The week in GRC: Buffet and Dimon caution on quarterly earnings guidance, and Goldman uses war games for cyber-security
– The Financial Times noted that a series of corporate law decisions in Delaware courts in recent years has constrained the ways in which aggrieved shareholders stop M&A deals they are concerned about. Law conference panelists are now talking about boards of directors having become aware of this more permissive climate where their decision-making has less likelihood of being challenged by a judge. As such, boards are pushing the envelope when it comes to conflicted transactions terms and this is causing concern among some observers.
‘One of the things that would control boards was their counsel coming in and saying, If you do this you’re going to get enjoined by the Chancery Court or you’re going to open yourself up to damages. That threat is basically gone,’ said shareholder plaintiff attorney Stuart Grant. ‘The lawyers may try to push them back onto the reservation, but in the end the directors and management are smart people and they see what’s happened in Delaware and they say, Hey we’re willing to take the risk because the risk is dramatically reduced.’
– Bloomberg reported that former Goldman Sachs and Federal Bureau of Investigation lawyer Lisa Osofsky was named as the new head of the UK’s Serious Fraud Office (SFO) as the white-collar crime prosecutor looks beyond efforts by Prime Minister Theresa May to shut it down. Osofsky, who begins a five-year term at the SFO in September, once advised Goldman Sachs bankers and managers on anti-money laundering, fraud and regulatory risk.
May’s party last year said it wanted to subsume the SFO into the National Crime Agency police department, before poor election results weakened May too much for her to see it through. The next political challenge will be how the UK balances going after corporate criminals with a need for more post-Brexit investment.
‘I look forward to building on the SFO’s successful record in the fight against economic crime and leading an emboldened SFO to even greater heights,’ Osofsky said. She will join the SFO from global governance, risk and compliance firm Exiger.
– According to Bloomberg, Commonwealth Bank of Australia agreed to pay the biggest civil penalty in Australian corporate history after admitting to more than 53,000 money-laundering law breaches that were said to have allowed drug syndicates to funnel millions of dollars offshore.
The bank will pay A$700 million ($530 million) under the settlement. ‘While not deliberate, we fully appreciate the seriousness of the mistakes we made,’ said Matt Comyn – who took over as CEO in April – in a statement detailing the settlement. ‘Our agreement today is a clear acknowledgment of our failures and is an important step toward moving the bank forward. I apologize to the community for letting it down.’
– The WSJ reported that, according to a new report from Good Jobs First, banks and insurance companies paid out some of the largest settlements in the past decade in lawsuits alleging inadequate worker compensation. Lawsuits accusing companies of wage discrepancies are often filed by workers who allege managers expected them to do job tasks after they clocked out, or failed to pay employees when they worked during breaks.
‘Wage theft is associated most frequently with low-wage work and with jobs that are low on the occupational totem pole,’ said Phil Mattera, director of the Corporate Research Project at Good Jobs First and author of the report. But he also found cases that involved thousands of workers in high-paying jobs, including stockbrokers, financial advisers and pharmaceutical sales representatives.
– Starbucks said Howard Schultz will be stepping down as executive chair and member of the company’s board, effective June 26, The Washington Post reported. Schultz long ago became an outspoken figure on social issues such as immigration, LGBTQ issues and gun control, and his move has reignited speculation that he may be planning to run for political office. In an interview with The New York Times, Schultz reportedly acknowledged that he may consider public service.
– US chip company Qualcomm is in a stand-off with a group of bondholders after telling them it does not intend to compensate them for the delay to its $44 billion acquisition of NXP Semiconductors, according to the FT. When investors bought $2.75 billion of bonds issued last year to fund Qualcomm’s purchase of NXP, they expected the US company to buy back that debt at a 1 percent premium if it failed to complete its acquisition by June 1, based on a provision in the notes’ documents.
But with the deal still awaiting final approval in China, Qualcomm notified bondholders on May 31 that it plans to redeem the outstanding notes at par, rather than at a premium, according to a person familiar with the matter. The company pointed to another part of the offering documents, which it said allows it to buy back the debt at face value. Qualcomm declined to comment.
– The WSJ noted that the SEC approved a request from the mutual fund industry to allow email, rather than regular post, to be the default method for disseminating shareholder reports. The commission approved a rule that will allow funds to post the documents on websites and tell shareholders how to access them electronically.
The decision marks the end of a years-long battle over the semi-annual reports, which often run to more than 100 pages. An earlier SEC proposal sparked a backlash from the nation’s paper industry. Under the rule approved Monday, mutual funds would have to tell shareholders when new reports are available, and shareholders could still request to have them mailed to them.
– CNBC reported that Warren Buffett and Jamie Dimon have teamed up to call for an end to quarterly earnings guidance by companies. Dimon, who chairs the Business Roundtable, said the CEO group supports companies backing away from the practice.
Executives often feel pressure to make quarterly forecasts, but ‘it can put a company in a position where management from the CEO down feels obligated to deliver earnings and therefore may do things [it] wouldn’t otherwise have done,’ Dimon said. ‘You should build the systems you need, you should do the R&D you need and explain it to your shareholders and your board. Of course, some of the CEOs will say it’s the sell side, that we put pressure [on them], but what I’m trying to say to people [is]: be free to drop it.’
– According to the FT, Goldman Sachs is using cyber-security war games to make sure its 8,000 technology staff are up to speed on the hacks and viruses that could delete bank data, compromise privacy or otherwise threaten key operations. Goldman has just become the first bank to sign up with Immersive Labs, a UK-based company that offers continuously evolving learning tests and war games on cyber-threats. The bank is offering tech employees access to the platform, where they can test their skills against colleagues and compete in a company-wide league table.
– The WSJ reported that US and Chinese authorities reached a deal that will allow ZTE to return to business, ending a near two-month shutdown of the Chinese telecommunication company’s operations. The agreement requires ZTE to pay a $1 billion fine and allow US enforcement officers inside the Chinese company to monitor its actions, commerce secretary Wilbur Ross said. In return, ZTE can resume buying components from US suppliers that it needs to make smartphones and build telecoms networks.
Ross said ZTE must change its management and its board, and put $400 million in escrow, which it will forfeit if it violates the agreement. A ZTE spokesperson did not respond to a request for comment.
– The UK’s Financial Conduct Authority (FCA) will move ahead with a new premium listing next month aimed at attracting companies such as state-controlled Saudi Aramco to London, although the rules have been ‘refined’ following investor criticism, according to Reuters. The Saudi government is expected to float up to 5 percent of Aramco in Riyadh and an international venue such as London or New York in what is expected to be the biggest ever IPO.
The City of London and TheCityUK, which promote the UK as a business center, welcomed the new rule provided strong corporate governance standards are maintained. Saudi Aramco had no immediate comment.
– Bloomberg reported that Paul Singer said efforts to require earlier disclosure for new investments in the US pose a threat to activist investors such as his Elliott Management. ‘It’s already very hard and it’s going to get harder,’ Singer said. ‘There are legislative efforts to reduce the time. But even the existing filing requirements make it difficult to build a position.’ Elliott has been one of the busiest activist investors of the past year, targeting companies around the world.
Narrowing the window for disclosing a stake in a new target would make it harder to hold boards accountable, particularly with the rise in passive investing, Singer said. Under federal law, activist investors must disclose ownership of any class of registered voting equity securities in excess of 5 percent within 10 days of acquiring them. Legislation backed by senators Tammy Baldwin, D-Wisconsin, and David Perdue, R-Georgia, would shorten that deadline to four days.