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In North Dakota, the state has seen drastically falling revenues due to low oil prices.  Lower revenues makes it more challenging for the communities in that state that are still trying to provide the necessary infrastructure and services that remain a challenge due to the enormous growth over the last several years.  The response from some in the North Dakota legislature? Cut taxes. 

Oil companies always seek lower taxes because they are rational actors.  Lower taxes means higher revenues. This was true with sky high oil prices and is even more true with lower prices. From a company perspective, the position makes sense.  From a legislative perspective, the position should be more nuanced. 

(Please click below to read more.)

Regular readers know that I have blogged repeatedly about my opposition to the US Dodd-Frank conflict minerals rule, which aims to stop the flow of funds to rebels in the Democratic Republic of Congo. Briefly, the US law does not prohibit the use of conflict minerals, but instead requires certain companies to obtain an independent private sector third-party audit of reports of the facilities used to process the conflict minerals; conduct a reasonable country of origin inquiry; and describe the steps the company used to mitigate the risk, in order to improve its due diligence process. The business world and SEC are awaiting a First Amendment ruling from the DC Circuit Court of Appeals on the “name and shame” portion of the law, which requires companies to indicate whether their products are DRC Conflict Free.” I have argued that it is a well-intentioned but likely ineffective corporate governance disclosure that depends on consumers to pressure corporations to change their behavior.

The proposed EU regulation establishes a voluntary process through which importers of certain minerals into the EU self-certify that they do not contribute to financing in “conflict-affected” or “high risk areas.” Unlike Dodd-Frank, it is not limited to Congo.

In an earlier BLPB post, I wrote about President Obama’s call for greater regulation of retirement investment brokers.  The proposed reforms focused on elevating the current standard that brokers’ investment advice must be “suitable” to something closer to an enforceable fiduciary duty to counter financial incentives for some brokers to channel investors into higher-fee investment options.  

Yesterday, the U.S. Department of Labor released new proposed rules (Proposed Rule), which would classify brokers as “fiduciaries” under ERISA but allow them to continue to receive brokerage commissions and fees (a practice that would otherwise violate ERISA conflict-of-interest rules) so long as the brokers and customers enter into a  “Best Interest Contract”.

The exemption proposed in this notice (“the Best Interest Contract Exemption”) was developed to promote the provision of investment advice that is in the best interest of retail investors such as plan participants and beneficiaries, IRA owners, and small plans.  Proposed Rule at 4.

In 1975, the DOL issued rules defining investment advice for purposes of triggering fiduciary status under ERISA and the attended duties and conflict-of-interest prohibitions.  That 1975 definition is still in use, is narrow, and excludes much of paid-for investment advice, particularly that…

Energy is big business, and there is evidence that renewables are starting to play along with the more traditional big-time players.  The Economist recently published the article, Renewable Energy: Not a Toy, which reports that renewable energy installations are continuing to increase even as subsidies fall because prices are continuing to drop. The energy sector is likely to continue to diversify, in part because diversification is good for resilience and for financial management.  The Economist article notes:

Nearly half of last year’s investment was in developing countries, notably China, whose energy concerns have more to do with the near term than with future global warming. It worries about energy security, and it wants to clean up its cities’ air, made filthy partly by coal-burning power plants.

Sometimes lost in the discussion about cleaner energy is that climate concerns are not the only reasons to consider other resources. Cleaner air, more stable prices, and locally sourced energy can all be good reasons to consider renewable energy sources along side more traditional resources. Prices, are the big one, of course, but when it’s close, other considerations can more easily be part of the analysis.  It appears we’re approaching that point…

It’s that time of year again where I have my business associations students pretend to be shareholders and draft proposals. I blogged about this topic last semester here. Most of this semester’s proposals related to environmental, social and governance factors. In the real world, a record 433 ESG proposals have been filed this year, and the breakdown as of mid-February was as follows according to As You Sow:

Environment/Climate Change- 27%

Political Activity- 26%

Human Rights/Labor-15%

Sustainability-12%

Diversity-9%

Animals-2%

Summaries of some of the student proposals are below (my apologies if my truncated descriptions make their proposals less clear): 

1) Netflix-follow the UN Guiding Principles on Business and Human Rights and the core standards of the International Labour Organization

2) Luxottica- separate Chair and CEO

3) DineEquity- issue quarterly reports on efforts to combat childhood obesity and the links to financial risks to the company

4) Starbucks- provide additional disclosure of risks related to declines in consumer spending and decreases in wages

5) Chipotle- issue executive compensation/pay disparity report

6) Citrix Systems-add board diversity

7) Dunkin Donuts- eliminate the use of Styrofoam cups

8) Campbell Soup- issue sustainability report

9) Shake Shack- issue sustainability report

10) Starbucks- separate…

Today marks my return to blogging after a brief (3 weeks) respite, and what better way to be welcomed back than with news of a mega-merger?!?  Today, Kraft Foods, a publicly traded company, and H. J.Heinz, owned by Warren Buffett’s Berkshire Hathaway and Brazilian private equity firm 3G, signed a multi-billion dollar merger agreement to create what will become the third largest food company in North America. 

Under the proposed merger Kraft shareholders will receive 49% of the stock in the newly merged company, plus a cash dividend of $16.50 per share, representing a reported 27% premium on Kraft’s trading stock price as of Tuesday, March 24th which closed at around $61.33/share.  

The stock market reacted positively to the news with Kraft stock opening around $81/share and climbing up to $87 and settling down in the low $80’s (it was trading at $82/share around 2:00 pm). You can track the stock price here.  The immediate bump in price casts some shadows on the Kraft stock premium agreed to in the deal.

Among the possible legal hurdles are antitrust concerns, but the deal doesn’t raise red flags on its face given the little overlap between the two

…

Bernard Sharfman has posted a new article entitled “Activist Hedge Funds in a World of Board Independence: Long-Term Value Creators or Destroyers?” In the paper he makes the argument that hedge fund activism contributes to long-term value creation if it can be assumed that the typical board of a public company has an adequate amount of independence to act as an arbitrator between executive management and the activist hedge fund. He also discusses these funds’ focus on disinvestment and attempts to challenge those in the Marty Lipton camp, who view these funds less charitably. In fact, Lipton recently called 2014 “the year of the wolf pack.” The debate on the merits of activist hedge funds has been heating up. Last month Forbes magazine outlined “The Seven Deadly Sins of Activist Hedge Funds,” including their promotion of share buybacks, aka “corporate cocaine.” Forbes was responding to a more favorable view of these funds by The Economist in its February 7, 2015 cover story.

Whether you agree with Sharfman or Lipton, the article is clearly timely and worth a read. The abstract is below:

Numerous empirical studies have shown that hedge fund activism has led to enhanced returns to investors and increased…

Last week, I posted about Walmart’s ballyhooed wage hike and asked whether boycotts and activism actually work. Apparently, the President was so impressed that he called the company’s CEO to thank him. Some Walmart workers, however, aren’t as pleased because without more hours, they still can’t make ends meet. Nonetheless, TJX, the parent company of retailers TJ Maxx and Home Goods announced yesterday that its employees would also receive a pay raise. Is this altruism? Have the retail giants caved to pressure?

As some commented on the blog last week and to me privately, it’s more likely that these megaretailers have implemented these “pro-employee” moves to reduce turnover, raise morale, and most important compete in a tightening job market. But one LinkedIn commenter from Australia believes that boycotts in general can work, stating:

My experience with having organised boycotts is that they work, but they take time. They create the conditions for public awareness of corporate activities, and put pressure on the company to change. They are effectively the ‘bad cop’ of civil society pressure. Consequently, they do not work on their own, requiring also the ‘good cop’ – civil society organisations and market conditions that allow the subject…

On Monday the White House released a report on The Effects of Conflicted Investment Advise on Retirement Savings which highlights the unique constraints of many retirement investors.  The current “suitable” investment advise standard leaves room for financial service provides to channel retirement investors into investments with higher fees paid by the investor but higher commissions earned by the professional.  Higher fees paid on investments can reduce the return on savings an average of 12% over the life of the retirement account.  In other words, paying less in fees could mean that retirement savings could last an average of an additional 5 years.  This has major implications for individual financial stability as well as our national retirement policy, which is increasingly dependent upon self-directed retirement savings in the form of 401(k)s and IRAs.

To reduce the conflict of interest and lessen the likelihood that retirement investors will “select” higher-fee investment vehicles based on the self-interested advise of financial services providers, the White House is asking the Department of Labor to impose a fiduciary duty standard requiring the advise provided to be consistent with the best interests of the investor.  This is such an intuitive position that many investors…

I have just finished a draft of an article arguing that disclosures don’t work because consumers and investors don’t read them, can’t understand them, don’t take any real action when they do pay attention to them, and fail to change corporate behavior when they do threaten boycott. I specifically pointed out the relative lack of success of consumer protests over the years. I also noted that Wal-Mart continues to get bad press for how it treats its employees despite the fact the Norwegian Pension Fund divested hundreds of millions of dollars due to the company’s labor practices, prompting other governments and cities to follow. My thesis—it takes a lot more than divestment and threats of boycott to change company behavior. But perhaps I’m wrong. Yesterday, Wal-Mart CEO Doug McMillon announced a significant wage increase declaring:

We’re strengthening investments in our people to engage and inspire them to deliver superior customer experiences… We will earn the trust of all Walmart stakeholders by operating great retail businesses, ensuring world-class compliance, and doing good in the world through social and environmental programs in our communities.

The letter to Wal-Mart associates is here. I don’t know which was more striking, the $1 billion dollar move…