volume 9 ••• Winter 2011
INsider Interview: Scott Zdrazil, First Vice President, Corporate Governance
Amalgamated Bank Corporate Governance
In mid-March of this year, Amalgamated Bank’s name began appearing globally in newspapers as diverse as The New York Times, The Sydney Morning Herald, The Guardian in the U.K., and India’s Hindustan Times. The cause was a 46-page complaint filed by Amalgamated Bank on behalf of its LongView Funds challenging the plans of Rupert Murdoch’s News Corporation – which has since been tainted by phone hacking revelations – to purchase Mr. Murdoch's daughter's television company for $675 million. Among other things, the suit asserted that Mr. Murdoch “…historically has operated News Corp. as his own private fiefdom with little or no effective oversight from the board."
Scott Zdrazil, Director of Corporate Governance at Amalgamated’s Investment Management Division, coordinates and directs the LongView Funds' corporate governance program, which initiated the suit. Since the funds were launched in 1992, they have pursued a program of vigorous and aggressive shareholder activism, playing a leadership role in a series of successful corporate governance initiatives that have sought to enhance shareholder value by holding portfolio companies to higher standards of corporate accountability and environmental, social, and governance practices. In this interview, Mr. Zdrazil, an Amalgamated First Vice President, discusses the history of the program, touching on both the challenges it has faced and the changes it has brought about.
INsider: It’s unusual, to say the least, for bank-sponsored investment funds to engage in an activist corporate governance program of this type. How did it get started?
SZ: Shareholder activism is really built into the DNA of the funds. When they were established in 1992, the LongView Funds were – as the name implies – specifically designed to take a long-term view of shareholder value, and good corporate governance is clearly critical to supporting sustainable returns and building shareholder value.
As America’s Labor Bank, we manage investments for about 650 Taft-Hartley pension plans – more than any other U.S. money manager – and, in doing so, we are the defenders of the capital in workers’ pension funds. We actively monitor companies in our portfolios for good governance and engage them to follow practices that will promote sustainable long-term shareholder investment returns. Typically, the LongView funds engage over 20 companies every year – they are companies that we see dragging down the performance of the indices through practices that place the value of our investments at risk. By challenging their practices, we are working to improve performance.
INsider: How do you engage them?
SZ: Part of our work involves “quiet diplomacy” through dialogues and letters with company directors to promote good corporate practices. Often, we also introduce shareholder resolutions seeking change. But when we come across companies engaging in what we believe to be malfeasance, we will pursue direct legal action to recover losses – the News Corp. litigation is an example.
INsider: What are some of the practices you have challenged over the years?
SZ: Executive compensation has been a continuing concern for LongView and for investors in general. How are companies designing incentives to drive performance and how can investors monitor them to make sure that corporate assets aren’t being wasted on compensation practices that have nothing to do with performance?
For example, LongView spearheaded a challenge to companies making commitments to pay “golden coffins” – awards and bonuses that are payable if an executive dies. We see no problem with compensation designed to push good performance, but seeing multimillion-dollar packages go out the door when shareholders receive no services in return is simply not acceptable. Backdating stock options is another example of an unacceptable practice.
Highlighting practices like these generates discussion in the marketplace as to what is appropriate. We have seen revisions in compensation practices as a result of shareholder engagements that have created a ripple effect in the market as other boards re-examined and ultimately changed what they were doing.
INsider: What other practices you have questioned?
SZ: A second and huge challenge is finding ways to make boards more accountable to shareholders. The LongView Funds have been aggressively advocating that directors be elected by a majority of shares cast in an election rather than a plurality standard. The default standard in corporate law in most states is a plurality. We believe directors are more accountable if they are required to have the firm support of a majority of shareholders.
And of course, achieving greater transparency is a constant struggle. For example, there is an incredible amount of corporate activity in politics in the United States, and for many years investors have been trying to get more disclosure about how much money is going into the political arena, where it’s going and whether boards are exercising oversight as to how that money is spent.
If they aren’t, we see a number of risks. A company can run afoul of regulatory rules on political spending, there can be fines and reputational damage, and there’s concern over whether corporate assets are being spent according to the personal preferences of executives rather than in the interests of the corporation itself. We are seeing increasing pressure from investors for greater disclosure in this area and for assurances that boards are reviewing political expenditures.
INsider: How are you putting pressure on corporate directors?
SZ: An important push in the 1990’s was increasing the independence of boards. We were among the first to say that boards should have a super majority of independent directors. The Council of Independent Investors, a group we work closely with and is responsible for the oversight of assets valued at $3 trillion, has adopted that standard, and it has in turn, been adopted by many companies.
The challenges today are to ensure that independent directors are exercising rigorous oversight on behalf of investors and that investors are able to monitor which directors are genuinely looking out for them and which have lost sight of their obligations or are simply ill-equipped to exercise oversight.
INsider: Over two decades, what have been some of the victories along the road?
SZ: Among the achievements are boards that are more independent, and there is much clearer disclosure of what companies are doing. Some really bad practices such as golden parachutes, have been reined in, and other good practices, such as limiting or prohibiting executives from hedging company stock they hold, have been instituted. Now, however, it’s incumbent upon us to make use of the improved disclosure, to dig deeper and to align the corporate practices with the long term interests of the investors in our funds. That’s a huge challenge.
INsider: Do you have a measure of progress?
SZ: Yes, today, the amount and quality of companies’ engagements with us has significantly increased. When we take action through a letter or through a shareholder resolution, we typically get a response. Whereas twenty years ago, few companies would actively discuss a shareholder resolution prior to the resolution being voted at an annual shareholders’ meeting, we now regularly withdraw over half of the resolutions filed because companies initiated reform that precludes the need for an annual meeting vote. This increased engagement and responsiveness is a very positive sign. And it continues to grow as more proactive companies and more responsible boards are trying to figure out what their investors’ concerns are.
The support of the investors in the LongView Funds is critical to helping to further and expand our initiatives.