The week in GRC: Harley-Davidson plans to adopt proxy access, and SEC’s Jackson to step down
– Reuters reported that the US Department of Labor has made it tougher for employees of fast-food restaurants or other big franchises to sue corporations when individual franchise owners violate wage laws. The department issued a rule, which takes effect in March, that will make it more difficult to prove companies are liable for wage law violations of their contractors or franchisees.
Labor secretary Eugene Scalia said in a statement that the rule furthers President Donald Trump’s effort to address regulations that hinder economic growth. Unions and worker-advocacy groups had opposed the rule after the department proposed it last April. The union-backed National Employment Law Project said on Monday that the rule would allow companies to avoid liability even when they have some control over working conditions.
– The Guardian reported on BlackRock’s announcement that it will put sustainability at the core of its investment decisions. BlackRock CEO and chair Larry Fink in his annual letter to CEOs writes that the climate crisis is changing how investors view the long-term prospects of companies. ‘Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,’ he writes.
Fink’s statement is a shift for the firm. In his 2019 annual letter, Fink said his overriding duty was to make money for customers. BlackRock identifies several new measures in its investment approach, including lowering its exposure to fossil fuel companies, which has been a major demand from environmental protesters.
– The Wall Street Journal said that, according to new research from the Federal Reserve Bank of New York, a well-planned cyber-attack on the US banking system could have a devastating impact on the country’s financial stability. ‘If a cyber-attack were to compromise the integrity of banks’ systems, the reconciliation and recuperation process would be an unprecedented task,’ the authors of the report wrote. ‘This could have severe implications on the stability of the broader financial system vis-à-vis spillovers to investors, creditors and other financial market participants.’
The paper describes a cyber-attack as having a lot in common with an old-fashioned bank run, where a bank is unable to provide money to customers who want their funds, leading to panic.
– Bloomberg reported that, according to people familiar with the matter, activist investor Starboard Value has built a position in Merit Medical Systems and intends to meet with management to discuss ways to improve the company’s performance. The hedge fund firm has built a roughly 9 percent stake in the company and believes it is undervalued, the people said. It is unclear what changes Starboard may seek.
Starboard confirmed the stake in a regulatory filing. Representatives for Starboard and Merit Medical couldn’t be reached for comment.
– Reuters said activist investor Teleios Capital has asked Germany’s Aareal Bank to look into selling its software business Aareon, after the bank ruled out a such step in the near term. ‘We welcome recent reporting, which would suggest that Aareal Bank is open to selling its software business Aareon in the medium term,’ said Adam Epstein, co-founder of Teleios Capital. ‘Aareal Bank should now run a competitive, dual-track process for both a full and a minority sale of Aareon in order to make a fully informed decision that maximizes value for all shareholders.’
Aareal had no immediate comment.
– According to Reuters, SEC member Robert Jackson said he supports direct listings as a way to help reduce the fees companies pay to Wall Street banks to underwrite their IPOs. The SEC is considering a proposal by the NYSE for a rule change that would allow more companies to go public without using banks to underwrite the transaction. Jackson said he could not comment on the NYSE’s specific proposal but that he generally welcomed innovations that could reduce the 7 percent fee companies raising less than $1 billion typically pay to Wall Street banks when they go public. That fee is a major obstacle for middle-market companies looking to list, he said.
He also rejected the claim often made by corporate lobbyists that regulatory red tape is the main reason the number of public companies has declined over the past 20 years. ‘The good news is I think people are starting to compete, and direct listings are the beginning of what I hope will be a lot of innovation in the space,’ Jackson said.
– The WSJ said the consolidated audit trail (CAT) project, which would create a huge market-surveillance database for US regulators, faces new resistance from Wall Street broker-dealers that fear it could be targeted by hackers seeking investors’ private information. Some of the biggest US brokerages are balking at a contract they must sign to connect their systems to the CAT ahead of a deadline three months away. The brokers have cited concerns they could be held liable if the database is breached, according to people familiar with the matter.
Those who support the CAT say it will help regulators make sense of US financial markets by putting data from disparate markets in one place and establishing the time of each trade to the millisecond. Kara Stein, a former Democratic member of the SEC, has called it a Hubble Telescope for the securities markets.
– Harley-Davidson plans to allow long-term shareholders to directly nominate board members, increasing investor influence at the company, Bloomberg said. Proxy access will give a shareholder – or a group of as many as 20 – owning at least 3 percent of Harley’s stock for at least three years the right to name up to a fifth of nominated directors, the company said in a filing. The measure must be approved at the company’s AGM.
In making the change, Harley would follow a long list of US companies that have granted proxy access. The shift has come as boards have shown greater willingness to engage with investors or face the growing power of activists.
– Reuters reported that investor Jeffrey Ubben, who founded the $17 billion ValueAct Capital in 2000, spent a year building an ESG portfolio and is fast becoming one of Wall Street’s biggest proponents of investments with strong ESG components. Now BlackRock’s Fink has warned CEOs to act on climate change or face anger from investors over how unsustainable business practices might curb their future wealth.
‘It is pretty exciting,’ Ubben said when asked about Fink sounding the alarm on a crisis that Fink called the most long term and structural in his more than 40 years in finance. BlackRock’s new stance may aid Ubben and other investors pushing for changes on things ranging from carbon emissions to safer workplaces for employees.
– According to the WSJ, US financial regulators have warned banks and brokers that a key part of compliance exams will be scrutiny of how firms control the information they store in the cloud. Regardless of any arrangements under models that divide responsibility between cloud users and providers, regulators from federal agencies and industry bodies said they consider the companies themselves liable for any breaches.
‘Even if you have identified who has responsibility for which controls, you’re still outsourcing your services and your control of that data and the firm is still going to be responsible,’ said Salvatore Montemarano, a senior SEC examiner.
‘They should be clear on what their responsibility is internally, and what the cloud provider’s responsibility is,’ said Gregory Markovich, a Financial Industry Regulatory Authority examiner. ‘When we come into a firm and we look at its cloud operations, those are the areas we look at.’
– SEC member Jackson will step down on February 14 to continue teaching at the New York University School of Law, where he is currently on faculty leave, according to Reuters. An independent who was picked to fill an open Democratic seat in January 2018, Jackson’s departure will leave Allison Lee as the only Democratic commissioner at the Republican-led agency, which has been pursuing an ambitious agenda to overhaul securities rules.
Jackson’s term expired in June, but commission members can continue to serve for 18 months after their term expires and before their replacement is confirmed by the Senate. Reuters reported last month that the White House is expected to nominate Caroline Crenshaw, an attorney in Jackson’s office, to fill his seat.
– CNBC reported that, according to new research by the EU-backed European Women on Boards, only 4.7 percent of CEOs at Europe’s top companies were women in 2019. That means just 28 of the continent’s 600 most valuable public companies had hired a female CEO.
The study looked at the overall share of women in leadership, the share of women on the board, the share of women at executive level and the share of women on corporate committees. According to the report, just one in four leadership positions were held by women, and only one third of board members across STOXX 600 companies were female.
– Renault chair Jean-Dominique Senard said the operating board of the Renault-Nissan alliance would meet by the end of the month to decide on joint industrial initiatives, according to Reuters. Senard declined to elaborate on what these joint projects might be, but said cost savings could be ‘substantial’ in the future.
– CNBC reported that Democratic presidential candidate Joe Biden wants to ditch legal protection that has shielded social media companies from liability for users’ posts. The Communications Decency Act became law in the mid-1990s to help young tech firms avoid being bogged down in legal battles. But as they have grown in size and influence, many lawmakers across the political spectrum have decided that some reforms of the law and its enforcement are likely warranted.
Section 230 of the law allows for tech companies to take ‘good faith’ measures to moderate content on their platforms, meaning they can take down content they consider violent, obscene or harassing without fear of legal retribution. ‘Section 230 obviously benefits not just Facebook,’ a Facebook spokesperson said. ‘It’s not just foundational to the internet, it’s what allows The New York Times to host reader comments on its websites.’
– For many multinational companies, preventing bribery and corruption involves sending lawyers abroad, holding meetings and web-based surveys and interviewing unco-operative or uninformed employees. But according to the WSJ, Anheuser-Busch InBev has spent three years developing machine-learning technology that can identify risky business partners and potentially illegal payments. The analytics platform, BrewRight, draws on data from operations in more than 50 countries, allowing the company to proactively monitor legal risks and prevent violations, rather than investigating problems after they arise.