Governance

Corporate Governance

Investors have the opportunity to influence a company’s corporate governance practices both through their proxy voting and engagement activities.

Wespath Benefits and Investments (Wespath) and other sustainable investors have engaged companies on best practices in corporate governance for many years, particularly after accounting irregularities and lax oversight resulted in the failure of several well-known corporations in 2000 and 2001.

The United Methodist Church believes that “Corporations are responsible not only to their stockholders, but also to other stakeholders: their workers, suppliers, vendors, customers, the communities in which they do business, and for the earth, which supports them.” The Church supports “the public’s right to know what impact corporations have in these various arenas…” (¶163I of The Book of Discipline.)

Case Study: Lending Practices

“Predatory lending” is a term describing a type of lending that takes advantage of people with poor credit history or limited financial knowledge. It is usually characterized by unscrupulous or unethical practices, including the application of excessively high fees and interest rates, the use of balloon payments, flipping (successive refinancing of the original loan at increasingly higher rates), packing (linking the issuance of the loan to the purchase of some form of insurance) and steering (directing otherwise creditworthy borrowers into high-interest loans). Most commonly, predatory lending targets the elderly, the poor and minorities.

Lenders may be involved in predatory lending either directly or through loan securitization, a process whereby one financial institution buys the loans of another, repackages them and then sells them to investors. Securitization provides lenders with new capital, allowing them to make additional loans.

The UMC Social Principles state that “financial institutions…must guard…against abusive and deceptive lending practices that take advantage of the neediest among us…” (¶163J of The Book of Discipline.) Wespath encourages lending institutions to develop policies and evaluative procedures to ensure that direct or securitized loans are not predatory. Financial institutions engaged in loan securitization may be implicated in predatory lending if they have not sufficiently evaluated the loans they are securitizing to ensure predatory loans are not among them.

Lending institutions are under constant pressure to increase the value of loan portfolios. In the past, some institutions relaxed their underwriting standards and approved many loans to borrowers with questionable credit histories. Relaxing underwriting standards without proper controls can seriously undermine a company’s ability to operate and can even lead to failure. In 2007, when interest rates on many mortgages were readjusted and borrowers defaulted in large numbers, banks were not able to absorb losses. This was a major contributor to the ensuing collapse of the housing market.

The UMC supports “existing laws such as the Home Mortgage Disclosure Act, which provides information to the public on where banks and savings and loans make their loans, and the enlarged Community Reinvestment Act, which mandates that banks and savings and loans have the responsibility to serve the credit needs of moderate and lower-income communities.” (Resolution 3262, Housing in the USA.)

 
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