Dodd-Frank Act at 5 Years – Not Quite Done in Rulemaking

by Hank Boerner – Chairman – G&A Institute

So Here We Are Five Years on With The Dodd-Frank Act

Summer’s wound down/autumn is here  — while you were sunning at the beach or roaming Europe, there was an important anniversary here in the U.S.A. That was the fifth anniversary of “The Dodd-Frank Act,” the comprehensive package of legislation cobbled together by both houses of the U.S. Congress and signed into law by President Barack Obama on July 21, 2010.

The official name of the Federal law is “The Dodd-Frank Reform and Consumer Protection Act,” Public Law 111-203, H.R. 4173. There are 15 “titles” (important sections) in the legislative package addressing a wide range of issues of concern to investors, consumers, regulators, and other stakeholders.

Remember looking at your banking, investment and other financial services statements …in horror…back in the dark days of 2008-2009?

The banking and securities market crisis of 2008 resulted in an estimated losses of about US$7 trillion of shareholder-owned assets, as well as an estimated loss of $3 trillion ore more of housing equity, creating an historic loss of wealth of more than $10 trillion, according to some market observers.

That may be an under-estimation if we consider the wide range of very negative ripple effects worldwide that resulted from [primarily] reckless behavior in some big investment houses and bank holding companies…rating agencies…and then there were regulators dozing off…huge failures in governance by the biggest names in the business…and therefore the ones that investors would presumably place their trust in.

In response to the 2008 market, housing and wealth crash, two senior lawmakers — U.S. Senator Christopher Dodd of Connecticut and Congressman Barney Frank of Massachusetts — went to work to enact sweeping legislation that would “reform” the securities markets, address vexing issues in investment banking practices, and “right wrongs” in commercial banking, and consumer finance services. (Five years on, both are retired from public office. Congressman Frank is still vocal on the issues surrounding Dodd-Frank.)

After more than a year of hearings – and intense lobbying on both sides of the issues — the The Dodd-Frank Act became the Law of the Land — and the next steps for the Federal government agencies that are charged with oversight of the legislation was development of rules to be followed.

So — in July, we observed the fifth anniversary of Dodd-Frank passage. I didn’t hear of many parties to celebrate the occasion. Five years on, many rules-of-the-road have been issued — but a significant amount of rule-making remains unfinished.

Yes, there has been a lot of work done: there are 22,000-plus pages of rules published (after public process), putting about two-thirds of the statutes to work. But as we write this, about one-third of Dodd-Frank statutes are not yet regulatory releases — for Wall Street, banks, regulators and the business sector to follow.

Is The Wind At Our Back – or Front?

What should we be thinking regarding Dodd-Frank half-a-decade on? Are there positive results as rules get cranked out — what are the negatives? What’s missing?

We consulted with Lisa Woll, the CEO of the influential Forum for Sustainable & Responsible Investment (US SIF), the asset management trade association whose members are engaged in sustainable, responsible and impact investing, and advance investment practices that consider environmental, social and governance criteria.

She shared her thoughts on D-F, and progress made/not made to date: “Congress approved the Act following one of the worst financial crises in our country. The 2008 crash impacted the lives of millions of Americans who lost their homes, jobs and retirement savings. The Dodd-Frank Act helped to bring about much-needed accountability and transparency to the financial markets.”

Examples? Lisa Woll thinks one of the most important achievement was creation of the Consumer Financial Protection Bureau (CFPB), “which is up and running and now one of the most important agencies providing relief to consumers facing abuse from creditors.” She points out that CFPB has handled more than 677,000 complaints since it opened its doors four years ago.

Put this in the “be careful what you wish for” category: You may recall that the buzz in Washington power circles was that Harvard Law School professor Elizabeth Warren was slated to head the new bureau – -which was a concept championed by her. Fierce financial service industry opposition and Republican stonewalling prevented that appointment. Elected Senator from Massachusetts on November 6, 2012, she is now mentioned frequently in the context of the 2016 presidential race.

Continuing the discussion on Dodd-Frank, US SIF’s Lisa Woll points to a recently released regulatory rule that addresses CEO-to-work pay-ration disclosure. This is a “Section” of the voluminous Dodd-Frank package requiring publicly-traded companies (beginning in 2017) to disclose the median of annual total compensation of all employees except the CEO, the total of the CEO compensation, and the ratio of the two amounts.

Says Lisa Woll: “Disclosure of the CEO-to-worker pay ratio is a key measure to ensure sound corporate governance.”

She says in general US SIF members are pleased that the Securities & Exchange Commission (SEC) rule applies to U.S. and non-U.S. employees, as well as full-time, part-time, seasonal and temporary workers employed by the company or any consolidated subsidiaries, with some exceptions: “The rule will provide important information about companies’ compensation strategies and whether CEO pay is out of balance in comparison to what the company pays its workers. Those will be measurable results.”

What Doesn’t Work/ or May be Missing in D-F?

CEO Woll says investors were disappointed that the pay ratio provision (CEO-to-worker) did not include smaller companies and that up to five percent of non-U.S. employees may be excluded from reporting. Her view: “High pay disparities within companies can damage employee morale and productivity and threaten a company’s long-term performance. In a global economy, with increased outsourcing, comprehensive information about a company’s pay and employment practices is material to investors.”

The Conflict Minerals Rule

Another positive example offered by Lisa Woll: The Dodd-Frank Act requirement that companies report on origin of certain minerals that are used, and that originate in conflict zones such as the Democratic Republic of the Congo. (Section 1502 of Dodd-Frank instructed SEC to issue rules to companies to disclose company use of conflict minerals if those minerals are “necessary to the functionality or production of a product manufactured by the company”. This includes tantalum, tin, gold or tungsten.)

Lisa Woll observes: The submission of these reports exposes operational risks that are material to investors. Last year 1,315 companies submitted disclosures, according to Responsible Sourcing Network. We continue to urge more corporate transparency in conflict minerals reporting.”

Dodd-Frank Rule Making Scorecard

The US SIF CEO notes that of 390 rules required to be enacted, 60 rules have yet to be finalized and another 83 have not even been proposed, according to law firm Davis Polk & Wardell LP.

Woll: “One example is the Cardin-Lugar Amendment, requiring any U.S. or foreign company trading on a U.S. stock exchange to publicly disclose resource extraction payment made to governments on a project basis. We are still waiting for SEC to complete the rule.”

CEO Woll sees the ongoing effort by some members of the U.S. Congress to undermine or weaken The Dodd-Frank Act as “very concerning,” and putting investors at risk. “In my own work with our asset management members, I am seeing positive effects in that they have greater access to information in order to make an investment decision in companies. The examples are rules around transparency and disclosure. At the same time, asset managers lack access to information in a number of areas where rules are still pending, such as payment disclosures to companies by extractive companies.”

Of rules not yet adopted (or addressed), Lisa Woll urges continued work by SEC: “We hope to see more of the rules finalized so that we can move toward more transparent financial markets and a more sustainable economy.”

# # #

Notes: The Forum for Sustainable & Responsible Investment (US SIF) is an asset management trade association based in Washington, D.C. Member institutions include Bank of America, UBS Global Asset Management, Bloomberg, Calvert Investments, Legg Mason, Domini Social Investments, Cornerstone Capital, Walden Asset Management, and many other familiar names.

Members are engaged in sustainable, responsible and impact investing, and advance investment practices that consider environmental, social and governance criteria. Lisa Woll has been CEO since 2006.

Disclosure: G&A Institute is a member organization of US SIF and team members participate in SIRAN, the organization’s “Sustainable & Responsible Research Analyst Network.”) Other SIF entities include The International Working Group; Indigenous Peoples Working Group; and Community Investing Working Group. Information is at: http://www.ussif.org/

Corporate Human Rights Performance — Benchmarking and Ranking of Global Companies

by Hank Boerner – G&A Institute

Interesting news out of Switzerland today — the first wide scale project to rank up to 500 global companies on their human rights performance was launched, and corporate human rights performance in key sectors will be researched and ranked over the coming months.  The first sectors in focus are Agriculture, Apparel, Extractives, and Information and Communications Technology.

This is the new Corporate Human Rights Benchmark (“CHRB”).

The organizers of the long-term project include Aviva Investors; Business and Human Rights Resource Center; EIRIS; the Institute for Human Rights and Business; and VBDO (a sustainable investment forum for SR investors in the Netherlands).  The Corporate Roundtable (ICAR) has endorsed the project.

In announcing the project, the organizers said that investors, companies and consumers are increasingly aware of the impacts of business on human rights.  The project will share the first publicly-available (open source) information on corporate policies, processes and performance on human rights…including what managements are doing to address negative impacts, and what they can do to scale resources.

Among recent positive developments the organizers citied:

  • A year after the Rana Plaza factory fire in Bangladesh, the Bangladesh Accord has spurred on greater transparency, with increased public reporting on factory inspections.
  • Beverage industry giants Coca Cola Company and PepsiCo have committed to Zero Tolerance policies on “land grabs.”
  • The European Union is committed to restricting exports of spyware surveillance technologies because of human rights concerns.
  • The recently-adopted Conflict Mineral legislation in the United States has resulted in a 65% drop in armed groups profiting from illegal mining trade.

Backgrounds of the partnering organizations in the project:

  • Aviva Investors – global asset management business, and part of Aviva plc, one of the UK’s largest insurance services providers.
  • Business and Human Rights Resource Centre – international NGO that tracks human rights impact of 5,600 companies in 180+ countries, with information available in 7 languages.
  • Calvert Investments – influential US investment management firm and long-time recognized leader in advancing sustainable & responsible investment strategies.
  • EIRIS – global leader in ESG research and SRI strategies (UK based with members in the EU).
  • Institute for Human Rights and Business – global “think and do” tank, providing “impartial space for dialogue to deepen understanding of human rights challenges and the [appropriate] role of business.”
  • VBDO – The Dutch association of institutional investors promoting  sustainable development; members consider both financial and ESG criteria for their investments.

Over the next 3 years the 6 organizations — organized as the “CHRB Steering Group” — will conduct a worldwide “consultation” on the methodology and results with diverse stakeholders, and collect and release information on 500 companies’ human rights performance.  The information will be open source, and available to company managements, investors, the public sector, local communities, and NGOs.

Steve Waygood of Aviva Investors commented:  “Our benchmark will introduce a positive competitive environment and companies try to race to the top of the annual ranking.  [The effort] will also shine a light on those [companies] where performance needs to improve.

“It took more than 60 years from the signing of the Universal Declaration of Human Rights before the UN Guiding Principles on Business and Human Rights were developed.

“We believe that within 6 years of their approval, we can help to make these Guiding Principles routine corporate practice through the development and use of the Benchmark.”

Information is available through EIRIS:  contact is Stephen Hine, head of Responsible Investment Development – Stephen.hine@eiris.org

Note that the team at Governance & Accountability Institute identifies, tracks and monitors third party recognitions of companies for a variety of [their] achievements. These include scores, rankings, ratings, and “best of” lists.  This is definitely a growth business, and the third party actions can have influence on a company’s reputation and capital markets valuation.  Investors and other third parti4s will be watching the new human rights benchmarking as the project moves forward.