The week in GRC: SEC sees surge in tips, and investors continue moving into ESG funds

May 15, 2020
This week’s governance, compliance and risk-management stories from around the web

Bloomberg reported that the Japanese government gave details of a range of companies that will be subject to new rules restricting foreign investment as it seeks to protect from foreign state interference any industries it says are core to national security.

The Foreign Exchange and Foreign Trade Act requires some foreign investors to report in advance when they plan to buy a more than 1 percent stake in the designated firms, down from a previous threshold of 10 percent. The steps add restrictions to investments in more than half the listed companies in the country, although blanket exemptions apply for registered investors, including most financial and asset management firms.

– Also in Japan, the country’s central bank appointed its first female executive director in 138 years, according to CNN. Tokiko Shimizu was appointed as part of a sweeping reshuffle at the Bank of Japan, becoming one of a team of six executives responsible for running the central bank’s daily operations. Shimizu started working for the Bank of Japan in 1987. Women make up 47 percent of the central bank’s workforce but only 13 percent of senior managerial posts and just 20 percent of expert positions dealing with legal affairs, payment systems and bank notes, according to the bank’s own data.

According to 2018 World Bank data, the country is ranked 121 out of 153 countries in the World Economic Forum’s latest Global Gender Gap Report.

The Wall Street Journal said ESG funds have been a rare bright spot in this year’s market chaos, suggesting that they are more than a trend for a bull market. Investors added a record of at least $12.2 billion to ESG funds in the first four months of 2020, according to Morningstar Direct. That is more than double the amount ESG funds drew during the same period last year.

More than 70 percent of ESG funds across all asset classes performed better than their counterparts during the first four months of the year, according to Morningstar Direct data. ‘This crisis has shown that ESG investing is here to stay – ESG is not a fad,’ said George Serafeim, a Harvard Business School professor who has studied sustainable investing. ‘People are looking for resilience. They are looking for companies that are able to weather the short-term storm and are positioning the business for long-term success.’

– The Members Exchange (MEMX) said BlackRock was among its latest financial and strategic backers as the new bourse prepares to challenge the NYSE and Nasdaq with a third-quarter launch, Reuters reported. MEMX said Wells Fargo, Flow Traders, Manikay Partners and Williams Trading also took part in its recent $65 million financing round.

BlackRock will take a seat on the board of directors of the new stock exchange, which has raised $135 million since it was founded in January 2019. MEMX said it will offer lower fees than the existing exchanges as well as fewer, less complex order types and a basic market data feed. Other firms with board representation include Bank of America, Morgan Stanley, Citadel Securities, Charles Schwab, E*Trade Financial and TD Ameritrade.

Reuters reported that sandwich company Potbelly Corp pledged to reimburse activist shareholders’ expenses with stock rather than cash, in a move lawyers said was an outlier for now but one that could become more common in tough economic times. The two sides reached a settlement with two board seats going to the activist group led by Vann Avedisian while the company’s directors keep their jobs.

The settlement may be the first to repay expenses with stock, lawyers and industry analysts say. Potbelly was advised by law firm Sidley Austin while Cadwalader Wickersham & Taft represented the investors. Neither firm responded to requests for comment.

Reuters reported that Steven Peikin, co-director of the SEC’s enforcement division, said the agency has received a surge in tips, complaints and referrals and opened hundreds of new probes since mid-March despite being forced to work remotely due to the coronavirus pandemic.

The SEC has received more than 4,000 tips since mid-March, representing a 35 percent increase over the same period a year ago, Peikin said. During the same period, the SEC has opened hundreds of new investigations into violations of securities law, many related to Covid-19. ‘We can’t permit the crisis to be used as a cover for gamesmanship,’ Peikin said. The SEC has formed a ‘steering committee’ of roughly 24 leaders from across the agency to identify areas for misconduct related to coronavirus, he said.

– The WSJ noted that International Flavors & Fragrances (IFF), which makes colors, scents and tastes for many consumer goods, is facing the dual challenge of managing its business during the pandemic while also preparing to close a major deal. IFF in December reached a deal to merge with DuPont de Nemours’ nutrition business. The transaction is expected to close in the first quarter of 2021.

When the coronavirus pandemic began to unfold earlier this year and started to disrupt global supply chains, the company activated its contingency plan, adding it to its to-do list ahead of the planned merger. ‘It’s been strong – our response and our supply chain – but it’s stressed,’ said IFF CFO Rustom Jilla.

As IFF’s crisis-management plans have been kicked into gear, Andreas Fibig, the company’s chair and CEO, has been overseeing the DuPont integration, Jilla said. The company has received approvals from US regulators and is now focused on securing support from IFF shareholders in September, Fibig said.

CNBC reported that former Google CEO Eric Schmidt warned employers that creating fear and requiring employees to return to work amid the Covid-19 pandemic will not lead to productivity. ‘It’s never a good idea to force your employees under fear of losing their jobs to come to work,’ Schmidt said. ‘It just doesn’t produce the right outcome.’

As some states begin to ease coronavirus-related restrictions, employers are wondering when and if to bring employees back to work. Companies whose employees can work remotely, such as in technology and financial services industries, can extend work-from-home policies. But others in industries such as manufacturing will likely require people to be in the company’s workspace.

Schmidt was Google’s CEO from 2001 to 2011, before he transitioned to executive chair of Google and then Alphabet until 2018. He did not seek re-election to the board last year as his latest term came to an end.

– Equinor said its shareholders, dominated by the Norwegian government, rejected all climate resolutions at the oil firm’s AGM, according to Reuters.  One of the resolutions, proposed by Follow This, a group representing roughly 5,400 environment-minded shareholders in oil and gas companies, called for adjusting Equinor’s climate targets in line with the Paris Agreement on carbon dioxide. Proposals from other small investors included stopping oil exploration in vulnerable areas such as the Arctic Barents Sea, and spinning off the renewables business into a separate company.

Follow This founder Mark van Baal said the group’s proposal received backing of around 27 percent of total non-government votes, up from 12 percent in 2019, showing growing shareholder pressure on the company to shift away from fossil fuels to renewables. The company’s board had urged shareholders to reject the resolutions, saying Equinor’s strategy already supported ‘a balanced transition to low-carbon society.’

– US businesses are pressing lawmakers to shield companies from what they fear could be a wave of lawsuits by workers and consumers blaming them for being exposed to Covid-19. But Reuters reported that court records so far show few such cases have been filed and some legal experts say the threat of liability is overblown because of the difficulty of proving where someone was infected.

‘Those cases haven’t materialized and I doubt they will,’ said David Vladeck, who teaches civil procedure at the Georgetown University Law Center, at a Senate Judiciary Committee hearing on a liability shield for businesses. As of Wednesday, only 45 of 1,018 coronavirus-related lawsuits were personal injury or medical malpractice cases against a business, the areas of most concern for trade groups, based on a case tracker by law firm Hunton Andrews Kurth.

– According to the WSJ, the US State Department, US Treasury Department’s Office of Foreign Assets Control and US Coast Guard said the global maritime industry may need to develop procedures to avoid being exploited by alleged terrorists and other parties seeking to trade with countries subject to US sanctions. In a guidance advisory, the agencies noted that malign actors have been using a number of novel, deceptive tactics to enable maritime trade with countries such as Iran, North Korea and Syria.

Although the advisory is aimed at ship owners, brokers, port operators, insurance companies, financial institutions and others involved in maritime transportation, the agencies also encouraged parties engaged in trading energy and metals, including crude oil, refined petroleum, iron, copper and coal to review its guidance.

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