposals.
Take a look at our Carpenter Fund’s Shareholder Proposal History File.
Auditor independence, stock option expensing, pay-for-performance executive compensation, and majority voting in director elections are several of the issues on which Carpenter Fund leadership has produced important market reforms. Lucrative fee arrangements for a wide range of services that threatened auditor independence prompted pre-Sarbanes-Oxley activism on the auditor independence issue and laid the groundwork for new disclosures requirements and restrictions on audit firm performance of a range of non-audit services.
The fight to mandate stock option expensing proved critical to closing the floodgates on executive option grants that accelerated executive compensation to new heights. And years of work on establishing a majority vote standard in director elections have transformed director elections into meaningful director accountability events.
The Carpenter Funds began the decade with an innovative project that engaged companies across a variety of industries on a set of six governance and compensation issues. New formulations for director elections and shareholder advocacy and voting rights were central components of the proposed reforms designed to promote both long-term management and investment perspectives.
Several dozen companies each received shareholder proposals on the following topics: triennial director elections; shareholder proxy access to advance the candidacy of non-management board nominees; enhanced voting rights for long-term shareholders; a Strategic Plan Report to enhance a company’s disclosure of its strategic plan for long-term growth; a pay-for-performance executive compensation proposal, and a director independence proposal outlining overall board and key committee independence standards.
Not surprisingly, the triennial director election, proxy access and the enhanced voting rights proposals stimulated the most discussion. Triennial director elections and shareholder proxy access rights were presented as counter-balancing concepts — longer director terms combined with new shareholder rights to advance alternative director nominees.
A variety of corporate representatives, including chief executive officers, board chairs and individual directors, participated in extensive dialogue on the set of proposed reforms. The discussions were animated, informative, and constructive for all involved and were summarized by the Funds in a white paper entitled “A Shareowner – Management Dialogue on Governance Issues and Long-Term Corporate Value.”
While there was little common ground on individual reform proposals, there was wide agreement on the need to construct a governance framework that supported management and investment perspectives designed to produce long-term corporate and investment value. The discussions addressed the strengths and weaknesses of the proposal’s varied governance concepts, as well as practical implementation issues posed by changed voting rights, new proxy access rights, or new election schedules.
These discussions helped formulate the Funds’ later activism on a variety of governance and compensation topics, such as majority voting in director elections. Arguably the most significant result of the initiative was the demonstrated value of corporate-shareholder dialogue focused on finding common ground in the pursuit of the goal of long-term corporate value creation.
In 2001, the U.S. Securities and Exchange Commission (SEC) promulgated a final rule requiring issuer disclosure of the fees paid to accounting firms for audit and non-audit services. The resulting disclosure provided shareholders an opportunity to identify potential conflicts of interests between portfolio companies and the accounting firms hired to audit their books.
The Carpenter Funds and ProxyVotePlus, LLC, the voting fiduciary for the Funds, collected the fee data from the proxy statements of hundreds of companies in the Carpenter Funds’ investment portfolios and calculated non-audit to audit fee ratios at each company. The fee ratios revealed that corporations routinely paid their audit firms fees for non-audit services that were significantly larger than the fees paid for auditing services.
The underlying fee arrangements revealed potential conflicts of interests that jeopardized the integrity of the independent audit process. Market events would soon confirm concerns about the threats to auditor independence posed by significant non-audit fee arrangements between audit firms and their corporate clients.
Equipped with the fee data, the Funds prepared and submitted an Auditor Independence Policy Shareholder Proposal to 36 major companies with high non-audit to audit fee ratios. The proposal called on companies to establish a strict accounting firm independence standard that prohibited a company’s independent audit firm from performing non-audit work. The Funds’ shareholder proposals transformed the fee disclosure data into an opportunity for shareholders to vote on the issue of auditor independence.
Starting with the Disney Company, shareholders expressed high levels of support. The strong vote received by the first-time proposal combined with the ongoing Enron controversy prompted many companies to negotiate settlements with the Funds. Key settlement terms adopted by many companies, including Johnson & Johnson, Merck, Bristol-Myers Squibb, and Apple Computer, included the following:
U.S. Securities & Exchange Commission Chair Harvey Pitt acknowledged publicly the Funds’ pre-Sarbanes-Oxley shareholder activism on the critical issue of auditor independence. In 2004, the Funds and other Trades Funds again addressed the audit firm issue with a campaign of over one hundred shareholder proposals designed to uphold the longstanding right of shareholders to ratify the selection of the outside audit firm. With nearly every company agreeing to retain or re-establish the auditor ratification vote, the campaign successfully short-circuited the effort to eliminate the annual ratification vote.
Audit firm independence has been an enduring issue for the UBC Funds. The challenge to audit firm independence that took the form of significant non-audit fees in the early 2000’s, now takes the form of long-term corporate client-audit firm relationships that can span decades and generate considerable audit fee income for the Big Four audit firms that have captured the large cap corporation audit business. During the 2012 proxy season, the UBC engaged dozens of corporations on the issue of mandatory audit firm rotation. The UBC challenged firms to consider adopting a policy of mandatory audit firm rotation after seven years of engagement. Many of the companies persuasively made the case against mandatory audit firm rotation, but agreed to enhance their proxy statement disclosure regarding the long-tenured relationships with their public audit firm. The disclosure agreed upon is designed to inform shareholders of actions and positions taken by the corporate audit committee to protect audit firm independence. A description of the UBC Funds activism on this in the 2012 to 2017 proxy seasons can be found in the “Proxy Season Reports” section of this website.
An aggressive bi-partisan Congressional effort in 1992 smothered a proposed accounting standard by the Financial Accounting Standards Board (“FASB”) that would have required corporations that use stock options to compensate executives to expense those options in the corporation’s financial statements. Bowing to intense political pressure, FASB required only that option expense information be included in financial report footnotes. SEC Chairman Arthur Levitt would later call his direction to FASB to back down in the face of Congressional pressure “my single biggest mistake during my years of service.”
Without a stock option expensing requirement, companies awarded excessive levels of options to executives. The combination of large stock option grants and the 1990’s bull market produced skyrocketing levels of executive compensation and wealth accumulation. Over the period of the decade, the ratio of executive pay to rank and file worker earnings increased from 15 to 1 to 500 to 1. Rising stock prices muted shareholder complaints about excessive executive compensation, with companies such as General Electric rationalizing CEO Jack Welsh’s $700 million compensation as a modest percentage of the company’s growing market capitalization.
After years of executive compensation being supercharged by “no-cost” stock options, the Carpenter Funds submitted shareholder proposals to large option granters calling on companies to do what the existing FASB standard did not require: expense the cost of all future stock options in their financial statements. The Funds’ goal was for the first time to bring shareholders into the public debate over option expensing so as to build support for a new FASB option expensing rule. Companies fought hard against the option expensing proposal. Most companies sought no-action letter relief from the U.S. Securities and Exchange Commission (“SEC”). The SEC Staff granted the corporate requests to omit the proposals from proxy materials on the grounds that the issue of option expensing was “ordinary business” (an accounting standard issue) and thus not a proper subject for a shareholder proposal under SEC Rule 14a-8 (See National Semiconductor Corporation, July 19, 2002). The Carpenter Funds requested full SEC reconsideration of the no-action decision and successfully argued that the issue of stock option expensing was now an “important social policy issue.” In a December 2002 letter to UBC President Douglas McCarron, the Division of Corporation Finance wrote:
After further consideration of the issues by the Division, as directed by the Commission, the Division does not concur in National Semiconductor’s view that the United Brotherhood of Carpenters Pension Fund’s proposal relates to ordinary business matters and, in the future, we will not treat shareholder proposals requesting the expensing of stock options as relating to ordinary business matters.
The SEC reversal paved the way for the Carpenter and Trades Funds to submit option expensing proposals to over a hundred companies in the 2003 and 2004 proxy seasons. In an impressive showing of overwhelming shareholder support for stock option expensing, the votes in favor of the expensing proposals were among the highest ever received for a first-time issue. In late 2004, FASB initiated a new rule making to address the issue of option expensing and once again bi-partisan political opposition developed. This time the results were different; strong investor support deflected political opposition and FASB issued a stock option expensing standard. As New York Times columnist Floyd Norris reported:
A decade ago, there was little support among investors for expensing options. But now many investors have concluded that options are an expense and that they would be better off with information on them in the financial statements. Shareholders of Hewlett-Packard and PeopleSoft voted this year in favor of expensing options, despite strong opposition from the companies’ managers, and shareholders of other companies are expected to do the same at other annual meetings this spring.
Option expensing has prompted improvements in long-term compensation plans by reducing the number of stock options granted and increasing the use of performance-vested restricted shares, performance shares, and other performance-vested long-term incentive pay instruments. Academic research on the Funds’ option expensing activism revealed that it helped prepare the way for option expensing and lower levels of executive compensation. Most importantly, it ended the thinking that company stock option grants were cost-free to the company and not the concern of shareholders.
In proxy seasons, subsequent to the option expensing initiative, the UBC Funds outlined and advanced a series of “pay-for-superior-performance” shareholder proposals designed to inject greater pay-for-performance rigor into incentive and post-employment compensation plans. Strong votes and constructive dialogue with hundreds of companies have encouraged transparency in pay reporting, toughened pay-for-performance rigor in annual and long-term incentive plans, constrained all-too-often generous post-employment compensation, and focused individual companies on pay plan deficiencies. In a broader context, the pay concepts advanced by the proposals have contributed to the vigorous public debate on the appropriateness of a range of executive pay plan features.
With the establishment of a management Say-on-Pay vote in Dodd-Frank, the Funds’ activism on the executive compensation issue has changed course. The Say-on-Pay vote has promoted a standardization of executive compensation plan design and diminished the value of effective shareholder proposal advocacy on substantive executive compensation issues. In this environment, the Funds’ focus has been on defining an overarching set of executive compensation principles and practices to be used as a measure of corporations’ executive compensation plans. The Executive Compensation Core Principles and Practices, which are updated annually serve to determine the Funds’ Say-on-Pay voting and as a basis for engagements with corporations regarding the plans.
A key insight from the Funds’ extensive corporate engagements and dialogue during the 2000 and 2001 proxy seasons noted above was the need to transform board of director elections into meaningful accountability mechanisms. The vote standard used in director elections became the focus of the Funds’ efforts to transform director elections into meaningful accountability events. At the time, corporations used a plurality vote standard in all corporate director elections, both in the rare contested director election, as well as in the typical “uncontested” elections in which management candidates run unopposed. The use of a plurality vote standard in uncontested elections rendered the role for corporate shareholders in the director election process meaningless, as the plurality standard meant that candidates’ elections were assured.
In an effort to invigorate the corporate election process, the Carpenter Funds advanced majority voting in director elections as the centerpiece for an electoral reform initiative beginning in 2003. The goal of the majority vote standard campaign was simple: transform all director elections into meaningful accountability exercises. The majority vote advocacy campaign advanced an accountability reform that had applicability to nearly every director election, thus promising to broadly enhance the voting rights of every shareholder.
The Carpenter Funds’ campaign began modestly with the submission of twelve shareholder proposals in the Fall of 2003. The Funds engaged several companies in unsuccessful negotiations to settle the proposals, and responded to SEC no-action letter relief sought by the others. The proposals received a modest 12% average level of support in the 2004 proxy season, attributable in large measure to the opposition of leading proxy advisory firms, such as Institutional Shareholder Services (“ISS”) and Glass-Lewis. These firms cited their preference for the creation of a proxy access right in casting a vote against majority voting.
The majority vote proposal was fine-tuned for the 2005 proxy season, with a “majority of the votes cast” standard established as the uniform vote standard in all fifty-seven of the proposals submitted. Support for the majority vote standard quadrupled in 2005 to an average of 44%, as the issue of majority voting now enjoyed widening shareholder support. In 2006, an event that would be a catalyst for the adoption of the majority vote standard by an increasing number of companies occurred when the Board of Directors of Intel Corporation, a company that had participated in a Work Group of representatives of 13 leading companies and Carpenter and Trade Fund representatives to collaboratively review the issue, voted to amend company bylaws to establish a majority vote standard in “uncontested” director elections. Further, it provided for a director resignation policy to address the status of those directors that failed to be re-elected.
The Intel Board had established the “gold standard” for director majority voting. The combination of increasingly strong shareholder support for majority voting and the Intel action prompted dozens of companies to agree to voluntarily implement a majority vote standard for uncontested director elections in their bylaws. Despite strong momentum for the reform, the Carpenter and Trades Funds would find it necessary to submit hundreds of majority vote proposals in subsequent proxy seasons. The UBC-led “private-ordering” effort to establish majority voting has been an overwhelming success. As of mid-201-74, nearly 93% of the S&P 500 Index companies have adopted a majority vote standard in director elections. Additionally, over 1,000 other mid-cap and small-cap companies have also adopted majority voting.
The ingredients for success started with a fundamentally sound reform proposition, majority voting in uncontested director elections. It included determined advocates that to date have submitted over 500 majority vote shareholder proposals, engaged in thousands of hours of dialogue with corporate representatives, and presented the proposals at hundreds of annual meetings. The majority vote standard has introduced a new level of accountability into every corporate election in which it is used, and if the new voting power is responsibly exercised by shareholders, it promises positive and lasting improvements in corporate governance and corporate performance.
The results of the Carpenter Funds’ continuing activism, along with that of other institutional investors, have generally been positive: Corporate governance processes are more democratic; corporate boards and key board committees are more independent; boards are more accountable; accounting standards are improved; executive compensation excesses and environmental shortcomings are under intense scrutiny, and companies have been forced to confront irresponsible behavior. These responsible ownership activities have enhanced core governance principles market-wide and helped protect Fund investment value through the increase in corporate value.
Carpenter pension fund activism has been successful in many notable ways that advance the interests of Carpenter Fund participants and beneficiaries, and other market participants. It is a challenge to promote governance reforms that encourage long-term investor and management behavior, while at the same time advocating for necessary board and management accountability mechanisms. The Carpenter Funds have met this challenge by eschewing corporate accountability initiatives premised on creating an active corporate control market that can promote short-termism.
The Funds’ energies have been focused on building a strong advocacy capacity supported by an effective investment monitoring and research capability. The combination of vigilance in monitoring the performance of portfolio companies and the judicious use of shareholder advocacy tools has enhanced auditor independence, supported executive compensation reforms including stock option expensing, expanded pay disclosure, and enhanced board accountability in the form of majority voting in director elections. The Funds’ thoughtful monitoring approach combined with the persistence and determination to drive reform processes that don’t always succeed overnight has been a winning formula for Fund participants and beneficiaries, as well as the broader market.