The week in GRC: Wells Fargo issues internal probe report and Arconic says board change vote could trigger $500 million payment

This week’s governance, compliance and risk-managementstories from around the web

– Wells Fargo’s board said it had clawed back an additional $75 million of pay from two former executives it holds largely responsible for sales practice problems, the Wall Street Journal reported. According to a 113-page report by a board committee, directors of the bank decided to hold back more pay than disclosed last year from former CEO John Stumpf and former retail bank leader Carrie Tolstedt.

The board ‘should have been more forceful in pushing Stumpf to change leadership,’ the committee concluded. Neither Stumpf nor Tolstedt could be reached for comment. The report, which was approved by all the board’s independent directors, didn’t call for any other top-level clawbacks or terminations.

– The Financial Times reported that Barclays CEO Jes Staley is facing potential sanctions from UK regulators and a ‘very significant’ pay cut for trying to uncover the identity of an internal whistleblower. Staley is being investigated by the Financial Conduct Authority and the Bank of England’s Prudential Regulation Authority for allegedly breaking rules surrounding the treatment of whistleblowers, the bank said. Barclays’ policies for handling whistleblowing are also being investigated.

An external investigation commissioned by Barclays’ board has already concluded that Staley acted ‘honestly but mistakenly’ in trying to identify the whistleblower last year, and the board has vowed to cut his pay package, the bank said. ‘I am personally very disappointed and apologetic that this situation has occurred, particularly as we strive to operate to the highest possible ethical standards,’ said Barclays chair John McFarlane.

Staley said: ‘I have apologized to the Barclays board, and accepted its conclusion that my personal actions in this matter were errors on my part. I will also accept whatever sanction it deems appropriate.’

– Mondelēz International is preparing to look for a successor to CEO Irene Rosenfeld, as the snack company faces pressure from shareholders and a shift to healthier eating habits, according to the WSJ. The maker of Oreo cookies, Trident gum and Ritz crackers has retained executive search firm Heidrick & Struggles International, and its board recently discussed external candidates, according to people familiar with the matter.

Heidrick & Struggles hasn’t yet been asked to interview prospects, and succession timing is up to Rosenfeld, some of the people said. Rosenfeld said in an interview in late February that she had no current plans to leave her post. She noted that Mondelēz had no mandatory retirement age and said she was focused on running the company and doing what was best for shareholders. A spokesperson said: ‘We have succession plans in place for all executives. That’s simply good corporate governance.’

– An auditor at BDO USA secretly taped conversations with colleagues about the firm’s audit of insurer AmTrust Financial Services, the WSJ reported. The auditor was taping on behalf of the FBI and co-operating as a whistleblower with the SEC. The clandestine recordings in 2014 were part of a continuing investigation being led by the SEC, according to people familiar with the matter. The focus of the probe includes accounting practices of AmTrust.

The agency sometimes closes investigations without taking action. An AmTrust spokesperson declined to comment on whether the company knows of any SEC probe, saying the company didn’t speak for the agency but that questions about AmTrust’s accounting practices are ‘fantasies concocted and intentionally publicized by parties who clearly have a self-serving agenda and appear to be trying to profit from misinformation about AmTrust.’ BDO declined to comment on AmTrust, saying it is ‘bound by professional standards that prohibit discussing confidential client matters.’

Reuters said an internal investigation into Wells Fargo’s sales practices found no evidence the bank had retaliated against employees who came forward with concerns, despite earlier media reports and lawsuits from ex-employees that claimed otherwise. The internal report commissioned by Wells Fargo’s board and prepared by Shearman & Sterling said there was no systematic retaliation against employees who spoke out about the sales practices.

‘Based on a limited review completed to date, Shearman & Sterling has not identified a pattern of retaliation against community bank employees who complained about sales pressures or practices,’ a footnote in the report stated.

– Michael Ducker, CEO of FedEx Freight, called for aviation-style federal rules to govern autonomous trucking in the US, at a time when the regulatory future of self-driving trucks is still undecided, the FT said. Ducker said it was regulation and social acceptance, not technological barriers, that would determine how soon self-driving technology became widely adopted in US trucking. 

– The Financial Industry Regulatory Authority (Finra) said the National Adjudicatory Council (NAC) had revised its sanction guidelines to include a new principal consideration that contemplates coverage for financial exploitation of vulnerable individuals or individuals with diminished capacity. It also includes three new guidelines relating to systemic supervisory failures, borrowing and lending arrangements and short-interest reporting. In addition, the NAC revised the guidance concerning sanctions imposed by other regulators, indicating that these sanctions may be considered as mitigating factors.

– KPMG said five partners, including Scott Marcello, the head of its audit practice, were fired after the accounting firm improperly obtained information about which audits the PCAOB planned to inspect, according to the WSJ. Marcello did not respond to requests for comment. The firm said it also dismissed a sixth employee, whose identity and role could not be learned. KPMG says it told both the accounting board and the SEC, which oversees the board, about the leak as soon as it was discovered.

‘KPMG has zero tolerance for such unethical behavior,’ said Lynne Doughtie, the firm’s chairman and CEO. ‘KPMG is committed to the highest standards of professionalism, integrity and quality, and we are dedicated to the capital markets we serve. We are taking additional steps to ensure such a situation should not happen again.’ A spokesperson for the PCAOB said it has taken steps to ‘maintain and reinforce the integrity of its inspection process’ since discovering the leak.

– According to Bloomberg, Bank of England governor Mark Carney said the financial crisis showed why regulators and the banking industry must stay on top of the rapid developments in financial technology (fintech) so that the system is solid enough to withstand shocks. Carney said the ‘hard and soft infrastructure of the financial system failed to keep pace’ with innovation in the buildup to the 2008 crash.

‘Light touch regulation, outmoded codes of market conduct, inadequate settlement and clearing infrastructure all contributed’ to the crisis a decade ago, he noted. ‘We can draw on these experiences to help ensure fintech boosts growth and promotes financial stability.’

The New York Times reported that hedge fund firm Elliott Management said it would seek to replace the chairman of AkzoNobel in a fight over whether the company should discuss a takeover with its US rival, PPG Industries. AkzoNobel twice rejected takeover offers from PPG last month and has declined further discussions.

Elliott Management has been pressuring the Dutch company over a merger since the first approach became public. AkzoNobel said it had been informed that an Elliott-led group of shareholders planned to seek a special meeting to replace AkzoNobel’s chairman, Antony Burgmans. Elliott separately confirmed it had made the request. AkzoNobel said it would formally respond in 14 days as required under Dutch law.

‘The view of the supervisory board is that the removal of Mr Burgmans would be irresponsible, disproportionate, damaging and not in the best interest of the company, its shareholders and other stakeholders,’ AkzoNobel said. ‘Therefore the proposed agenda item to remove Mr Burgmans will be rejected.’

– The WSJ said that, according to people familiar with the matter, top Wells Fargo shareholder Berkshire Hathaway is likely to vote in support of the bank’s directors at a shareholder meeting later this month. Warren Buffett, Berkshire’s chairman and CEO, has long been a supporter of the bank and largely kept quiet as allegations about its sales practices emerged in the fall. It wasn’t known whether Berkshire had cast its votes and it is still possible the company could decide to oppose certain Wells Fargo directors. The bank’s annual shareholder meeting is April 25.

A Wells Fargo spokesman declined to comment on the likely Berkshire vote. Earlier, the company said the bank appreciates ‘the confidence that Berkshire Hathaway has placed in Wells Fargo over the years, both as our largest shareholder and a very valued customer.’

– The FT reported that a powerful group of investors called for stronger boardroom controls at Tesla to limit the influence of CEO Elon Musk and prevent ‘groupthink.’ The changes should include the appointment of two new directors with no ties to Musk, along with a requirement that all directors stand for re-election every year, according to a letter sent to Tesla by five investment groups including the California State Teachers’ Retirement Fund and Hermes Equity Ownership Services.

In response, Tesla said: ‘We regularly engage with our shareholders and value their feedback. We are actively engaged in a search process for independent board members,’ adding that it expects to announce additions ‘fairly soon.’

Finra requested feedback on its rules governing the participation of broker-dealers in capital raising, as part of efforts to modernize its regulation of those activities. The request was one of three regulatory notices Finra issued on Wednesday related to the capital formation process, with the others seeking comment on proposed amendments to rules for underwriting arrangements and a proposed safe harbor from equity and debt research rules for desk commentary.

– The FT said the largest US banks are defying calls to break themselves up, arguing that the benefits of size and diversity were evident during a very mixed set of first-quarter results. During calls with analysts, several executives reacted to recent talk from the Trump administration about restoring some kind of modern-day Glass-Steagall Act, which would in theory slice certain banks in two. Banks have long argued that splits would lead to billions of dollars of lost cost synergies, impairing their ability to invest through different business cycles, while shrinking the excess capital available to shareholders.

Reuters reported that, according to people familiar with the matter, Bharat Ramamurti, a legislative aide for Senator Elizabeth Warren, D-Massachusetts, is a contender for one of the vacancies on the SEC. Ramamurti is senior counsel to Warren on banking and economic policy and she is staunchly backing him for the SEC job, one of the people said. Ramamurti declined to comment. A spokesperson for the White House declined to comment.

– Arconic said a vote to change its board could trigger a $500 million payment to a corporate trust, according to the WSJ. The aerospace and automotive parts maker said in a regulatory filing that the election of Elliott Management-backed directors could count as a ‘change-in-control,’ which would require the company to pay down $500 million it owes to a trust that holds deferred compensation and retirement benefits.

Arconic said it hasn’t made a final determination if an Elliott win would trigger the payment. Elliott called Arconic’s disclosure an ‘act of desperation’ ahead of the May 16 vote.


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