Winners of 2018 IRRC Institute Research Award Examine Pressing, Big Picture Investor Issues

Winners of 2018 IRRC Institute Research Award Examine Pressing, Big Picture Investor Issues – Impact of Index Funds and Impact of Responsible Investing 

Honorable Mention Academic Research Explores Sustainability and Stock Prices  

NEW YORK, NY, December 6, 2018 – An academic research paper examining the corporate stewardship of index fund managers and a practitioner paper looking at how to measure the amount of sustainable investing in equity portfolios are the winners of the 2018 Investor Responsibility Research Center Institute (IRRCi) annual investor research competition. Each winning research team will share a $10,000 award.

“The two winning research papers make a substantial contribution to understanding big picture, weighty issues for investors and the global economy,” said Jon Lukomnik, IRRCi executive director. “The winning academic paper examines the stewardship of index funds that own an increasingly large proportion of public companies. The winning practitioner research offers an innovative data-driven model to measure the level of sustainable investments in a portfolio. The authors make us think about how investments interact with real world economic activity,” Lukomnik said.

The first winning research paper, Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy, is co-authored by Lucian Bebchuk, James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, Harvard Law School and Scott Hirst, Associate Professor, Boston University School of Law and Research Director, Program on Institutional Investors, Harvard Law School.

This paper studies the resources and decisions of index fund managers — how they monitor, vote and engage with their portfolio companies. This research provides an analytical framework for understanding the incentives of index fund managers,  provides the first comprehensive and detailed empirical account of the full range of stewardship activities that index fund managers do and do not undertake, and considers the significant policy implications of the issues analyzed. Download the research here.

“We are honored to have our work recognized by the IRRC Institute,” said report co-author Lucian Bebchuk.

“Our work aims to highlight a key dimension of our corporate governance system that deserves the close attention of policymakers and market participants,” said report co-author Scott Hirst.

The second winning paper, Measuring the Sustainability Impact of 25 European ESG Funds, is co-authored by Larry Abele and Antti Savilaakso, both with Auriel Investors.

This research introduces a new quantitative data-driven model to measure the level of sustainable investments in a portfolio as compared against a benchmark by creating a measure called “active ESG (environmental, social and governance) share” intended to quantify the impact of sustainability considerations on the portfolio’s holdings. The research then compares the active ESG share of 25 diversified European ESG funds. It finds that these funds prioritize the provision of environmentally and socially positive products and services by their portfolio companies, but have lower board independence, gender equality and social impacts than their benchmark. In general, the funds had an active ESG share of only four to five percent, meaning that sustainability issues only caused a four to five percent holding differential from a portfolio that did not consider  sustainability. Download the research here.

“We built the Impact-Cubed model to push for more accountability in the sustainable and responsible investment community,” said report co-author Antti Savilaakso. “The apparent lack of accountability as demonstrated by our research waters down the potentially transformative power of responsible investments when ESG funds are more green marketing than real changes in how we invest. We are grateful for the recognition from IRRCi, which reassures us that we are making a real and valuable contribution to the industry.”

The research submissions were of such high quality that the judges selected another research paper for Honorable Mention recognition, Are Sustainability Factors Associated with Stock Price Informativeness? This research is authored by Zabihollah Rezaee, Professor, School of Accountancy, University of Memphis, and Anthony C. Ng, Deakin University, Australia. Download the research here.

The blue ribbon panel of judges for the 2018 IRRC Institute Prize were:

  • Robert Dannhauser, Head of Capital Markets Policy, CFA Institute
  • James Hawley, Professor emeritus and former Director of the Elfenworks Center for Fiduciary Capitalism at St. Mary’s College of California
  • Erika Karp, Founder, CEO and Chair of the Board of Cornerstone Capital
  • Nell Minow, Governance Expert and Huffington Post Columnist

Information on past winners is available here. More information about the award is available here. Read the full body of IRRCi research here.

The IRRCi is scheduled to dissolve by December 31, 2018. The John L. Weinberg Center for Corporate Governance at the University of Delaware will take over the award beginning in 2019, as well as sustain access to the full body of IRRCi research.

The Investor Responsibility Research Center Institute is a nonprofit research organization that funds academic and practitioner research enabling investors, policymakers, and other stakeholders to make data-driven decisions. IRRCi research covers a wide range of topics of interest to investors, is objective, unbiased, and disseminated widely. More information is available at www.irrcinstitute.org.

IRRCi Media Contact:

Kelly Kenneally | +1.202.256.1445 | kelly@irrcinstitute.org

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New Study Identifies Key Corporate Governance Differences Between Microcap & Larger Companies

Microcap Boards Smaller, Less Independent and Less Diverse  

Microcap Study Stats: 22% of Boards Studied Have Five or Fewer Directors; 61% Have No Female Directors; and 70% of Companies with Combined CEO/Chair Have No Lead Director

Webinar to Review Findings on August 22nd at 4 PM ET

NEW YORK, NY, August 1, 2018 – A new in-depth analysis of micro-capitalization (microcap) public companies finds that the corporate governance of these companies with less than $300 million in market capitalization differs materially from that of their larger brethren.

The new study, Microcap Board Governance, conducted by Board Governance Research LLC and commissioned by the Investor Responsibility Research Center Institute (IRRCi), examines the governance practices at 160 microcap companies, representing approximately ten percent of all companies with less than $300 million in market capitalization traded on a major U.S. stock exchange.

Most of these microcaps are not included in major indices and many do not have analysts following their performance. Possibly as a result, microcap governance practices have not received the same level of scrutiny as larger capitalization companies.

Download the full study here. Register here for a webinar on Wednesday, August 22nd at 4:00 PM ET to review the findings.

Among the study’s key findings were:

  • Microcaps typically are not young, nor do they feature dual class stock. The vast majority (86 percent) of the study companies have been in existence for more than a decade. Also, few (seven percent) of the companies studied have multiple classes of stock and even fewer (four percent) have one shareholder controlling more than 50 percent of the common stock. These findings contradict common misconceptions that many microcap companies are early-stage growth companies or are controlled by founders or early funders.
  • Microcap boards are less independent than larger corporations’ boards. Some 61 percent of microcap boards have fewer than 80 percent independent board members, compared to 51 percent of large companies. Also, while large cap and microcap boards are just as likely to have combined the roles of CEO and board chair, microcap companies are unlikely to have an independent lead director in such circumstances — 70 percent of such microcap companies have not named a lead director, despite that being considered best practice.
  • Microcap boards are less gender diverse. The majority (61 percent) of microcap companies have no female directors. By contrast, only 21 percent of the Russell 3000 boards have all male boards. Additionally, only 12 percent of the microcap companies have more than one female director, while nearly half (45 percent) of Russell 3000 companies have more than one female director.
  • Microcap boards are smaller. The average microcap board has 6.9 directors, compared to 8.9 at larger companies. Nearly a quarter (22 percent) of microcaps have boards with five or fewer directors.

“Microcaps are an intriguing and often overlooked corner of the equity market,” said Jon Lukomnik, IRRCi executive director. “This report is a much-needed deep dive into the corporate governance of microcaps so investors can better understand the landscape. The findings contradict a number of microcap misconceptions. For example, these aren’t necessarily young companies with the founder at the helm. Instead, about one-quarter of microcaps have been public for less than five years and only 14 percent of microcap CEOs are the founders.”

Lukomnik added, “At the same time, the report suggests some paths microcap companies should consider moving toward consensus best practice for corporate governance. For example, there is nothing associated with size that suggests it is a good idea to have an all-male board or to fail to establish the position of a lead independent director when there is a combined chair/CEO structure.”

“The smallest U.S. companies play an important role in our economy, so everyone has an interest in how they are governed,” said Annalisa Barrett, report author, chief executive officer and founder of Board Governance Research and clinical professor at the University of San Diego School of Business. “Investors, employees, customers and suppliers of these microcap companies all benefit when they are well-governed and their boards have the optimal structure and practices in place to provide effective oversight and guidance to management,” Barrett explained.

Other key findings of the report include:

  • Only one in seven (14 percent) of the microcap CEOs studied are the founders of the companies they lead, contrasting the notion that many small companies are founder led start-ups.
  • Only four percent of the microcap companies studied have a majority shareholder who owns 50 percent or more of shares.
  • Director election standards differ. While the majority (54 percent) of Russell 3000 companies have adopted majority voting for director elections, only 11 percent of microcap companies have done so.
  • Microcap directors may have less boardroom experience, as only 17 percent of them currently serve on the boards of other publicly-traded companies compared to 35 percent of Russell 3000 directors.
  • Microcap boards have more variability in the number of board meetings held than do larger companies. More microcap boards (24 percent) held 12 or more meetings as compared to the 17 percent of the Russell 3000 boards which did so during the study year. On the other hand, microcap boards were also more likely (five percent) than Russell 3000 boards (two percent) to have held fewer than four meetings that year.
  • The committee structures in place at microcap boards tend to be less complex than those of larger company boards. While the microcap boards studied are just as likely to have the three key committees (Audit, Compensation and Nominating/Governance) as the Russell 3000 boards, they are less likely to have additional committees. Further, many microcap board committees meet only once a year and some reported holding no meetings during the study year.

The Investor Responsibility Research Center Institute is a not-for-profit organization headquartered in New York, NY, that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors.  More information is available at www.irrcinstitute.org.

Board Governance Research LLC provides independent research on corporate governance practices, board composition, and director demographics.  For more information and to see the firm’s research on various corporate governance topics, please visit www.boardgovernanceresearch.com.

 

Media Contact:

Kelly Kenneally
Investor Responsibility Research Center Institute

+1.202.256.1445

kelly@irrcinstitute.org

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New Study Identifies Key Corporate Governance Differences Between Microcap and Larger Companies

Microcap Boards Smaller, Less Independent and Less Diverse  

Microcap Study Stats: 22% of Boards Studied Have Five or Fewer Directors; 61% Have No Female Directors; and 70% of Companies with Combined CEO/Chair Have No Lead Director

Webinar to Review Findings on August 22nd at 4 PM ET

NEW YORK, NY, August 1, 2018 – A new in-depth analysis of micro-capitalization (microcap) public companies finds that the corporate governance of these companies with less than $300 million in market capitalization differs materially from that of their larger brethren.

The new study, Microcap Board Governance, conducted by Board Governance Research LLC and commissioned by the Investor Responsibility Research Center Institute (IRRCi), examines the governance practices at 160 microcap companies, representing approximately ten percent of all companies with less than $300 million in market capitalization traded on a major U.S. stock exchange.

Most of these microcaps are not included in major indices and many do not have analysts following their performance. Possibly as a result, microcap governance practices have not received the same level of scrutiny as larger capitalization companies.

Download the full study here. Register here for a webinar on Wednesday, August 22nd at 4:00 PM ET to review the findings.

Among the study’s key findings were:

  • Microcaps typically are not young, nor do they feature dual class stock. The vast majority (86 percent) of the study companies have been in existence for more than a decade. Also, few (seven percent) of the companies studied have multiple classes of stock and even fewer (four percent) have one shareholder controlling more than 50 percent of the common stock. These findings contradict common misconceptions that many microcap companies are early-stage growth companies or are controlled by founders or early funders.
  • Microcap boards are less independent than larger corporations’ boards. Some 61 percent of microcap boards have fewer than 80 percent independent board members, compared to 51 percent of large companies. Also, while large cap and microcap boards are just as likely to have combined the roles of CEO and board chair, microcap companies are unlikely to have an independent lead director in such circumstances — 70 percent of such microcap companies have not named a lead director, despite that being considered best practice.
  • Microcap boards are less gender diverse. The majority (61 percent) of microcap companies have no female directors. By contrast, only 21 percent of the Russell 3000 boards have all male boards. Additionally, only 12 percent of the microcap companies have more than one female director, while nearly half (45 percent) of Russell 3000 companies have more than one female director.
  • Microcap boards are smaller. The average microcap board has 6.9 directors, compared to 8.9 at larger companies. Nearly a quarter (22 percent) of microcaps have boards with five or fewer directors.

“Microcaps are an intriguing and often overlooked corner of the equity market,” said Jon Lukomnik, IRRCi executive director. “This report is a much-needed deep dive into the corporate governance of microcaps so investors can better understand the landscape. The findings contradict a number of microcap misconceptions. For example, these aren’t necessarily young companies with the founder at the helm. Instead, about one-quarter of microcaps have been public for less than five years and only 14 percent of microcap CEOs are the founders.”

Lukomnik added, “At the same time, the report suggests some paths microcap companies should consider moving toward consensus best practice for corporate governance. For example, there is nothing associated with size that suggests it is a good idea to have an all-male board or to fail to establish the position of a lead independent director when there is a combined chair/CEO structure.”

“The smallest U.S. companies play an important role in our economy, so everyone has an interest in how they are governed,” said Annalisa Barrett, report author, chief executive officer and founder of Board Governance Research and clinical professor at the University of San Diego School of Business. “Investors, employees, customers and suppliers of these microcap companies all benefit when they are well-governed and their boards have the optimal structure and practices in place to provide effective oversight and guidance to management,” Barrett explained.

Other key findings of the report include:

  • Only one in seven (14 percent) of the microcap CEOs studied are the founders of the companies they lead, contrasting the notion that many small companies are founder led start-ups.
  • Only four percent of the microcap companies studied have a majority shareholder who owns 50 percent or more of shares.
  • Director election standards differ. While the majority (54 percent) of Russell 3000 companies have adopted majority voting for director elections, only 11 percent of microcap companies have done so.
  • Microcap directors may have less boardroom experience, as only 17 percent of them currently serve on the boards of other publicly-traded companies compared to 35 percent of Russell 3000 directors.
  • Microcap boards have more variability in the number of board meetings held than do larger companies. More microcap boards (24 percent) held 12 or more meetings as compared to the 17 percent of the Russell 3000 boards which did so during the study year. On the other hand, microcap boards were also more likely (five percent) than Russell 3000 boards (two percent) to have held fewer than four meetings that year.
  • The committee structures in place at microcap boards tend to be less complex than those of larger company boards. While the microcap boards studied are just as likely to have the three key committees (Audit, Compensation and Nominating/Governance) as the Russell 3000 boards, they are less likely to have additional committees. Further, many microcap board committees meet only once a year and some reported holding no meetings during the study year.

The Investor Responsibility Research Center Institute is a not-for-profit organization headquartered in New York, NY, that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors.  More information is available at www.irrcinstitute.org.

Board Governance Research LLC provides independent research on corporate governance practices, board composition, and director demographics.  For more information and to see the firm’s research on various corporate governance topics, please visit www.boardgovernanceresearch.com.

 

Media Contact:

Kelly Kenneally
Investor Responsibility Research Center Institute

+1.202.256.1445

kelly@irrcinstitute.org

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