The week in GRC: Mifid II goes into effect, and pensions group urges board care on CEO pay
– According to Bloomberg, UK Brexit secretary David Davis said the EU cannot pick and choose which bits of its economic relationship with the UK it keeps and which it eliminates in any future trade deal. Post-Brexit trade talks are due to start in March, with a year remaining until the country’s scheduled exit day in 2019. Davis’ remarks are a response to those of his EU counterpart, Michel Barnier, who said last month that financial services couldn’t be included in a deal because no previous EU trade agreement with other countries had such provisions.
– The Financial Times reported that the heads of some of Europe’s largest lenders and their regulators are talking about the need for consolidation in the banking industry. If that happens it would end a barren spell for banking deals stretching back to the financial crisis. ‘If you think 10 years ahead… you can think about the design of the banking sector with fewer banks, more domestic consolidation and probably a few more pan-European banks,’ said Société Générale CEO Frédéric Oudéa.
Oudéa, who is also president of the European Banking Federation, said that although most banks were focused on domestic consolidation, he believes cross-border deals would come back on the table ‘in the longer term’ once the eurozone banking union was completed and more lenders had automated their operations.
– Bloomberg reported that Steven Maijoor, head of the European Securities and Markets Authority (Esma), said the first day of Mifid II operating in EU markets wasn’t the disaster many in the financial services industry had predicted. ‘What we can see for our part is no glitches so far,’ he said on Wednesday. ‘Obviously in the coming days, the coming weeks, we’ll get more information on the start of Mifid.’
The revised directive was introduced as part of the EU’s response to the financial crisis. It is designed to push trading on to regulated venues, increase market transparency, curb speculation on commodities, adapt EU rules to new technologies such as high-frequency trading, and boost investor protections.
– That said, the FT said the launch of Mifid II was overshadowed as UK and German authorities granted last-minute reprieves from certain aspects of the reforms. Underlining the complexity of the changes, ICE Futures Europe and the London Metal Exchange were given an extra 30 months to comply with rules related to trading and clearing on the day they were due to come into force. Eurex, the Frankfurt-based futures exchange owned by Deutsche Börse, was given a similar delay. The UK’s Financial Conduct Authority said the extension was to ensure the ‘orderly function’ of clearing in Europe.
– Reuters reported that music-streaming company Spotify was sued by Wixen Music Publishing for allegedly using thousands of songs ‘without a license and without compensation’ to the music publisher. Wixen, an exclusive licensee of songs, sought damages worth at least $1.6 billion along with injunctive relief. Spotify failed to get a direct or compulsory license from Wixen that would allow it to reproduce and distribute the songs, Wixen said in the lawsuit. Spotify declined to comment.
– Reuters noted that Ant Financial’s plan to acquire US money transfer company MoneyGram International collapsed after a US government panel rejected it over national security concerns – the most high-profile Chinese deal to be nixed under the administration of US President Donald Trump. ‘Despite our best efforts to work co-operatively with the US government, it has now become clear that [the Committee on Foreign Investment in the United States] will not approve this merger,’ MoneyGram CEO Alex Holmes said.
– Brazilian state-run oil company Petróleo Brasileiro (Petrobras) said it would pay one of the largest settlements in history to end a class-action lawsuit by US investors that sought to recoup losses related to a corruption scandal, according to The Wall Street Journal. Petrobras agreed to pay $2.95 billion to resolve claims from investors that bought its US-listed shares or bonds between January 2010 and July 2015.
The deal is pending court approval. ‘The agreement is in the company’s best interests and that of its shareholders, given the risks of a verdict advised by a jury,’ Petrobras said. ‘It eliminates the risk of an adverse judgment that… could have a material adverse effect on the company and its financial situation, and puts an end to the uncertainties, burdens and costs of protracted litigation.’
According to Brazilian court documents, Petrobras’ contractors colluded to drive up the price of services they billed to the oil company while paying kickbacks to Petrobras executives and government officials. Petrobras maintains it was a victim of the scheme. Brazilian authorities have agreed, leading them to spare the company from prosecution and allow it to collect restitution from former executives and suppliers. More than 100 people have been convicted of corruption and other offenses.
– Rent-A-Center said founder Mark Speese had resigned as CEO as the company addresses investor concerns about its performance, the WSJ reported. Steven Pepper stepped down as board chair in October as the company announced it would suspend its dividend and explore strategic alternatives after reporting lower-than-expected third-quarter results. Mitchell Fadel, who formerly served as COO at the firm, will succeed Speese as CEO.
Engaged Capital has been pressuring the company, which went public in 1995, to sell itself amid declines in same-store sales. ‘With the company having entered its current transitional phase, and the improvements in the company’s portfolio as reported over the past several months, I believe now is an appropriate time for me to move on,’ Speese said.
– Compensation was a theme in the news during this first week of the year. The New York Times, for example, reported that Iceland has begun putting in place a new law that requires companies and government agencies to prove they are paying men and women equally – putting the country at the forefront of global efforts to minimize gender inequality.
The Equal Pay Standard, which was part of broader legislation passed in June 2017, took effect on Monday. It requires companies with 25 full-time employees or more to analyze their salary structures every three years to ensure men and women are being paid the same amount for doing the same jobs. Then they must report back to the government for certification or face penalties that include fines.
– In the UK, meanwhile, Bloomberg reported that by the end of the first three working days of the year, the country’s top CEOs would each have earned on average as much as a typical worker will take home in all of 2018, citing a study by the High Pay Centre and the Chartered Institute of Personnel and Development. The study was released amid growing investor and political unease in the UK about inflated CEO pay.
Recent years have seen investor revolts against the level of salaries paid to top executives at some London-listed companies. Other companies have adjusted pay packages downwards to avoid protest votes. Some firms, such as Legal & General and Aberdeen Asset Management, published pay ratios in their annual reports last year that showed the difference between what their executives were earning compared with what the employee was paid.
– The FT reported that the Pensions and Lifetime Savings Association – responding to the report cited by Bloomberg – called on the boards of companies to be ‘more skeptical about the need for vast executive pay awards.’ Luke Hildyard, stewardship and corporate governance policy lead at the trade body, said: ‘Huge pay differences between executives and the wider workforce symbolize how too many companies fail to understand or appreciate the value of their workers.’
Starting this year, most US public companies will have to comply with an SEC rule by including in their proxy statements a ratio comparing the compensation of their CEO with that of their ‘median employee’ (CorporateSecretary.com, 12/29).
– In other news, the WSJ reported that corporate leaders see cyber-security threats, disruptive technologies and tougher competition for talent as some of their most pressing issues in the new year. The growing pressures coincide with a widespread changing of the guard in the corner office. Last year, 919 CEOs resigned, retired or got fired at publicly traded North American companies, the highest number in at least a decade, according to research from Liberum Capital.
Under increased investor pressure, directors are making unprecedented demands of CEOs, some leadership specialists say. ‘The expectations boards have of CEOs is that they can do everything,’ said Hugh Shields, co-founder and principal at Shields Meneley Partners. ‘In some cases, they are looking for a unicorn.’
– The WSJ reported that the Office of the Comptroller of the Currency (OCC) said Citigroup’s deposit-taking bank, Citibank, hasn’t lived up to its promises to beef up anti-money laundering procedures by failing to adhere to a 2012 order that accused it of failing to fully comply with the Bank Secrecy Act. The original 2012 cease-and-desist order said the bank had inadequate internal controls and independent testing. In Thursday’s statement, the OCC didn’t specify its complaints. The OCC fined the bank $70 million and left the consent order in place.
The bank neither admitted nor denied wrongdoing following the OCC’s Thursday announcement or the 2012 order. ‘Citi is committed to taking all necessary and appropriate steps to remedy the concerns identified by the OCC,’ a spokesperson said. ‘We have made substantial investments to enhance our [anti-money laundering] programs and we maintain a commitment to developing an industry-leading program to help to protect the integrity of the financial system.’
– The SEC warned that investors should ‘exercise caution’ with crypto-currencies such as bitcoin, noting state and federal regulators may not be able to recoup any lost investments from illegal actors, Reuters reported. Many promoters of initial coin offerings and other crypto-currency investments are not following federal and state securities laws, SEC chair Jay Clayton and commissioners Kara Stein and Michael Piwowar said in a statement.