The week in GRC: Director pay continues to rise, survey finds, and SEC proposes proxy adviser rule change

Nov 08, 2019
This week’s governance, compliance and risk-management stories from around the web

CNN reported that McDonald’s CEO and president Steve Easterbrook was out after the board determined he had violated company policy. Easterbrook, who became CEO in 2015, ‘demonstrated poor judgment involving a recent consensual relationship with an employee,’ the company said in a statement. He has ‘separated’ from the company and has been replaced in both roles by Chris Kempczinski, effective immediately. Kempczinski was most recently president of McDonald’s USA. The board said it is confident in Kempczinski’s ability to lead the company.

In an email to McDonald’s employees, Easterbrook expressed regret over the relationship. ‘As for my departure, I engaged in a recent consensual relationship with an employee, which violated McDonald’s policy,’ Easterbrook wrote. ‘This was a mistake. Given the values of the company, I agree with the board that it is time for me to move on. Beyond this, I hope you can respect my desire to maintain my privacy.’

The Wall Street Journal said that, according to people familiar with the matter, federal authorities are investigating Under Armour’s accounting practices, looking at whether the company moved sales from quarter to quarter to appear healthier. US Department of Justice (DoJ) prosecutors are conducting a criminal inquiry into the matter in co-ordination with the SEC, one of the people said.

Under Armour said it is co-operating with the DoJ and SEC investigations. ‘The company began responding in July 2017 to requests for documents and information relating primarily to its accounting practices and related disclosures,’ Under Armour said. ‘The company firmly believes its accounting practices and disclosures were appropriate.’

Spokespeople for the DoJ and SEC declined to comment.

CNBC reported that the Kingdom of Saudi Arabia officially launched the IPO of state-owned Saudi Aramco, announcing that a domestic listing will happen in December. Saudi Arabia’s market regulator has approved the listing but exact details surrounding the size and scope of the IPO remain unknown. In a statement, Saudi Aramco said ‘the final offer price, number of shares to be sold and percentage of the shares to be sold will be determined at the end of the book-building period.’

Amin Nasser, president and chief executive of Saudi Aramco, said the IPO prospectus would be released on November 9. He added that the Saudi Aramco listing was intended to help diversify the economy, and was a way to strengthen the domestic Tadawul exchange by attracting both domestic and international investment.

– According to The Wall Street Journal, investor and lawmaker pressure to increase gender diversity in the executive ranks and on boards is leading more companies to consider a wider array of C-suite candidates and increasingly link performance reviews and pay to hiring targets.

A recent study by S&P Global Markets Intelligence found that companies with female CFOs are more profitable than those without. But the number of female executives at large US companies continues to be quite low. That’s changing as more investors insist on diverse executive teams and as regulators, such as in California, weigh in. Recruiters say companies in the past year have increasingly requested more diverse candidates. More companies are also setting internal recruitment and promotion targets that promote diversity.

CNBC said the SEC proposed a new rule that may make it more difficult for shareholders to submit proposals to AGMs dealing with social issues such as executive pay and climate change. The proposed rule would increase the resubmission thresholds for shareholder resolutions. SEC members Allison Herren Lee and Robert Jackson dissented on the proposal, saying the change would limit accountability of corporate executives and suppress shareholder rights.

At present, shareholder resolutions can be excluded from firms’ annual proxy materials if the proposals do not garner support from at least 3 percent of shareholders within one year of the proposal. The thresholds then rise to 6 percent within two years and 10 percent within three years. If passed, the new resubmission thresholds would become 5 percent in the first year and 25 percent of shareholder support after three years of proxy inclusion.

If a proposal after three attempts does not reach support from 75 percent of shareholders within five years, a proposal must take a ‘time out,’ said SEC chair Jay Clayton in opening remarks. Any resolution that gains 25 percent support year over year can be resubmitted if it is ‘potentially on a path toward more meaningful shareholder support,’ he continued.

Separately, the SEC voted to propose a rule that would require proxy advisers to provide more disclosures on possible conflicts of interests or methodological weaknesses in their advice to institutional investors.

– The SEC extended a no-action letter it provided to help market participants regarding their US-regulated activities as they engage in efforts to comply with the provisions relating to research in Mifid II and related implementing rules and regulations.

Under the extension of the temporary no-action letter, the staff would not recommend enforcement action to the commission under the Investment Advisers Act against broker-dealers receiving payments in hard dollars or through research payment accounts from clients subject to Mifid II. The no-action letter, which was set to expire on July 3, 2020, has been extended until July 3, 2023.

CNBC reported that October saw 172 CEOs leave their posts, according to business and executive coaching firm Challenger Gray & Christmas. Chief executive departures hit a record high for the year through October, with 1,332 US-based companies announcing CEO departures. The firm started tracking CEO exits in 2002, a period that includes the financial crisis. This year is on pace to have the most departures on record.

Not all CEOs are leaving because of board decisions or to retire. October also saw a fair amount of C-suite shuffle.

Reuters reported that, according to an analysis of SEC announcements and interviews with more than a dozen lawyers, academics and advocacy groups, commission chair Clayton has presided over more than two dozen measures that make life easier for US companies. The changes – 17 of which have been implemented, with a further nine proposed – are part of a broader push to help reverse a 20-year decline in US public company listings by modernizing disclosures and cutting regulatory costs for firms.

But most of them will weaken investor safeguards or weaken their rights, according to lawyers, consumer and investor groups and SEC sources. ‘Under Clayton’s leadership, the [SEC] has been quietly chipping away at an array of rules, many quite technical in nature,’ said Mayer Brown partner Anna Pinedo. ‘Although individually these haven’t gotten much attention, in aggregate the SEC’s rulemaking agenda under Clayton adds up to positive changes for public companies.’

Clayton declined to be interviewed but his spokesperson said protecting the interests of Main Street investors was a top priority. ‘The initiatives advanced under his leadership maintain or enhance investor protections, including by ensuring today’s investors receive the material information necessary to make investment decisions,’ the spokesperson said in a statement.

– A regulatory crackdown targeting the sale of higher-fee mutual funds has increased SEC enforcement results, pushing its annual fines to their highest total in more than 30 years, according to the WSJ. The agency brought 526 enforcement actions in the past fiscal year, which ended September 30. The tally was lifted by 95 cases against investment advisers for inadequately disclosing their practice of selling more expensive funds to retail clients, according to SEC figures.

The SEC’s caseload produced monetary sanctions totaling $4.3 billion, the highest tally in nominal dollars since at least 1987, according to data from Urska Velikonja, a Georgetown University law professor.

– Comscore has named board vice chair Bill Livek as its new CEO and executive vice chair, according to the WSJ. Board member Dale Fuller has been operating as interim CEO since March.

– According to CNBC, Alphabet’s board of directors has launched an investigation into how executives handled claims of sexual harassment and other misconduct. The board has created an independent subcommittee to look into the issues and has hired a law firm to assist with the investigation, according to materials seen by CNBC.

An Alphabet spokesperson said: ‘As has already been confirmed in public court filings, in early 2019, Alphabet’s board of directors formed a special litigation committee to consider claims made by shareholders in various lawsuits relating to past workplace conduct.’

Reuters reported that Californian authorities revealed for the first time an 18-month investigation into Facebook’s privacy practices and accused the social media company of hampering the probe by failing to turn over emails from CEO Mark Zuckerberg.

Will Castleberry, Facebook’s vice president of state and local policy, said the company has ‘co-operated extensively with the state of California’s investigation. To date we have provided thousands of pages of written responses and hundreds of thousands of documents.’

A spokesperson for California Attorney General Xavier Becerra responded: ‘It appears we have different definitions of co-operation’, noting that there were 25 requests the company declined to answer or provide documents to fulfill.

Reuters said that, according to a new report from recruiters Spencer Stuart, the average annual compensation for non-executive directors at S&P 500 companies increased by 2 percent to $304,856 last year, rising above $300,000 for the first time and 43 percent higher than it was 10 years ago. But some earned a lot more than that, thanks largely to stock grants. S&P 500 boards met, on average, just 7.9 times, in person or via telephone, during 2018. That’s down from nine times a decade ago, according to Spencer Stuart.

Investors are taking an increasingly tough view of directors’ compensation, which is usually set by the board itself. A growing number of shareholder lawsuits are challenging large board compensation packages. As a result, more companies are expected to put these matters to a shareholder vote at AGMs, said Paul Hodgson, a compensation expert and senior adviser at ESGauge.

– Kevin Stiroh, an executive vice president at the New York Federal Reserve who is responsible for regulating banks, put a price tag on climate and weather-related events and said financial firms need to take seriously the danger of climate change in their risk-management decisions, the WSJ reported.

‘The US economy has experienced more than $500 billion in direct losses over the last five years due to climate and weather-related events,’ Stiroh said. ‘Climate change has significant consequences for the US economy and financial sector through slowing productivity growth, asset revaluations and sectoral reallocations of business activity.’

– According to CNN, a report from UBS and PwC shows that shares in companies controlled by billionaires have significantly outperformed the global market average over the past 15 years. Researchers looked at the stock performance of 603 public companies in which billionaires have considerable sway and to which most of their wealth is tied. The companies’ annualized gain over the 15-year period was nearly 18 percent versus 9 percent for a broad stock index that tracks shares in 47 countries. The billionaire-controlled companies were also more profitable.

 

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