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Issue Brief: Corporate Governance
Introduction
Calvert believes that companies with the best corporate governance, environmental, and social standards are strongly positioned for long-term success. In recent years, poor corporate governance has threatened the US economy, diminishing value for shareholders, leaving employees without jobs and their retirement savings, and damaging or sinking dozens of companies. The flood of governance scandals has destabilized and depressed markets and eroded investor trust. However, it has also created an opportunity as investors of all stripes now expect increased transparency and as a result, in our view, governance performance has improved.
Transparency is key to evaluating a company's corporate governance performance. Calvert sees companies that disclose both financial information and relevant environmental and social information as better investment candidates. Companies with strong disclosure are better able to manage risk, thus enhancing their value to shareholders by preventing environmental, social, or corporate governance issues from developing into long-term problems. Disclosure also helps to create a cohesive and robust corporate culture, and promotes a healthy sense of accountability and transparency.
Corporate responsibility reporting has helped many companies understand how much money is spent simply managing production waste or dealing with costly litigation or regulation. Such reporting can lead to changes that may yield substantial cost savings. For other companies, knowing the dimensions of social and environmental performance has led to new business opportunities. Public reporting of environmental and social information can help build positive reputations, which over the long term will contribute to increased brand value, market share, and customer loyalty.
Calvert's Approach
Calvert assesses corporate governance, ethics, and business practices. Calvert monitors numerous aspects of corporate governance, including board independence and diversity, executive compensation, and stakeholder consultation. We avoid investing in companies that have poor compliance records with respect to bribery and corruption, as well as companies that have poor governance ratings reflecting illegal or questionable activities such as fraud or insider loans. Calvert will not invest in companies whose corporate governance and business practices compromise the interests of shareholders.
In order to determine which companies meet our stringent standards for corporate social responsibility, Calvert relies on publicly available information, including data voluntarily disclosed by each company. We believe that meaningful corporate responsibility reporting has several key features, including performance, targets, and trends; management and policy information; a mix of quantitative and qualitative data; and independent third-party auditing and certification.
Calvert also sees corporate governance practices and responsible environmental stewardship as linked. Calvert and other shareholders have made it clear through support of the Carbon Disclosure Project, letter writing, filing of shareholder resolutions, and direct company dialogue that investors want to know whether companies understand the risks and opportunities presented by climate change, and what the companies are doing to manage those risks and take advantage of the opportunities. Disclosure of investment relevant climate change information is sign of good governance.
Calvert seeks to invest in companies with policies that:
- align the incentives of management and boards with those of shareholders and other stakeholders,
- have diverse, independent boards,
- publish sustainability reports in accordance with the Global Reporting Initiative, and
- have affirmative programs to protect civil liberties when obtaining personal information.
Executive compensation: Calvert views executive compensation as one of the most important tools that boards of directors can use in their oversight of company management. Unfortunately, many boards have not exercised this oversight effectively and have approved dramatic increases in executive compensation even during times of poor corporate performance. We expect companies to disclose their compensation philosophy and clearly defined performance benchmarks that set incentive compensation. When a company has governance problems, Calvert considers the relationship between the specific nature of the problem - earnings manipulation, for example - and executive pay. While we do not have a strict formula for evaluating a CEO's pay in comparison to employee wages, we recognize the concern with the growing gap and believe that such a gap can hurt employee morale.
Political contributions: Calvert's growing concern about the political contributions that corporations make with shareholder dollars has led us to become more active in addressing corporate political disclosure and accountability. A recent report by the Center for Political Accountability (CPA) on trade association political spending discusses how the political activities and agendas of trade associations may not align with and, in fact, may conflict with the interests of some of their member companies. According to a Mason-Dixon survey conducted for the CPA, 85 percent of respondents agreed that shareholder value is threatened by the lack of transparency and oversight of corporate political contributions. Shareholders are concerned about whether corporate political expenditures advance a company's interests and want to see more transparency, disclosure, accountability, and board oversight of corporate political activity.
Criteria in Practice
A company with strong governance practices is Texas Instruments (TXN). Independent directors make up the majority of the company's board, and each of the four major committees has detailed charters. Texas Instruments also has a code of ethics, along with a detailed statement of governance policies covering a range of issues. Written policies address company standards for diversity and employee rights. Texas Instruments' environmental record reflects the company's ability to enact its policies on environmental protection. The company's code of business conduct incorporates policies addressing equal employment, harassment, bribery, and workplace safety and health. In February 2006, the company adopted a policy requiring that directors receive a majority of votes in order to be elected to the board of directors. Texas Instruments has 4 women, including 1 African American, on its 12-member board of directors. Finally, as part of its exemplary disclosure, Texas Instruments discloses a GRI sustainability report on the company Web site.
Know What You Own®
Calvert's Know What You Own® screen for corporate governance includes securities drawn from a universe of the largest 1000 US companies. The companies that fail Calvert's corporate governance criteria do so because:
- they have compromised the interests of stakeholders, including shareholders,
- they are engaged in serious securities fraud, or
- their governance practices are significantly worse than those of their peers.
Advocacy
Calvert will sharpen our focus on disclosure of environmental, social, and governance performance in addition to comprehensive disclosure of financial performance. We will also continue to press for expanded shareholder rights by raising the issues of executive compensation, qualified majority voting and disclosure of political contributions made with shareholder funds.
In the area of political contributions, Calvert filed three resolutions for the 2005 and 2006 proxy seasons, and expects to file five more for 2007. These resolutions call upon companies to disclose their direct and indirect political spending as well as their policies and procedures for political contributions and expenditures made with corporate funds. After Calvert filed a shareholder resolution with software giant Microsoft (MSFT), the company agreed to publish its political contributions policy on its website and in its citizenship report, and to disclose explicit information regarding roles and responsibilities of the legal affairs department and the board Nominating and Governance Committee related to political giving. Microsoft also announced that it would no longer make contributions to 527 groups, tax exempt organizations that engage in political activities and that are subject to few restrictions. Following receipt of the initial report from Microsoft, Calvert and its partners encouraged the company to increase its disclosure on this topic. Our hope is to help Microsoft become a leader on this issue as it becomes a standard element of good corporate governance practice.
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