The week in GRC: LGIM to press for ethnic diversity on boards, and companies facing new compliance risks amid pandemic
– According to Reuters, a victory for Joe Biden in the US presidential election would signal the end of a period during which the banking industry has enjoyed more than $40 billion in regulatory cuts. But the industry is likely to keep many of these wins as Democrats prioritize more pandemic aid, healthcare, tax reform and financial rules that address racial injustice, environmental and inequality issues rather than attacking banks, said lobbyists and policy experts in Democratic circles.
‘A hypothetical Biden administration will be confronting an economy mired in Covid-19, an unsustainable climate policy [and] a healthcare system whose flaws were exposed by the disease,’ said Aaron Klein, a former US Department of the Treasury official during the financial crisis. ‘This is not 2009 where the stability and soundness of the financial system is the top priority for restoring the economy and a semblance of normalcy.’
– The Wall Street Journal reported that many large law firms have had an excellent 2020 financially, even as some clients in sectors ranging from hospitality to retail have suffered. The top firms say they are on track for a record year, thanks to busy practice areas such as restructuring and public-offerings work. Company leaders and consultants attribute the stability to attorneys’ ability to easily work from home, business that comes from a range of industries and practice areas, and a major cut in travel expenses.
At 125 firms surveyed by Wells Fargo Private Bank’s legal specialty group, revenue rose by an average of 6.4 percent in the first half of the year, compared with a year earlier. With demand roughly the same as last year, according to Wells Fargo, the boost stemmed from annual increases in hourly rates and momentum from a lucrative 2019.
– CNN said that despite uncertainty about the trajectory of the Covid-19 pandemic, companies are moving ahead with an unprecedented number of big M&A transactions. Thirty-seven deals worth $5 billion or more, totaling $496 billion, were announced between July and September, according to Refinitiv. By both deal count and deal value, that’s the best third quarter since records began in the 1970s. September was the busiest month of the period, seeing a 107 percent increase over the same month in 2019.
Deal-making slowed in the spring as nervous boards sought to conserve cash and shore up their balance sheets. But as initial lockdowns ended over the summer, companies grew more assured about where they stood, said Guillermo Baygual, co-head of M&A for Europe, the Middle East and Africa at JPMorgan Chase. ‘Management boards are seeing a level of activity that can give them confidence as to where they are going to land,’ he said.
– Reuters reported that US district judge Henry Morgan in Norfolk, Virginia, ordered Cisco Systems to pay $1.9 billion to a Virginia company that accused it of copying its cyber-security patents. Morgan concluded after a month-long non-jury trial that Cisco infringed four patents belonging to Centripetal Networks. He found no infringement of a fifth patent. Morgan said the case was ‘not a close call,’ citing inconsistencies in Cisco’s evidence and that its own technical documents, many of which Centripetal itself introduced at trial, ‘proved Centripetal’s case.’
Cisco said it was disappointed with the decision ‘given the substantial evidence of non-infringement [and] invalidity, and that Cisco’s innovations predate the patents by many years.’ The company plans to appeal.
– According to Bloomberg, Legal & General Group’s investment arm will vote against certain senior appointments at FTSE 100 and S&P 500 companies if they fail to include ethnic minorities on their boards. The asset manager wants to see at least one black, Asian or other ethnic minority on the board at major UK and US firms by January 2022, a newsletter from Legal & General Investment Management (LGIM) stated. If there isn’t any such representation, the firm will vote against appointments to chair the board and nomination committee.
‘The horrifying killing of George Floyd and so many others has led many institutional investors to think much more seriously about structural racism and inequality,’ LGIM wrote. ‘We believe asset managers must go further. Now is the time for action.’
– The WSJ reported that some US business groups are pushing back against a White House directive to limit racial-sensitivity training, which has caused confusion for some companies with federal contracts. Trade groups representing pharmaceutical, technology and advertising companies have issued statements protesting President Donald Trump’s executive order, which they say attacks free speech and undermines workplace equity. As they try to understand the directive, some companies are putting diversity training on hold, while several federal agencies have canceled scheduled events.
The executive order prohibits federal agencies, companies with federal contracts and recipients of federal grants from participating in training that ‘promotes race or sex-stereotyping or scapegoating.’ The Trump administration threatens to suspend or cancel federal contracts with companies that violate the order.
– According to Reuters, General Electric (GE) said it has received a Wells notice from the SEC warning that the company may face a civil action for possible violations of securities laws related to accounting practices for some of its insurance holdings. In a regulatory filing, the company said the issues the SEC could pursue relate to GE’s run-off insurance operations.
GE said the Wells notice is neither a formal allegation nor a finding of wrongdoing. ‘GE has fully co-operated with the SEC’s investigation related to past reserve practices at our run-off insurance subsidiary, as we have disclosed since 2018,’ a company spokesperson said. ‘We strongly disagree with the recommendation of the SEC staff and will provide a response through the Wells notice process.’
– The UK’s Financial Reporting Council (FRC) said some of the country’s largest companies limited shareholders’ ability to ask questions during their virtual AGMs, the WSJ reported. The FRC reviewed roughly 200 AGMs that were held remotely because of the coronavirus pandemic. It found that for 30 of those meetings, companies made no arrangements for investors to pose questions to the board before or during the event.
Around 80 percent of companies listed on the FTSE 350 conducted closed meetings, in which all shareholders had to vote on proposals and motions in advance, the FRC said. Of those companies, 81.6 percent made some arrangements allowing investors to ask questions of board members. This was mainly facilitated through questions emailed ahead of the event.
In its report, the FRC advised companies to make efforts to make sure shareholders have the ability to vote after presentations from the board. It said companies should also increase the use of technology to facilitate interaction with shareholders during virtual AGMs.
– Citigroup agreed to pay a $400 million penalty and draw up a sweeping remediation plan after the Federal Reserve and Office of the Comptroller of the Currency (OCC) identified what they called ‘several long-standing deficiencies’ and operational lapses, Reuters reported. The regulators said the bank required ‘comprehensive corrective actions’ and must overhaul its risk management, data governance and internal controls across the company.
‘For several years, the bank has failed to implement and maintain an enterprise-wide risk-management and compliance risk-management program, internal controls or a data-governance program commensurate with the bank’s size, complexity and risk profile,’ the OCC said in its consent order.
In a statement, Citi said it was disappointed to have fallen short of regulatory expectations and has ‘significant remediation projects’ under way.
– The WSJ said that, according to a survey, companies are facing new and increased compliance risks at a time when the Covid-19 pandemic has made many compliance programs less effective. Ninety percent of companies say they have experienced new risks or that existing risks have been exacerbated by the coronavirus, the WSJ survey of compliance professionals found. Almost half of respondents reported both, and one in four said compliance programs have taken a hit during the pandemic.
The pandemic has created new challenges that have forced compliance officers to vet new suppliers and revamp internal safeguards. Disruptions such as travel restrictions and remote working have complicated internal investigations and increased exposure to cyber-attacks.
– Reuters reported that IBM is splitting itself into two public companies, following a years-long effort by the company to diversify away from its legacy businesses to focus on high-margin cloud computing. IBM will list its IT infrastructure services unit, which provides services including technical support for data centers, as a separate company with a new name by the end of 2021.
‘We divested networking back in the 1990s, we divested PCs back in the 2000s [and] we divested semiconductors about five years ago because all of them didn’t necessarily play into the integrated value proposition,’ said CEO Arvind Krishna. The company has shifted focus to cloud growth in recent years.
– Wells Fargo & Co said its diversity initiatives comply with federal employment laws after it received a letter from the US Department of Labor (DoL) questioning whether the steps were unlawful or discriminatory, Reuters reported. The WSJ has reported that the DoL is probing companies with federal contracts that have specific goals to increase diversity.
The department’s Office of Federal Contract Compliance Programs has sent a letter to Wells Fargo, a company spokesperson said. ‘Wells Fargo is committed and taking action to become a more diverse and inclusive company. Numerous efforts are underway to implement changes at all levels of the company, and we are confident they comply with US employment laws,’ the spokesperson said.