CtW Investment Group, the US corporate governance adviser to trade union pension funds (Taft Hartley funds), has suggested that investors should vote against the re-election of three of Caterpillar's directors and in favour of a shareholder resolution proposing that the company’s clawback policy to include events that may result in reputational damage to the company at its AGM next month.

The advice follows the raids on the company in March by US law enforcement authorities which were believed to be related to an investigation that began in 2015 relating to off-shore tax schemes set up by the company. In its 2016 annual report, Caterpillar said it had received a  subpoena from the US District Court for the Central District of Illinois in January 2015 requesting documents relating to financial information concerning a number of US and non-US subsidiaries. More subpoenas were then received with requests for information focusing on the dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL, based in Switzerland.

Caterpillar appointed former US Attorney General William Barr as an independent legal adviser. Jim Umpleby, who became chief executive of Caterpillar at the beginning of the year, has asked Barr, currently a counsel to the law firm Kirkland & Ellis, to review the matters that led to the raids and ensure that the company deals with them properly. At that time CTW had called on the board to go further and establish a special committee to investigate any risks related to tax schemes set up by the company.

CTW has  singled out Daniel Dickinson, Dennis Muilenburg, and William Osborn as the directors to vote against because of their membership of Caterpillar's audit committee which it believes failed in its duty to manage the risks associated with the offshore tax structure, despite warnings by both internal and external parties, CTW said at least two employees and the company’s internal risk assessment system had warned of the risks of the offshore tax plan, which the audit committee appears to have ignored. The investment adviser added that Caterpillar continued to implement the offshore tax structure despite significant scrutiny from federal regulators, as well as shareholders themselves through various lawsuits.

Osborn is the audit committee chairman and CTW said he had sat on the board over 15 years which was almost since the inception of the tax strategy. All three of the directors had been on the audit committee for the investigations by the Internal Revenue Service and the US Senate. Additionally, CTW said that the audit committee had failed to manage the conflict of interest presented by PricewaterhouseCoopers, which both developed the tax avoidance scheme and continues to be the company’s external auditor.

Given these failings by the audit committee and the board more generally which had the potential damage to the company, both reputation and otherwise, CTW said shareholders needed to take action to strengthen executive pay accountability by adopting the changes to the company’s clawback policy, as outlined in the shareholder resolution.

CTW has also been involved in other recent engagement with companies - writing to the boards of jewellers, Tiffany, and retailer, Urban Outfitters - urging them to improve and refresh their board composition which the investment adviser would help to improve the performance of the companies.

The letter to Tiffany's board said:  "The board’s composition, coupled with Tiffany’s declining sales, call into question the company’s ability to actively recruit and retain directors that are best suited for challenging market pressures."

CTW urged Tiffany to take a number of steps to improve its board diversity before the company AGM next week (25th May). These included the adoption and implementation of a policy that requires that women and minority candidates are considered in the initial list of candidates from which new management-supported director nominees are chosen by its nominating and governance committee.

The letter also asked for Tiffany to disclose what steps had been taken to improve its board composition and to diversify Tiffany’s talent pipeline for possible future directors.

CTW has also questioned the commitment of the Urban Outfitters board to recruiting a more diverse mix of directors and requested the company to address this.