The week in GRC: ADP faces activist pressure and Senate approves new CFTC commissioners

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

– Douglas Flint, who has been at HSBC for 22 years and chair of the firm for the last six, used his final statement at the bank to call for the rules designed since the financial crisis to be implemented globally, and also warned on the impact of Brexit on Europe’s financial markets, the Guardian said. A divergence in regulation runs the risk of ‘skewing’ financial market activity to a point where the rules are less onerous, while the discussions over the UK’s departure from the EU will be ‘complex and time-consuming,’ he said.

‘The essential questions that have to be addressed are whether, at the conclusion of the negotiations, the economies of Europe will continue to have access to at least the same amount of financing capacity and related risk-management services, and as readily available and similarly priced, as they have enjoyed with the UK as part of the EU,’ he said.

– The Financial Times reported that, according to a new study, although banks have been encouraged since the financial crisis to hire more independent directors, they have had no impact on institutions’ risk-taking. Academics from Leeds University examined the boards and financial performance of more than 260 banks across the globe from 2004 and 2014. They found that banks had an identical risk of failure and risk of major losses regardless of the proportion of independent directors on their board. 

‘Governance at large banks, especially board information, seems to be of minor importance,’ said the report’s author Francesco Vallascas. ‘The key impact [of the findings] is that we need to rely primarily on the role of regulation rather than the role of governance.’ 

The Wall Street Journal reported that a quartet of activist investors has lined up to pounce on plans to break up DowDuPont, which will be created by merging Dow Chemical and DuPont. Jana Partners and Trian Fund Management have privately levied concerns about how the merged company might be divided, according to people familiar with the matter, joining previous criticism from Glenview Capital Management and Third Point.

Since the merger announcement in December 2015, the plan was to combine the two firms and then break the combined entity into three. The investors have voiced a view that the materials company expected to emerge from the breakup – the new version of Dow Chemical – needs to shrink. Dow CEO Andrew Liveris said the next iteration of the company will be poised for growth and innovation.

Bloomberg reported that, according to people familiar with the matter, Wall Street regulators have agreed to rewrite the Volcker Rule, moving to loosen restrictions that were a key part of the US response to the financial crisis. The five agencies that wrote the original limits on banks investing with their own capital have decided to begin working together on a revision, the people said. The agencies can revise the rule’s text but, unless it is repealed, there’s only so much that can be done in response to years of lobbying by large financial services firms.

‘We had a thorough and constructive dialogue on the Volcker Rule last week,’ Treasury Secretary Steven Mnuchin said when asked about the agreement. ‘During the discussion, the [Financial Stability Oversight Council (FSOC)] member agencies shared many good ideas on how the Volcker Rule could be improved. I look forward to continuing to work with our banking and market regulators on modifying the rule.’ Spokespeople with the five regulators declined to comment.

– According to the FT, 23 countries submitted applications to host the European Medicines Agency (EMA) or European Banking Authority (EBA), which have until now been based in London but must relocate because of Brexit. The bigger prize of the EMA will be contested by 19 cities, while eight will fight it out for the EBA. Four months of lobbying will now start ahead of the expected decision in November.

– In other Brexit news, the FT said that, according to consultants Oliver Wyman, leaving the EU will push up costs for banks by as much as 4 percent and their capital requirements will rise by up to 30 percent. Stuart Gulliver, chief executive of HSBC, said $1 billion of revenue in its global banking and markets unit would be put ‘at risk’ from Brexit. But he said the bank planned to protect this revenue by moving up to 1,000 of its 6,000 UK investment banking jobs to France.

The pace of announcements about banks’ Brexit plans has picked up in recent weeks, partly because of pressure from the Bank of England for them to submit their plans for coping with the ‘worst-case scenario’ of a so-called ‘hard Brexit’ that would sever access to EU clients. The UK is set to leave the EU in March 2019.

– A new rule aimed at restoring consumers’ ability to band together to sue financial services firms has survived its first challenge, according to Reuters. The Consumer Financial Protection Bureau’s (CFPB) rule abolishing mandatory arbitration clauses was released on July 10, and was immediately threatened by Republicans in Congress and the Trump administration.

Acting US Comptroller of the Currency Keith Noreika publicly argued with CFPB director Richard Cordray over whether the rule could endanger the banking system. Many observers had expected Noreika to ask colleagues on the FSOC to stay the rule but he said he was unable to complete a thorough review of the rule in time to make a petition. The CFPB declined to comment.

– S&P Dow Jones Indices took a stand against public companies with multiple classes of shares, saying it would bar newcomers with such setups from its flagship index, the S&P 500, according to the WSJ. The move came as other major index companies, including FTSE Russell and MSCI, are evaluating similar changes to assuage concerns about investors getting limited or no voting rights. The issue is that increasingly popular index funds are otherwise forced to buy stakes in companies that leave investors with little say in corporate decisions. The ruling effectively pits two trends against each other: the move toward multiple-class voting in corporate governance and the increased popularity of index investing.

– The Securities Investor Protection Corporation (SIPC) and Financial Industry Regulatory Authority (Finra) announced a services agreement designed to ease reporting burdens and compliance costs for member broker-dealers. The new, simplified filing process will also reduce inconsistent or incomplete filing of annual audited financial statements and supplementary reports. Effective September 1, firms that now file annual reports separately with SIPC and Finra will file just once, using Finra’s existing reporting portal. The portal will provide both agencies with the information, enabling the firms to meet the two agencies’ respective reporting requirements with a single filing. 

Reuters reported that the Delaware Supreme Court reversed a lower court ruling that payday lender DFC Global was sold too cheaply in 2014, but stopped short of declaring that the deal price should be a key test of fair value of a stock in a merger. The ruling stems from a so-called ‘appraisal action’ – which has become a popular strategy for hedge funds to try to get more cash from a merger deal – over the sale of DFC Global to Lone Star Funds. The deal was approved by DFC shareholders, but the funds went to court.

The Delaware Supreme Court sent the case back to the Court of Chancery and directed chancellor Andre Bouchard to reassess his finding and explain why he did not accept the deal price as fair value. Lone Star Funds declined to comment and a lawyer for the hedge funds did not respond to a request for comment.

– According to the WSJ, Irene Rosenfeld is stepping down after 11 years as CEO of Mondelez International, as the snack food company faces pressure to improve sales and profitability amid an upheaval in the packaged food business. ‘In hindsight I think perhaps we could have gone after the costs a little faster,’ Rosenfeld said. ‘My regret is that we haven’t fully realized the potential on the top line.’

Dirk Van de Put, head of Canada’s privately held McCain Foods, will take over from Rosenfeld in November. She will continue as chair of the Mondelez board until she retires in March. Rosenfeld’s retirement will shrink an already small pool of female CEOs of the biggest US businesses: as of June, women held just 28 of the CEO spots at S&P 500 companies, according to Catalyst.

– The SEC promoted Donna Esau to the position of associate regional director for examinations in the agency’s Atlanta office. Esau will direct a staff of roughly 40 accountants, examiners and attorneys responsible for the examination of broker-dealers, investment companies, investment advisers and transfer agents across Alabama, Georgia, North Carolina, South Carolina and Tennessee. She will assume her new post on August 6.

– Avon Products said CEO Sheri McCoy will resign in March, as the company grapples with results and pressure from activist investors to accelerate its turnaround plan, according to the WSJ. The move highlights a recent shift by activists, which are increasingly targeting CEOs as they seek new ways to boost the shares of targets. Avon said it has retained executive search firm Heidrick & Struggles to help find a successor to McCoy.

The Telegraph said London Stock Exchange CEO Xavier Rolet defended plans to change UK listing rules in order to attract state-controlled companies such as Saudi Aramco onto the exchange. Proposals from the Financial Conduct Authority to tweak the initial public offering rules for state-controlled companies have stirred debate. The Institute of Directors and the UK’s investor community have already attacked plans, but Rolet hit back at critics by arguing that the country needs to ‘keep up with the times’.

– Automatic Data Processing (ADP) said activist investor and hedge fund manager Bill Ackman is seeking to take half of the company’s board seats and replace CEO Carlos Rodriguez, the WSJreported. ADP said its board unanimously rejected the ‘last-minute’ request, as the deadline for board nominees has been public for nearly a year.

ADP also argued that its shareholder return under Rodriguez’s tenure as CEO has been stronger than Ackman’s performance at Pershing Square and that no executive changes are needed. ‘We believe our current board has an effective balance of leadership continuity and fresh perspectives’ that will help continue delivering value to shareholders, the company said.

Reuters reported that the US Senate voted to confirm two Republicans and one Democrat to serve on the Commodity Futures Trading Commission (CFTC). The Senate approved the nominations of Republican Christopher Giancarlo to serve as agency chair, as well as Republican Brian Quintenz and Democrat Rostin Behnam to serve as commissioners. The Senate did not vote to confirm another Republican nominee, Dawn Stump.

A Senate Democrat aide said Stump was not on the slate of nominees because the party did not want to approve a total of three Republican commissioners and only one Democrat. That would leave the CFTC with just one Democrat commissioner because the other one, Sharon Bowen, announced recently that she planned to step down soon.

– In other appointments news, the Federal Energy Regulatory Commission can get back to approving multi-billion-dollar natural gas pipelines after the Senate moved to fill two of four vacancies at the agency, Bloomberg said. Senators confirmed the appointment to the commission of Robert Powelson, former chair of the Pennsylvania Public Utility Commission, and Neil Chatterjee, a senior aide to Senate majority leader Mitch McConnell.


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