Hello Business by Carlson blog readers. Welcome to what I hope will be an informative and entertaining take on current issues in local, national and international business issues important to our great state. Each Wednesday at about 8:20am, Carlson School of Management and Law School Professor Paul Vaaler talks about these issues with WCCO 830AM Radio’s Dave Lee on his Morning News show. We call it Business by Carlson, but it’s really business for ‘CCO listeners from throughout our great state. Here’s what we’re discussing Wednesday, April 26, 2017:
Shareholders Playing More Active Role in Annual Meetings
Locally and nationally, there are two big annual meetings where shareholders are going to have a say on how well top managers and directors have been performing. One meeting in June concerns Minnesota-based Buffalo Wild Wings. The other meeting yesterday (Tuesday) concerns California-based Wells Fargo bank, which has a long corporate history in Minnesota as Northwestern and then Norwest Bank before merger with Wells Fargo in the 2000s. Both are about dissident shareholders irritated by perceived miscues involving top managers and directors causing financial and reputational harm to their respective firms.
Let’s start with Wells Fargo (WF), which Tuesday (April 25, 2017) had its annual shareholders’ meeting in Ponte Vedra Beach, Florida. You can learn more about that meeting here: http://money.cnn.com/2017/04/25/investing/wells-fargo-shareholder-meeting/index.html. The meeting is typically an uneventful review of past performance, leading to the re-election of directors, and softball questions from the few shareholders that actually attend. Not yesterday. Many individual and institutional shareholders are outraged over financial and reputational losses related to the fraudulent account scandal that broke last Fall. High pressure sales incentives led Wells Fargo employees to open checking, credit card and other accounts under false names or real names without consent, just so that employees could meet sales goals. Wells Fargo has since paid out millions of dollars in regulatory fines and law suit settlements, with more of both to come. Former CEO John Stumpf and Executive Vice President Carrie Tolstedt were forced out, stripped of various benefits, and then targeted for blame after an internal investigation. That wasn’t enough for outraged shareholders, more than 40% of whom voted against renewing several WF board directors, including board chair and former General Mills CEO, Steve Sanger. “Tell us what you knew and when you knew it!” screamed Bruce Marks, CEO of Neighborhood Assistance Corporation of America, a nonprofit community advocacy group. Marks has a point. At least since 2004, the WF board had reports of such high-pressure sales tactics, but did nothing. Board members only needed a majority of votes to be retained, but usually it isn’t even close to that mark. New independent board members received 99% of shareholder votes. Don’t be surprised if 4-5 WF board members, including Sanger, offer their resignations in the next several weeks. Their reputation for good governance is tarnished, like WF’s. .
What about the upcoming June 2 meeting of shareholders of Buffalo Wild Wings (BWW) in Wayzata? You can read more about it all here: https://finance.yahoo.com/news/buffalo-wild-wings-comments-marcato-125200604.html. Here the dissident shareholder is Marcato Capital, a activist hedgefund investment company from San Francisco with a 6% share of the BWW. Marcato’s head Mick McGuire acquired this stake in BWW over the past year. He has been using it to needle BWW’s CEO, Sally Smith, about several strategies he thinks value destroying. The big strategic conflict between McGuire and Smith is over franchising. BWW owns outright about half of their 1175 stores in the US and overseas. Another 50% are owned by BWW franchisees: franchisees build and run the stores according to BWW standards. BWW provides business support and advertising. And franchisees pay BWW a royalty, typically tied to store sales. Most casual dining firms franchise a higher percentage of stores than BWW –like 80-90% of stores. That way, the franchisor can conserve capital. Marcato wants BWW to be more like others, up the franchised store percentage to 90%, and distribute the freed-up capital to shareholders…like Marcato. Smith thinks that short-sighted, but I haven’t heard her articulate a smart reason why. Here’s one: Company-owned (not franchised) stores are easier to control and experiment with new products and processes. Okay, but where are the new products and processes at BWW? Marcato is proposing a slate of “pro-franchising” directors for election at the June meeting while Smith is proposing a slate of “stay-the-course” directors. Never bet big against the company, which controls annual shareholder machinery. But maybe place a side bet on McGuire and Marcato. And pass the green pepper sauce. June 2’s meeting will be a hot time in the old town of Wayzata.
President Trump’s Corporate Tax Proposal
Nationally, later today (Wednesday, April 26, 2017) will see President Donald Trump announce the broad outlines of a proposed overhaul of corporate and individual federal income tax law. Here is where you can read more about that announcement: https://www.nytimes.com/2017/04/25/us/politics/tax-plan-trump.html. I think the big proposal item is the reduction in federal corporate income tax from 36% to 15%. That’s a big reduction, and for many corporate executives, a long overdue reduction. The high rate helps explain why many US large multinationals from the US shifted their headquarters overseas to low-tax countries like Ireland –Minnesota-based med-tech giant, Medtronic, pulled off such a “tax inversion” in 2014 when it merged with Covidien and took up tax residence in Dublin. Trump’s proposed reduction in corporate tax rates is designed to stop that emigration of corporate headquarters, and give small- and medium-sized US corporations more after-tax money to invest and grow. Here are two challenges for that proposal. First, don’t expect the Irish and other Europeans to take this lying down. They’ll lower their own corporate rates to restore their advantage lest they lose US companies like Medtronic –call it a looming corporate tax “war.” Second, a big US corporate tax cut means a big hole in the US Treasury. Trump officials think the rate reduction will see US corporations repatriate profits “trapped” abroad, and spur growth in corporate profits to fill that hole. I think it’s wishful thinking rather than thoughtfully analytical. Wait until the Congressional Budget Office scores this proposal. Then let’s see if it can pass Congress. Only then may we learn if lower corporate taxes can lure Medtronic and other companies to “de-invert” and come home.
French Election Results Bode Well for Minnesota
Internationally, the French elections matter for Minnesota firms and investors (and would-be summer tourists!). Read more about how French presidential elections matter for local and national business and finance here: http://www.cnbc.com/2017/04/24/global-markets-jump-as-macron-takes-lead-in-french-election-gold-sinks-by-over-1.html. Last Sunday, the French electorate winnowed the presidential candidate pool down to two: pro-European Union (EU), pro-international business centrist Emmanuel Macron; and anti-EU, anti-immigrant, economic nationalist Marine Le Pen. Macron was first in a field of 11 candidates with 23% of the vote while Le Pen was second with about 21%. The 2% difference sent financial markets skyward on Monday, April 24. The Dow increased more than 1% (+200 points). The Paris stock market equivalent, the CAC 40 increased 4% –that’s like an 800 point increase in the Dow! The Euro shot up 1.2% against the greenback to about $1.09. World financial markets are elated. Macron’s pro-market centrism will likely draw support from all other major parties –left and right– except Le Pen’s National Front, when French voters go to the polls for the run-off on May 7. This matters for Minnesota firms like Medtronic (again), 3M, Donaldson, Ecolab, and Toro, companies exporting high-tech manufactured goods to the EU. It just got less costly to do so with the likely survival of the EU and the appreciation of the Euro. And a pro-growth technocratic French president like Macron just might help the rest of Europe start growing faster than the 0.5% average of the past four years. What’s the down-side? Well, things got a 1.2% more expensive for Minnesota tourists heading to Paris (or Berlin) bistros this summer. But in the longer run, US tourists are still much better off. In 2008, a Euro cost more than $1.40. Now it is about $1.10. Sacre bleu!