The week in GRC: DoJ appeals AT&T-Time Warner deal approval, and PCAOB to assess ‘going concern’ statements
– Bloomberg reported that Starbucks said it plans to eliminate single-use plastic straws from its more than 28,000 coffeehouses globally by the end of the decade – a move that comes as plastic waste has come under fire, particularly for contributing to ocean pollution and harming birds and sea mammals. Last month, a group of 25 investors managing more than $1 trillion in assets demanded that companies including Nestlé and PepsiCo reduce their use of plastic packaging.
A proposal asking Starbucks to issue a report on its global plastic footprint was rejected at the company’s annual shareholder meeting in March. But Starbucks says it’s the largest food and beverage retailer to make a commitment to end plastic-straw use.
– According to The Wall Street Journal, US companies are buying back record amounts of stock in 2018, but their shares are not being lifted to the degree expected. S&P 500 companies are on track to repurchase as much as $800 billion in stock this year, but 57 percent of the more than 350 companies in the S&P 500 that have bought back shares so far this year are trailing the index’s 3.2 percent increase. That is the highest percentage of companies to fall short of the benchmark’s gain since the start of the financial crisis in 2008, according to a WSJ analysis.
The historic spending on share buybacks has some analysts concerned that companies are buying their shares at excessive valuations during the peak of the economic cycle and at a time when the market rally is nine years old. Others warn that the money could have been spent on capital improvements that could lead to stronger long-term growth.
– The Financial Times reported that a £200 million ($265 million) share sale by TalkTalk and the position of chair Charles Dunstone will come under scrutiny at the company’s annual meeting this month following warnings from the UK’s Investment Association (IA) and ISS.
The IA issued a ‘red-top’ warning for the broadband provider to highlight its share sale as a significant issue when deciding whether to re-elect directors. ISS separately urged investors to vote against the re-election of Dunstone and three other directors because of governance concerns and the share raise.
A TalkTalk spokesperson said: ‘Cash-box placings are a recognized means of raising capital and the regulations, which were updated in 2017, allow for companies to raise up to 20 percent of their value in this way.’
– The WSJ reported that Uber Technologies has hired Scott Schools, a former top official at the US Department of Justice (DoJ), to be its first chief compliance officer. Schools stepped down recently as the department’s highest-ranking career official and a close adviser to Deputy Attorney General Rod Rosenstein.
Uber has made a number of high-level appointments since CEO Dara Khosrowshahi joined last September, including operations chief Barney Harford and general counsel Tony West, to whom Schools will report. ‘Scott has provided invaluable leadership and counsel in his years at the department, and his service is an example to all,’ Attorney General Jeff Sessions said.
– The New York Times looked at what Brett Kavanaugh, President Donald Trump’s pick to join the US Supreme Court, might mean for business. It noted that in recent rulings, Kavanaugh favored reining in the Environmental Protection Agency’s efforts to cut carbon emissions, on the basis that Congress, not the courts, should set such rules. He also wrote a 2016 opinion, later overruled, declaring the Consumer Financial Protection Bureau’s structure to be ‘unconstitutional.'
– The WSJ reported that Deutsche Bank has hired one of its top shareholders, private equity firm Cerberus Capital Management, as a paid adviser to help the bank tackle costs and boost profits. As a private equity investor, Cerberus often provides advice for a fee to its portfolio companies. The arrangement with publicly traded Deutsche Bank makes Cerberus the only Deutsche Bank shareholder in a paid advisory role, formally bringing a firm with skin in the game inside the bank’s operations, according to people familiar with the matter.
A Cerberus spokesperson said the advisory contract is with Deutsche Bank’s management board, citing the private equity firm’s ‘extensive track record of driving value through financial and operating improvements.’
– The US Department of the Treasury released the final version of regulations designed to limit US companies’ ability to engage in so-called inversion transactions that put their tax addresses abroad, the WSJ reported. In an inversion, a US company takes a foreign address, typically through a merger with a smaller firm. The combined company could then lower its tax rates by using internal borrowing and can more easily move non-US profits around the world and back to shareholders while avoiding US taxes.
– According to the FT, the Public Company Accounting Oversight Board (PCAOB) has vowed to examine whether market intervention is necessary to strengthen investor confidence in auditors’ ‘going concern’ statements, which indicate whether a company is viable for the next 12 months.
Going-concern opinions are made by directors and signed off by auditors. The PCAOB said it would launch a project to evaluate ‘whether there is a need for regulatory action… in light of concerns from investors about the effectiveness of auditor going-concern reporting.’ The PCAOB said it would consider whether to change its standards around going-concern evaluations, which currently require an auditor to raise its worries if it has ‘substantial doubt’ about a company’s ability to survive.
– Bloomberg reported that UK Prime Minister Theresa May proposed a looser partnership with the EU in the financial services industry, dropping demands for UK-based banks to retain easy access to the bloc. May now accepts that a version of the third-party agreements the EU has with outside countries is the best deal possible, according to a government white paper on Brexit. As a result, UK-based banks would lose unrestrained access to EU markets. Although the document suggested how a deeper version of regulatory equivalence could be achieved with treaty-based processes, it received a scathing response from London’s financial community.
– According to Reuters, the top shareholder of Italy’s Banca Carige said he intended to resign from the board, amid the bank seeking to restructure and fix corporate governance issues. Vittorio Malacalza, who owns more than 20 percent of the bank, said recent resignations of other board members had influenced his decision to quit. Chair Giuseppe Tesauro and two board members resigned in recent weeks due to a row over the running of the bank.
Malacalza said he tendered his resignation on Wednesday but would formalize the step and explain his reasons at a later date. He added that he remained ‘committed to Banca Carige, fully confident of its potential to consolidate and relaunch thanks to the recent efforts of shareholders.’
– One of Unilever’s biggest shareholders warned of the forced selling of the company’s shares as unrest grows among UK investors over the decision to move its headquarters to the Netherlands, the FT reported. The company has tried to woo investors through a series of meetings ahead of a vote on abandoning the company’s Anglo-Dutch structure. Nick Train, joint founder of Lindsell Train, a top-five shareholder with a 2.5 percent Unilever stake, urged holders of Unilever’s UK-listed stock to ‘give serious consideration over the summer as to whether the proposal is in their interest.’
Train warned of possible ‘inconveniences and increased risks for our clients’ linked to the move, including the ‘likelihood we will become forced sellers of the shares for some of our clients at a time and a price not of our choosing.’
Unilever said: ‘Unilever will remain listed in London and, as we continue to engage extensively with our investors and shareholders, we remain very confident of the outcome of the vote on simplification.’
– The WSJ reported that AT&T CEO Randall Stephenson said his company won’t change its plans for running Time Warner’s media assets despite the DoJ appealing the court decision that allowed the transaction to go forward. ‘We think the likelihood of this thing being reversed or overturned is really remote,’ Stephenson said. ‘The merger is closed. We own Time Warner.’
The department started the appeals process in a two-page court filing late Thursday, a move that will send the case to the DC Circuit Court of Appeals. US district court judge Richard Leon ruled against the government in June, writing in a strongly worded opinion that the department had failed to prove the combination of AT&T’s television distribution system and Time Warner’s cable channels would drive up pay-TV prices.
– According to the FT, two of the UK’s largest fund platforms are looking at introducing electronic systems that help DIY investors exercise their shareholder rights, in a move backing shareholder democracy following a series of high-profile corporate governance rows.
Investors in the DIY investment market do not legally own their shares, meaning they have no automatic voting rights and often rely on cumbersome voting processes involving paper forms and telephone conversations. Hargreaves Lansdown and Charles Stanley are both exploring the move, with Charles Stanley set to launch a digital system to allow customers to vote on corporate decisions such as takeovers and tender offers within 12 months.
– Global regulators made a co-ordinated effort to press banks and traders to speed up the transition away from using the London interbank offered rate (Libor), the WSJ reported. In meetings and speeches around the world, regulators urged banks to stop launching new contracts that reference Libor, and to come up with a plan for legacy contracts that will expire after the agreed-on transition date away from Libor at the end of 2021.
The move will not be easy. Libor is used to set rates for hundreds of trillions of dollars of derivatives and other borrowings, including loans to consumers, companies and governments.