The week in GRC: SEC eyes potential earnings manipulation and Yellen warns of climate change impact

Mar 10, 2023
This week’s governance, compliance and risk-management stories from around the web

Bloomberg (paywall) reported that Bath & Body Works, which had been nearing a proxy battle with Third Point, appointed a director nominated by the activist investor. Third Point told the company it no longer plans to nominate additional board members at its AGM following the appointment of Thomas Kuhn, which was the result of ‘continued engagement’ with the firm, according to a statement.

‘The board was impressed with Tom’s background as a strategic adviser to numerous companies and boards of directors,’ said Sarah Nash, board chair at Bath & Body Works, in a statement. ‘The board values the feedback of its shareholders and appreciates Third Point’s thoughtful recommendations.’

‘I commend the Bath & Body Works board for its commitment to bringing on fresh voices and believe that with the recent additions… the board is well positioned to drive long-term shareholder value,’ Third Point’s Daniel Loeb said.

– Brazilian digital lender Nubank said it had expanded its board to add David Marcus, former digital wallet executive at Meta Platforms, Reuters (paywall) reported. Marcus led payments and crypto-currency operations at Meta and left the social media company at the end of 2021 to launch crypto-focused start-up Lightspark. Before Meta, he was president at digital payments company PayPal Holdings.

– According to the Financial Times (paywall), the European Banking Authority (EBA) wants supervisors across the EU to crack down on banks and investment companies that are not complying with rules on promoting diversity. The EBA said 27 percent of almost 800 European banks and investment companies it reviewed had still not created the diversity policies that became a legal requirement in 2014.

The EBA’s report also charts the slow progress of banks and investment companies in improving the diversity of their top management teams and supervisory boards, which remain almost 75 percent male and continue to pay men more than women for their services.

The rules included a requirement that companies set a diversity policy for their management boards, and that larger companies set targets for improving the diversity of their leadership teams. Compliance was 94 percent among a group mainly composed of large banks. But the EBA criticized that group’s approach to setting mandatory targets, with almost 40 percent found to have set ‘very low’ goals, including some that sought less than 25 percent female representation on boards.

Reuters reported that Spain’s government released draft legislation designed to boost the share of women in business and politics. The Equal Representation Law will impose a 40 percent minimum female representation threshold on boards of directors of big companies and governing boards of professional associations, and apply the principle of full gender parity to electoral lists.

‘We need to take advantage of 100 percent of the female talent in our country to improve the productivity of companies and have stronger and more sustainable growth over time,’ economy minister Nadia Calvino said.

The law will require that women make up at least 40 percent of the management of any listed company by July 2024. Unlisted companies with more than 250 workers and annual turnover of €50 mn euros ($53 mn) must reach the target by 2026.

CNBC reported that Treasury Secretary Janet Yellen warned climate change is already taking a major economic toll and could cause extensive losses to the US financial system in the years to come. Yellen made the remarks during the first meeting with the Climate-related Financial Risk Advisory Committee, an advisory board set up last year by the Financial Stability Oversight Council to boost US action on minimizing climate risk to the economy.

‘As climate change intensifies, natural disasters and warming temperatures can lead to declines in asset values that could cascade through the financial system,’ Yellen said. ‘A delayed and disorderly transition to a net-zero economy can lead to shocks to the financial system as well.’

Climate-related disasters have caused economic losses through infrastructure damage, disruptions in critical services and losses in property values, according to a federal government report released last year. ‘These impacts are not hypothetical,’ Yellen said. ‘They are already playing out.’

Reuters reported that, according to findings by the World Economic Forum (WEF) and equality experts, global gender parity is going to take more than five generations to achieve. Several investors and regulators are pushing for corporate diversity, but data from the WEF shows it will still take 132 years to reach global gender equality in general versus a projected 136 years in 2021.

In Europe, where EU and UK regulators have set a 40 percent board quota for women, almost 80 percent of large companies had at least one third of their board seats held by women, Bank of America showed. ‘If a company is not meeting its obligations, we would certainly engage with that business very directly on it because that [diversity] is an important part of ensuring good governance in all markets,’ said Peter Harrison, CEO of asset manager Schroders.

Europe’s largest asset manager Amundi said it monitors the pay gap between men and women in equivalent positions. It has engaged with hundreds of companies on the protection of employees and on human rights, it said.
 

– According to The Wall Street Journal (paywall), Credit Suisse Group delayed its annual report to address a request from the SEC for more information on how the bank recorded its cash flows in the past. The bank said the agency called late Wednesday for more information on its consolidated cash flow statements from 2019 and 2020, which the bank later revised.

Credit Suisse in its 2021 annual report said its internal controls led it to make several revisions to the cash flow statements. The SEC’s request focuses on the bank’s ‘technical assessment’ of those previously disclosed revisions.

‘Management believes it is prudent to briefly delay the publication of its accounts in order to understand more thoroughly the comments received,’ the bank said.

– A US law student group critical of law firms that represent fossil fuel clients is now targeting law schools that send a high proportion of graduates to work in the fossil fuel industry, Reuters reported. Law Students for Climate Accountability released a report highlighting law schools it says have the most graduates working for energy industry clients at law firms.

It called on schools to direct fewer students into high-paid law and lobbying jobs serving fossil fuel companies, and instead increase financial aid and assistance for students pursuing alternative careers.

‘The careers their graduates go on to perform are the most influential effect law schools have on the climate crisis,’ the report said.

– According to the WSJ, the SEC is looking into whether companies are manipulating financial results to meet Wall Street targets amid pressure on executives to ‘make the numbers’. This earnings season has been marked by falls in both reported profits and expectations of future returns, and tough economic times have historically been fertile ground for earnings management.

In many cases this is perfectly legal but sometimes it can slide into securities-law violations or even fraud. The SEC’s enforcement tools include its EPS initiative, which uses data-driven analytics to try to identify earnings manipulation. The agency has put particular focus on pursuing individuals in EPS cases in the hope of changing corporate behavior.

– Allison Herren Lee, a former SEC commissioner, joined law firm Kohn Kohn & Colapinto, according to the WSJ. She will help represent whistleblowers, including those in cases related to securities, commodities and anti-money-laundering laws, as well as those involving problems related to ESG, said Stephen Kohn, a founding partner of the law firm. Lee will also help guide policy related to whistleblowing at the nonprofit National Whistleblower Center.

 

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