The week in GRC: Shareholders press BP on climate change, and banks said to struggle with compliance recruitment

May 24, 2019
This week’s governance, compliance and risk-management stories from around the web

CNBC reported that Federal Communications Commission (FCC) chair Ajit Pai said he plans to recommend that the agency approve the $26.5 billion merger of T-Mobile US and Sprint, saying it would speed up 5G deployment in the country and help bring faster mobile broadband to rural Americans.

‘Two of the FCC’s top priorities are closing the digital divide in rural America and advancing [US] leadership in 5G, the next generation of wireless connectivity,’ he said in a statement on Monday. ‘The commitments made today by T-Mobile and Sprint would substantially advance each of these critical objectives.’ He added that the companies were committed to rolling out a 5G network that would cover 97 percent of the US population within three years of the closing of the merger and 99 percent within six years.

The Wall Street Journal noted that, according to agency statistics, the SEC over the five years ending in 2018 took in 55 percent of the $20 billion in enforcement fines set through settlements or court judgments. During the previous five years, from 2009 through 2013, the agency collected on 60 percent of $14.6 billion in fines.

The SEC has faced challenges for years in getting defendants to pay more of their fines, although some are almost certain to avoid payment forever. That includes people who went to prison on related criminal charges, or people behind Ponzi schemes who spent the funds they took from defrauded investors. The agency at the end of its 2018 fiscal year was owed roughly $1.5 billion in fines, but expects to collect just $228 million of that amount, according to its financial statements.

‘We have a committed group of attorneys and paralegals in the dedicated office of collections who work hard to collect these funds, many of which will be distributed to harmed investors,’ an SEC spokesperson said.

– Senator Kamala Harris, D-California, is proposing that large companies pay women on an equal basis with their male counterparts or face government fines, according to the WSJ. The presidential candidate released a plan that would put the burden on companies to demonstrate that they are not engaging in pay discrimination. Her campaign said companies would be fined 1 percent of their profits for every 1 percent wage gap they allow to continue for work of equal value.

The campaign estimated that the law would generate roughly $180 billion over 10 years, with revenue decreasing over time as equal-pay practices become more common. Women who work full time are paid on average 80 cents for every dollar paid to men, and the disparity is higher for black and Hispanic women.

Reuters reported that a legislative change doubling the leverage cap for business development companies (BDCs) will lead to further bifurcation between larger and smaller platforms, as many start to get approval to increase debt on the balance sheet. Larger BDCs benefit from managing bigger asset pools to attract a lower cost of debt funding compared with smaller rivals.

The passage last year of the Small Business Credit Availability Act was the result of lobbying efforts from the BDC industry and the vast majority have been quick to take advantage by either seeking board or shareholder approval, which is required because BDCs are publicly traded. A one-year waiting period is required for board approval, although a shareholder vote means a BDC can pursue higher leverage immediately.

CNN said that, according to a count by Alliance Advisors, Amazon received more shareholder resolutions than any other company this year. Although a few were withdrawn or excluded with the SEC’s permission, shareholders were due to vote on 12 measures at Amazon’s AGM on Wednesday, on issues ranging from food waste to hate speech.

Nine of the resolutions were co-ordinated by the Interfaith Center on Corporate Responsibility (ICCR), a coalition of roughly 300 institutional investors that presses portfolio companies to take action on human rights, gender and racial diversity and the environment.

Amazon’s board opposed every resolution on the ballot, saying it’s already taking action to address many of the concerns they raise. ‘We generally oppose proposals requesting specific reports, policies or initiatives for not reflecting the unique and evolving nature of our operations,’ a company statement reads.

Reuters reported that Thyssenkrupp’s supervisory board unanimously approved CEO Guido Kerkhoff’s overhaul strategy, including a plan to list its elevators unit. ‘We have agreed that the executive board will now work out the concrete plans and begin the implementation,’ Thyssenkrupp supervisory board chair Martina Merz said in a statement following a meeting of the company’s directors.

– Legg Mason confirmed that it reached an agreement with Trian Fund Management on the composition of its board, naming Nelson Peltz and Ed Garden as directors, according to the WSJ. Legg Mason said Trian will identify a third independent director candidate who, following board approval, will be included as a Legg Mason nominee.

In a statement, Peltz, the hedge fund firm’s co-founder and CEO, and Garden, Trian’s chief investment officer and co-founder, said their priorities include helping Legg Mason reduce costs, increase revenue and increase profits. The only other time Trian has placed more than one of its founders on the same board was at Wendy’s, where it has held a position since 2005 and still holds three board seats.

– Two shareholder groups urged BP at the company’s AGM to do more to tackle global warming, a day after climate activists staged a blockade of its London headquarters, CNN reported. BP accepted a resolution from Climate Action 100+, a group of 300 investors with more than $33 trillion in assets under management, that calls for the company to align its business strategy with the 2015 Paris climate accord. More than 99 percent of shareholders voted in favor of the resolution.

But executives advised investors to vote against a more radical proposition by a group called Follow This, which urged BP to commit to reducing all emissions, including those generated by BP’s customers. Only 8 percent of investors voted for the Follow This resolution. Shell is the only major energy company that has committed to cutting emissions generated by both its activities and the products it sells. It has said it will link executive pay to these goals.

Reuters reported that US District Judge Lucy Koh in San Jose, California, ruled that Qualcomm illegally suppressed competition in the market for smartphone chips by threatening to cut off supplies and extracting excessive licensing fees. ‘Qualcomm’s licensing practices have strangled competition’ in parts of the chip market for years, harming rivals, smartphone makers and consumers, Koh wrote. She ordered the company to renegotiate licensing agreements at reasonable prices, without threatening to cut off supplies, and ordered that it be monitored for seven years to ensure compliance.

Qualcomm said it will ask Koh to put her decision on hold and seek a quick appeal to the federal appeals court in California. ‘We strongly disagree with the judge’s conclusions, her interpretation of the facts and her application of the law,’ general counsel Don Rosenberg said in a statement.

The WSJ noted that the Office of the Comptroller of the Currency said in a semi-annual report on the risks facing lenders that US banks are having a tough time recruiting and retaining compliance officers, particularly those who specialize in financial crimes. Banks have expanded their compliance departments over the past two decades in response to laws enacted following the September 11, 2001 terrorist attacks, which imposed new requirements on banks to spot financial crimes.

Too few universities have developed curricula that can produce professionals capable of stepping into high-demand compliance roles, said David Schwartz, president and CEO of the Florida International Bankers Association. That creates a cost issue for banks that want to beef up controls. ‘Getting good compliance people is expensive,’ Schwartz said.

– JPMorgan Chase said only 72 percent of shareholders approved its executive compensation packages, marking an unusual opposition to pay for the bank’s top leaders, according to Reuters. Roughly 93 percent supported JPMorgan’s executive pay last year. The bank said that, according to preliminary tallies, all of its directors were elected and a shareholder proposal that the bank report annually on its global gender pay gap was voted down.

Roughly 29 percent of shareholder votes supported a proposal asking for more details on gender pay equity in the US and 28 percent of votes backed a proposal aimed at easing shareholders’ access to proxy voting rights.

Lead independent director Lee Raymond said the development and assessment of executive compensation was the board’s ‘top priority’. He said: ‘We believe our performance-based incentive program and our balanced approach... effectively align executive comp and shareholder value’, adding that the board will consider shareholders’ feedback.

Reuters reported that, according to an external director, Nissan Motor Co is not considering the option of a merger with top shareholder Renault and none of the nominees to Nissan’s board are pushing to make it an issue now. Given Nissan’s focus on improving corporate governance and recovering from a series of poor results, Keiko Ihara, who has been overseeing efforts to overhaul governance, said that the issue of a merger was not on the table at the moment.

‘We don’t have time to feel any of the pressure, which appears to be coming externally,’ she said. ‘We’re not aware of any director nominee who wants to make this an official topic of discussion at the moment.’

Ihara, who also chairs a provisional council for an external nominations committee to be set up next month, said the process to find eventual successors to CEO Hiroto Saikawa and other executives would begin soon after the group is formed.

– All of the unprecedented number of shareholder resolutions facing Amazon at its AGM failed, CNN said. Specific vote counts may still demonstrate substantial support for some resolutions when they are released in the coming days. The 12 resolutions, all of which Amazon’s board opposed, covered issues ranging from the sale of facial recognition technology to governments to equal pay for male and female employees.

Representatives of socially responsible investors and activist groups asked Amazon to produce reports on food waste, sexual harassment policies and the sale of offensive products on its platform, and to incorporate sustainability and equity metrics into executive compensation, among other measures.

CNN reported that two audience members, Alexa Kaczmarski and Sister Susan Smith Makos, spoke at McDonald’s shareholder AGM. Kaczmarski, speaking on behalf of the activist shareholder group Corporate Accountability, presented a proposal that would let shareholders act by written consent. That resolution failed to pass but received 42 percent of the vote.

Makos spoke on behalf of the ICCR about the importance of increasing transparency regarding McDonald’s efforts to remove antibiotics from its supply chain. ICCR withdrew a proposal on the topic before it reached the proxy statement because of a new company policy that addressed most of these concerns.

– According to the WSJ, the NYSE is trying to attract biotechnology IPOs that usually go to Nasdaq. The NYSE is lowering fees for companies with little to no revenue, a typical characteristic of biotech firms still in the development phase. Such companies have mostly listed on Nasdaq, in part because of its cheaper fees, more lenient listing standards and the prospect of inclusion in the popular Nasdaq Biotechnology Index. Last year, 43 of the 44 biotech companies with market capitalizations of at least $200 million that listed stock in the US selected Nasdaq, according to Dealogic.

‘When we talk to biotech firms, where these pre-revenue companies are a little different is [that] every dollar not spent on research and development is a dollar burned. The opportunity to provide them some relief, as they’re growing and spending on their businesses, is something we want to do,’ said John Tuttle, NYSE global head of listings and COO.

Nasdaq declined to comment.

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