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7/26/2024

Vanguard Warns Investors Over Company Stake Limits

Financial Times (07/26/24) Johnson, Steve; Schmitt, Will; Masters, Brooke

Vanguard has warned investors that U.S. regulators may restrict the size of stakes it can hold in companies, potentially driving up costs and increasing risks for some of the world’s largest index tracking funds. The world’s second-largest asset manager, with $9.3 trillion of assets as of May, recently updated disclosures for dozens of funds to highlight the increased risk that authorities will force it to comply with long-standing but rarely enforced caps on individual bank and utility stock ownership. Vanguard has come under fire, along with the other two passive investment giants BlackRock (BLK) and State Street Global Advisors, for its sheer size and voting record on climate and social issues. In January, passively managed U.S. funds passed their actively managed counterparts in assets under management for the first time. Progressive activists have long sounded alarms about the power of the large passive investment complexes, which collectively own nearly 25% of many U.S. companies. In the past three years, they have been joined by conservatives who complain that the fund companies are using their shareholdings to push liberal causes that they dub “woke capitalism." Historically, regulators have allowed investment funds to exceed the 10% ownership caps on bank and utility shares that normally trigger additional responsibilities, as long as they do not seek a management role. But the Federal Deposit Insurance Corporation is considering imposing tighter conditions on those waivers, while Republican state attorneys-general have pressured the Federal Energy Regulatory Commission to review Vanguard’s ability to hold large chunks of publicly traded utilities. Vanguard’s latest disclosures, filed last week with the U.S. Securities and Exchange Commission, warn that the Pennsylvania money manager may not be always able to breach the ownership maximums in the future. “It is not always possible to secure relief, and there is an increasing amount of uncertainty around how much ownership limitations relief regulators will grant to asset managers like Vanguard,” the asset manager said. Without regulatory relief, Vanguard could be forced to sell off securities and instead buy indirect exposure to affected holdings using derivatives like total return swaps or investing in subsidiaries. The asset manager told the Financial Times that the new risk statements “make clear the potential negative consequences a loss of regulatory relief could have on fund expenses and performance as well as the potential tax consequences for investors." “We continue to work with policymakers to answer questions, address concerns and minimize these risks,” Vanguard said. A trade association representing asset managers, the Investment Company Institute (ICI), reiterated its concerns that heavy-handed regulation could hamper returns for millions of U.S. investors. “Given the stakes, we encourage regulators to carefully consider these impacts and avoid making changes that will impede funds’ ability to help Americans invest for a secure financial future,” ICI said. Ben Johnson, head of client solutions at Morningstar (MORN), said the increasing size of the largest asset managers had inevitably ushered in tighter regulatory scrutiny, and that the pressure would be likely to continue, no matter who wins in November’s national elections. “The chance [of unfavorable rulings] only goes up as these firms, and their stakes in individual entities, continue to grow,” he said. Jeff DeMaso, editor of the Independent Vanguard Adviser newsletter, said Wednesday that “the days of index funds getting a regulatory ‘free pass’ are over." “Vanguard managing $10 trillion is a different beast than Vanguard managing $1 trillion,” DeMaso wrote.

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7/26/2024

Nike Investors Question Treatment of Garment Workers Overseas

Bloomberg Law (07/26/24) Kalra, Avani

Nike Inc. (NKE) investors are redoubling their efforts to pressure the sports retailer to focus on treatment of workers in its supply chain, as the company attempts to freshen its image and boost slumping sales with its Olympics “Winning Isn’t for Everyone” ad campaign. Shareholders plan to reintroduce a proposal at this fall’s annual meeting asking Nike to report on how its equity goals and human rights commitments line up with its supply chain management infrastructure. And a different investor activist group has announced in the run-up to the Paris Olympics that it will offer a second specific worker rights proposal at Nike’s September 10 meeting. Investors coalesced around the worker rights issue in 2023 after more than 4,000 garment workers employed by Nike suppliers said they are owed $2.2 million dollars in wages and benefits. Cambodia’s Arbitration Council, the labor dispute resolution body in the country, declined to rule on the workers’ claims saying it lacked jurisdiction. The new proposal up for a vote this September is a resolution requesting that the company examine supply chain oversight mechanisms like social responsibility principles for its suppliers and binding agreements with labor organizations. The bid comes after Nike had reported its biggest share price fall in more than two decades, down 60% from highs at the end of 2021. The company is responding to the slump with a slew of Olympic ads, with one focusing on athletes’ relentless drive already drumming up significant social media attention. “This Olympics, we want to know that Nike is a responsible company that treats its workers and its stakeholders well,” Mary Beth Gallagher, director of engagement at Domini Impact Investments, said. “These are issues that are related to the company’s long-term success.” The renewed pressure comes after shareholders say the company failed to respond to their concerns adequately last year. A group of 70 shareholders with a collective $4 trillion invested in Nike sent a letter to CEO John Donahoe last October asking the company to enable payments to workers at Cambodian Violet Apparel Co. owned by Nike supplier Ramatex, who say they have not received required compensation after they were suddenly fired in 2020, and Thai Hong Seng Knitting Co., who allege underpayment. The letter also urged Nike to incorporate social responsibility principles like the American Bar Association Model Contract Clauses and the Sustainable Terms of Trade Initiative, specifically named in the re-introduced proposal. Shareholders said those frameworks that integrate human rights due diligence into supply contracts allow the brand to ensure a more ethical production process. Chavi Keeney Nana, director of the equitable global supply chain program at the Interfaith Center on Corporate Responsibility, said shareholders did not receive a response after several attempts to reach out. “It boggles the mind that Nike has allowed this conversation to go unanswered,” Keeney Nana said. Nike did meet with investors after they filed their formal 2024 resolution, but the shareholders said they were not satisfied with the response. The company did not respond to requests for comment but recommended in its 2024 proxy statement released late Thursday that shareholders vote against both proposals in September. Nike already publishes information on how it identifies, assesses, and manages human rights risks and expects suppliers to share in that commitment. The sports retailer did not respond to a request for comment. “The Company works with suppliers, industry associations, brands, civil society, and other stakeholders to facilitate world-class, safe, and healthy workplaces for the people making our products,” Nike wrote in its opposition statement. Nike told Bloomberg Law in 2023 it conducted independent investigations into the 2020 allegations and found no evidence to support claims in Cambodia. An independent third-party investigation and legal review concluded that Thai workers were compensated in accordance with local law and Nike’s Code of Conduct, the company said. Martin Buttle, who works on labor issues at CCLA Investment Management and was one of the letter’s authors, said that Nike’s response indicates their code is insufficient to ensure worker safety. That’s why this year’s shareholder bid asks for additional oversight mechanisms, he said. “There are uneven power relations in a supply chain and the actions of brands can very much influence the degree to which suppliers can uphold certain standards,” Buttle said. “It’s designed to be a little bit more even and balance the responsibilities.” Some investors said they are hoping this year’s more targeted resolution—introduced by the Shareholder Association for Research and Education— will elicit a better response from the company. “Last year’s proposal was very broad,” said Sarah Couturier-Tanoh, an analyst at the shareholder association. “Our proposal is focused on key approaches to managing risk and recommendations for the future.” Investors are focused on strengthening Nike’s commitments going forward, rather than reflecting on past efforts, Couturier-Tanoh said. “It’s becoming evident that many companies like Nike are stuck in the old ways of doing human rights due diligence,” she said. “What we expect from the company is to be transparent and forceful about its approach to human rights, due diligence, and remediation in high-risk countries.”

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7/25/2024

Hong Kong Companies Say HKEX is ‘Micromanaging’ In Its Fix for Overboarding, Governance

South China Morning Post (07/25/24) Yiu, Enoch

Hong Kong’s publicly traded companies have come out to “strongly oppose” the plan by the city’s stock exchange to cap the number of board seats each independent director can take, and limit the duration of their tenure. “A hard cap on the number of directorships does not [ensure] better [performance],” said Mike Wong Ming-wai, chief executive of the Chamber of Hong Kong Listed Companies, whose members include most of the largest companies on the Hong Kong exchange. “A director may take on many directorships but can still contribute sufficient time and effort to serve,” Wong said in an interview with the Post. “It boils down to the integrity and discipline of the individuals. Directors are well aware of their duties and the consequences of failing them.” Wong’s comments represent the strongest pushback by one of the city’s most powerful lobby groups against Hong Kong Exchanges and Clearing Limited (HKEX) as it collects public feedback until August 16 on its proposal to improve corporate governance. HKEX wants to set the maximum of board seats for independent non-executive directors (INEDs) at six, each for up to nine years, effective January 2025, with a three-year sunset period to rectify the “overboarding” problems. Two dozen corporate figures sit as INEDs on 181 companies in Hong Kong, each serving over the proposed six-board limit. The city’s five busiest INEDs each sit on 10 boards, or more, according to the HKEX. As many as 1,500 INEDs have served as directors in 810 companies for longer than nine years, the data showed. Hong Kong has lagged behind other stock exchanges in tackling its “overboarding” problem. In Beijing, Shanghai and Shenzhen, concurrent INED positions are capped at three. The London bourse limits full-time executive directors to one board seat in a FTSE 100 company. Singapore has mandated a third of the boards of all publicly traded companies to be composed of INEDs, each for up to nine years, from 2022. Malaysia also has a nine-year limit, with an absolute cap of 12 years implemented in 2022. Hong Kong’s nine-year limit on INED tenure, starting in 2028, is “inappropriate”, tantamount to “micromanaging” by the stock exchange, Wong said. “The longer the director sits on the board, the more the director understands about the business, [which can lead to] better advice,” he said. “There is no evidence of the purported benefit to listed companies. It will only limit the choice of INEDs and prevent companies from appointing the talent they think fit.” This is the second attempt by the HKEX in nearly two decades to improve corporate governance by curbing directorship in one of Asia’s biggest capital markets, a task that the bourse’s chief executive Bonnie Chan said was a “perpetual work in progress”. A 2010 proposal to impose a hard cap was dropped after a backlash. “We are constantly looking for improvements,” Chan said during a June interview with the Post after 100 days in the job. “One always wants to be better” when it comes to governance, she said. Corporate governance is critical for HKEX as it reforms its listing rules to attract a broader crop of start-ups to raise funds. Many of the world’s largest pensions and asset managers already include governance when they weigh their investments, including the gender diversity on boards, and ESG disclosures. Hong Kong’s asset managers and brokers supported the HKEX’s plan. “The proposals will help enhance corporate governance,” said Katerine Kou, the chair of the Hong Kong Securities Association. “The cap is needed because the affairs of listed companies are complicated, requiring directors to spend sufficient time."

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7/25/2024

Southwest Airlines Nixes Open Seating in Major Policy Shift

Bloomberg (07/25/24) Schlangenstein, Mary

Southwest Airlines Co. (LUV) will begin offering assigned seats, ditching the free-for-all policy that has been a defining feature of the carrier for more than half a century. The airline announced the change to its business model Thursday alongside a new premium-class option and plans for redeye flights, shifts the company sees boosting sales and enhancing its appeal. While Southwest said earlier this year that it was reconsidering the seating policy, it’s now facing heightened pressure to revamp underperforming operations from Elliott Investment Management. The strains on Southwest’s business were underscored in the company’s earnings report, also released Thursday. While profit last quarter beat expectations, its guidance for revenue and costs in the current period was worse than Wall Street’s estimates. “We are taking urgent and deliberate steps to mitigate near-term revenue challenges and implement longer-term transformational initiatives,” Chief Executive Officer Bob Jordan said in a statement. He pointed to the seating changes as pieces of “an ongoing and comprehensive upgrade” to passenger accommodations. Its shares fell less than 1% at 9:31 a.m. in New York. Rival American Airlines Group Inc. slid 3.8% after it also reported a disappointing outlook. Southwest has struggled this year with slowing growth, fewer-than-expected aircraft deliveries from Boeing Co. and a series of flight-safety incidents that triggered a Federal Aviation Administration review of the carrier this week. Its stock has declined modestly this year even as the broader market has gained. The latest steps represent a strategic shift for the carrier, which has steadfastly maintained open seating while other airlines raked in revenue by charging extra for more-desirable seats. That unfulfilled opportunity is a major tenet of Elliott’s campaign — that Southwest has refused to modernize its business to appeal to today’s travelers. Adoption of premium seating could open the door for the carrier — which has long appealed primarily to leisure travelers — to potentially offer business- and first-class sections in the future. Southwest still won’t charge for checked bags. The “bags fly free” policy has been a focal point of Southwest promotions and advertisements, and some analysts have speculated charging for bags could cost the airline customers. It’s the only U.S. carrier that doesn’t impose fees to check two. Southwest will begin offering assigned seats and premium seating with more legroom next year. It will start flying overnight, cross-country routes on Feb. 13. Southwest didn’t provide specifics on potential revenue from the changes, which also include a redesign of its boarding process. All seats will be assigned, and about one-third will be premium class, but there won’t be a separate cabin for premium offerings. Changes to the onboard layout will require FAA approval. The airline said it opted to adopt the updates after its own research found that 80% of current customers and 86% of potential passengers prefer an assigned seat, particularly during the larger number of longer flights operated by Southwest now. Southwest Chief Commercial Officer Ryan Green will be moved to a new position to oversee the transformation and other commercial initiatives. The carrier has studied various seating options in the past, but always rejected a shift to assigned spots, saying passengers didn’t support such a move. While Southwest has long stood by some of its central policies, it hasn’t been entirely resistant to change. It began routes to nearby international destinations and, more recently, added flights to Hawaii. The airline previously revamped its boarding system, offered early boarding options at an additional cost and developed a corporate booking tool to win more business travelers. Southwest said in April that it had begun evaluating premium products and others changes, well before Elliott disclosed a $1.9 billion stake last month. But until Thursday, the airline said it wouldn’t disclose any details until an investor meeting slated for September. Elliott wants to oust Jordan and Chairman Gary Kelly for poor execution and a “stubborn unwillingness to evolve the company’s strategy.” They are “not up to the task of modernizing Southwest,” the activist has said. Southwest earlier this month named a veteran airline industry executive to its board to help address other concerns raised by Elliott. The carrier also adopted a “poison pill” shareholder rights plan to discourage the activist from gaining a larger share. In addition to policy changes, Southwest said Thursday that it earned an adjusted profit of 58 cents a share in the second quarter. That topped the 51-cent average of analyst estimates compiled by Bloomberg. Operating revenue of $7.4 billion also beat expectations. Still, the carrier acknowledged challenges from an industrywide capacity glut. Domestic-focused US airlines have had to slash fares to fill planes after the industry added too much capacity in anticipation of a record summer travel season. The discounting has cut into revenue and profit expectations at even the largest U.S. airlines. Southwest said it’s made changes to better match the supply of seats with demand in the remaining summer, fall and early winter schedules. But fare management issues that reduced unit revenue in the first three months will extend into this quarter. The recent performance “fell short of what we believe we are capable of delivering,” Jordan said. Its outlook for key sales and cost measures were worse than Wall Street estimates. Third-quarter revenue for each seat flown a mile, a gauge of demand and fares, will be flat to down 2% year over year, the airline said, while analysts were expecting growth of 4.9%. Non-fuel costs on the same basis will increase as much as 13%, compared with analysts’ estimates for a 6.8% rise.

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7/25/2024

Rentokil Hit by North America Woes; No Immediate Re-listing Plans

Reuters (07/25/24) Kalia, Yamini

British pest control company Rentokil Initial Plc (RTO) said on Thursday it expected underlying revenue at its North American business — the group's largest — to come in at the lower end of its forecast, sending its shares as much as 7% lower. The company, which made about 60% of its revenue in North America last year, also said it had no immediate plans to move its listing to the United States, as some analysts had speculated. "Going forward, the board will continue to keep the Group's listing structure under review to ensure that the strength of the Group's underlying financial performance and its prospects are appropriately valued," it said in a statement. Rentokil's shares have fallen about 20% since it flagged softer demand in North America last October. Earlier this month, the shares rose on reports ex-BT chief Philip Jansen was looking to buy the firm. They also jumped in June on news that investor Nelson Peltz's Trian Fund Management had built a stake in the company and was interested in discussing "ideas and initiatives." In March, Rentokil said it expected organic revenue in North America to rise by 2-4% this year. On Thursday, it said it now expected revenue growth there at the lower end of this range. For the second quarter, the key North American pest control business posted a 0.5% rise in organic revenue, compared with the previous quarter. "Investors are ostensibly reacting to the muted quarter-on-quarter improvement in organic growth for the beleaguered North America pest control business," said Morningstar analyst Grant Slade. Rentokil and rival Rollins (ROL) account for roughly half of the U.S. pest control market, with Rentokil the larger player after it bought U.S. rival Terminix. Rollins posted a 7.7% organic revenue growth in the second quarter. "Relative to the growth of the broader market, Rentokil is underperforming the peers while Rollins continues to outperform," Slade added.

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7/25/2024

Activist AREX Capital Poised to Win One Seat in Proxy Fight at Enhabit, Sources Say

Reuters (07/25/24) Herbst-Bayliss, Svea

AREX Capital Management has secured enough support from Enhabit (EHAB) shareholders to win one seat on the home health and hospice provider's board of directors, people familiar with the matter said on Thursday. Investor votes were still being counted before Enhabit's annual meeting of shareholders on Thursday morning. AREX nominated seven candidates to Enhabit's nine-member board. The seat is expected to go to Mark Ohlendorf, who has public company chief financial officer experience. Proxy advisory firms Institutional Shareholder Services and Glass Lewis urged shareholders to replace three current board members with AREX nominees. Enhabit's share price has tumbled roughly 60% since it was spun off of post-acute health care services provider Encompass Health (EHC) in July 2022. It has climbed nearly 10% in the last 5 days and is up 3.5% in early trading on Thursday. AREX, which owns a 4.9% stake in Enhabit, is the latest activist investor to push the company for changes and urged management last year to immediately start a strategic review. Enhabit in May decided to continue as an independent. In 2023, the company reached a settlement with Cruiser Capital and Harbour Point Capital Management and appointed two new directors to the board.

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7/25/2024

Norfolk Southern Results Complicated by Proxy Fight, Other Factors

Associated Press (07/25/24) Funk, Josh

Norfolk Southern (NSC ) got a boost during the second quarter from insurance payments related to last year’s disastrous East Palestine derailment, but it also made progress in reducing its expenses and getting more efficient. The Atlanta-based railroad said it earned $737 million, or $3.25 per share, in the quarter, but there were several unusual factors influencing the results. And last year’s $356 million profit, or $1.56 per share, was heavily weighed down by costs related to the derailment near the Ohio-Pennsylvania border. But CEO Alan Shaw is most proud of the $250 million in productivity and safety gains the railroad has made this year. Norfolk Southern also hauled 5% more freight during the quarter thanks to the efficiency and new business it was able to attract. “I’m really encouraged by our progress and I’m really confident in our future,” Shaw said. “We did everything we said we were going to do.” The $156 million in insurance payments the railroad received as it recovered some of the more than $1.7 billion it has spent in response to the February 2023 derailment in eastern Ohio more than offset the $91 million in costs this quarter. That resulted in a $65 million net boost to earnings. Much of the derailment costs, including the $600 million class action settlement the railroad agreed to this spring, will likely eventually be covered by the railroad’s insurance. Further complicating the financial picture is the fact that Norfolk Southern spent $22 million in the quarter to fight back against investor Ancora Holdings’ campaign to take over the board and fire the railroad’s management. Ancora’s nominees ultimately won three board seats, but not enough to take control. Without any of those unusual factors, Norfolk Southern estimated that it would have earned $694 million, or $3.06 per share, in the quarter. The analysts surveyed by FactSet Research expected the railroad to report earnings per share of $2.86. Its stock rose almost 7% in after-hours after the earnings report came out. Norfolk Southern endorsed all of the recommendations the National Transportation Safety Board made in its final East Palestine report, and the railroad said it has largely addressed the safety concerns the Federal Railroad Administration raised in a report last year. But the rail industry has been lobbying against many of the proposed regulations Congress has been considering. During the proxy fight, Shaw hired a new operations chief and promised to make the railroad more efficient, though he still says he doesn’t want to cut so deep that Norfolk Southern won’t have the resources it needs to handle additional freight when the economy does improve. The railroad said has already parked more than 320 locomotives and pulled some 7,000 cars off its network as it moved to run fewer but longer trains to handle the same freight without as many engines or crews. Over the next two years, Norfolk Southern predicts will improve productivity by about $550 million and boost its profit margin. Already, the railroad reported improvement in every single performance metric in its quarterly report Thursday with everything from the average velocity of its cars to the amount of time trains spend in railyards getting better. Edward Jones analyst Jeff Windau said Norfolk Southern has been steadily improving its efficiency and “put together a really solid quarter.” The railroad’s revenue grew 2% to $3.04 billion in the quarter, in line with Wall Street’s forecast.

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7/25/2024

Elliott Statement on Southwest Airlines' Revenue Enhancement Initiatives

PRNewswire (07/25/24)

Elliott Investment Management L.P. released a statement on behalf of Partner John Pike and Portfolio Manager Bobby Xu regarding Southwest Airlines Co. (LUV) and its revenue enhancement initiatives. The statement reads, "Southwest's announcement of revenue-enhancement initiatives, purporting to offer assigned seating, premium-seating options and redeye flights, comes more than a decade late, and after a 50% decline in its share price over the past three years. This new plan is being proposed by the same leadership team that has presided over a series of failed measures to improve performance, repeated operational missteps and poor financial results. Today, Southwest finally conceded that four out of five customers' preferences went unmet in recent years. These preferences did not emerge overnight; management simply was not doing its job. Elliott has engaged in direct dialogue with Southwest's Board on the scale and urgency of change needed at the Company. But this failed leadership team's announced initiatives – obvious attempts at self-preservation – are simply not credible. Too little, too late is not a strategy. It's time for new leadership. Southwest can do far better, and we look forward to offering our fellow shareholders an opportunity to elect a Board of industry leaders that can return Southwest to best-in-class performance."

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7/25/2024

Casey’s Shareholder Pushing for Rule to Remove Rebelez as Chairman

C-Store Dive (07/25/24) Dworski, Brett

A Casey’s General Stores (CASY) shareholder is proposing a policy that, if approved, would remove Darren Rebelez as board chairman, according to the retailer’s 2024 proxy statement. The shareholder, The Accountability Board (TAB), believes Casey’s board chairman should be an independent director — someone not employed by the company — moving forward. Rebelez, who became chairman last summer, has been president and CEO of Casey’s since 2019. Stockholders will vote on the policy at the company’s annual shareholder meeting Aug. 28. Casey’s board has recommended that stockholders vote against the proposal for several reasons, while TAB claims the current combined CEO/chair structure “can weaken a corporation’s governance and harm shareholder value.” In its proposal to Casey’s shareholders, TAB argues that “a lack of checks and balances may arise when the board is chaired by executive management,” since management’s role is to run the company and the chairman’s role is to oversee management. “Ultimately, a company’s CEO reports, and is responsible, to the Board — so we think an insurmountable conflict arises when a CEO is also Chair of the Board and thus, is his or her own boss,” Matt Prescott, president and chief operating officer for TAB, said in a statement to C-Store Dive. Casey’s noted in its Proxy report that its results with Rebelez as CEO and chairman “contradict” TAB’s sentiment that its current board structure can harm shareholder value. The company pointed to its latest year of earnings, when it exceeded $1 billion in EBITDA for the first time in its history and added over 150 c-stores to its network. Additionally, Casey’s emphasized that whenever its board chair is someone from within the company, it always appoints a lead independent director. That’s currently Judy A. Schmeling, who took on the role last summer, when Rebelez took the chairman role. Although this is the first time Casey’s has received this proposal — as confirmed by a company spokesperson — this type of request isn’t uncommon for public companies. Shareholder proposals calling for an independent board chair rose by 113% in the Russell 3000 stock market index in the first half of 2023 — the highest level over the past decade, according to a report from Harvard Law. Seven & i, parent company of 7-Eleven, made the move earlier this year, when Stephen Hayes Dacus took over as board chair from CEO and President Ryuichi Isaka. Prescott noted that other large companies such as Boeing, Staples and Rite Aid have undergone this change over the past decade. Additionally, so far this year, TAB has filed similar proposals at several other firms, such as Target, Mondelez and Kellanova, formerly known as Kellogg’s. None of those proposals passed, but all received at least 30% shareholder approval, Prescott noted. “We do believe other Casey’s shareholders want the company to improve its governance by adopting an independent Chair policy, which is why we filed this proposal,” Prescott said. “And just how many feel that way is exactly what the proposal aims to find out.”

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