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Dec 14, 2018

The week in GRC: Caterpillar recombines CEO and chair roles, and shareholders back Dell’s return to public markets

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

The Wall Street Journal reported that Carlos Ghosn was formally charged with understating his compensation in Nissan Motor Co’s financial reports. Tokyo prosecutors alleged Ghosn conspired to report only about half of his compensation during the five years ended March 2015. They said his true compensation added up to the equivalent of about $87 million over the period, but the company’s financial reports said it was $44 million.

Nissan was indicted alongside Ghosn. In a written statement, the company apologized for what it called ‘false disclosures’ and said it would improve its governance. A Nissan spokesperson declined to say whether the company would contest the allegations. Neither Ghosn nor his lawyer have spoken publicly about the case. Japanese public broadcaster NHK reported that Ghosn denies wrongdoing, and the lawyer’s office declined to comment.

– Investors with assets under management of $32 trillion called on companies and governments to step up efforts to tackle climate change, according to CNN. A group of 415 investors warned of an ‘ambition gap’ between steps governments have promised to take and the actions needed to meet goals set out in the Paris climate accord. The statement from the Institutional Investors Group on Climate Change has been endorsed by firms including HSBC, Nomura Asset Management and UBS Asset Management. The group says its push is the single largest policy intervention from investors on climate change.

Global investors are becoming more active in pushing companies to take meaningful action to combat climate change. Follow This, a Dutch activist shareholder group that helped pushed Shell on climate change, has started a similar campaign targeting BP. The group said it has filed a shareholder resolution demanding that BP sets hard targets for cutting carbon emissions. BP said it had received the resolution and will consider it carefully.

– The Financial Industry Regulatory Authority (Finra) published the 2018 report on its findings from examinations of member firms. The report focuses on suitability for retail customers, fixed-income mark-up disclosure, reasonable diligence for private placements and abuse of authority, followed by a summary of additional observations. Finra also included within the report a case study that highlights examination findings from a targeted examination of volatility-linked products.

– The WSJ reported that, according to a survey by the Financial Education & Research Foundation, US public companies paid a median of 2.5 percent more in 2017 to auditors for assuring that their financial statements are free from material misstatements.

The increase was nearly double the 1.3 percent median rise in audit fees recorded in 2016 and came as companies prepared to comply with new revenue accounting rules, which became effective for most public companies in 2018. US public companies were also preparing to adopt new lease accounting rules, which come into effect for fiscal years starting after December 15, 2018.

– According to the Financial Times, Paul Singer’s activist hedge fund firm Elliott Management is teaming up with Siris Capital to buy UK-headquartered Travelport in a $4.4 billion deal that highlights Elliott’s recent push to turn its activism into takeover deals. The deal comes roughly nine months after news broke that Elliott had built an activist stake in US-listed Travelport and that it was pushing for the company to explore a sale of itself.

The transaction is the latest example of Elliott taking an activist stake in a company and then turning itself into the ultimate acquirer of the business. Travelport chair Doug Steenland said it was ‘a good outcome for Travelport’s shareholders’ and would allow the company to ‘continue its work to position itself for growth in the evolving global travel industry.’

Reuters reported that an Olympus Corp subsidiary pleaded guilty and agreed to pay $85 million to resolve charges that it failed to file reports with US regulators regarding infections connected to its duodenoscopes while continuing to sell the medical devices used to view the gastrointestinal tract.

Olympus Medical Systems and Hisao Yabe, a former senior executive at the company in Japan, pleaded guilty in federal court in Newark, New Jersey, to distributing misbranded medical devices, the US Department of Justice said.

Olympus in a statement said it had agreed to take steps to enhance its regulatory processes and that the investigation did not identify any direct harm to patients caused by its failure to file the reports. Yabe’s lawyer had no immediate comment. Yabe is scheduled to be sentenced on March 27.

– Goldman Sachs’ chief information security officer Andy Ozment complained that too many different regulations are hampering companies’ ability to deal with cyber-attacks, CNBC said. ‘What’s frustrating for me is how much of my time, my team’s time and my resources are spent on having to answer a never-ending stream of regulator requests,’ Ozment said. ‘In my mind, it’s a distraction away from cyber-security.’

Companies must comply with regulations in each country they operate in, and those rules can differ dramatically. In the US there is no federal data-breach notification law, and companies must comply with different notification laws across all 50 states. Governments could do a better job of streamlining these many different and sometimes competing interests, Ozment said.

– The WSJ said that, according to a Duke University/CFO Global Business Outlook survey, almost half of US CFOs believe the nation’s economy will enter recession by the end of 2019, with the tight labor market and growing trade tensions driving economic concerns in corporate America. In addition, more than 80 percent of US CFOs think a recession will hit by the end of 2020.

‘All of the ingredients are in place: a waning expansion that began in June 2009 – almost a decade ago – heightened market volatility, the impact of growth-reducing protectionism and the ominous flattening of the yield curve that has predicted recessions accurately over the past 50 years,’ said Campbell Harvey, a director of the survey.

– According to the FT, Elliott Management has built a €1 billion ($1.1 billion) stake in Pernod Ricard in an effort to push the French drinks company to improve corporate governance and margins. France’s finance ministry said: ‘The state wants big French companies to have stable and long-term shareholders that are willing to support their development and anchor them in France, so they are not subject to pressure from shareholders that want only short-term financial profitability.’

Activists have tended to avoid France because of the high levels of family or state ownership and a mechanism that gives double voting rights to long-term investors. Beyond margin improvement, Elliott also wants Pernod Ricard to strengthen its corporate governance. Among its concerns is the Ricard family’s influence and what it views as a lack of independence in the boardroom, according to a person familiar with the matter.

In a statement, Pernod contested Elliott’s critique, pointing out that its sales and profits had grown in recent years.

– Dell Technologies is set to return to public markets later this month, after the company recut a deal that garnered sufficient shareholder support, according to the WSJ. Shareholders of a stock that tracks Dell’s interest in software maker VMware voted to approve a deal that will simplify Dell’s complex ownership structure and return it to the public markets. The vote followed months of shareholder resistance that led Dell to increase its offer and restructure its deal.

Dell said that more than 61 percent of all the unaffiliated shareholders in the tracking stock voted in favor of the transaction. Of the unaffiliated shareholders that cast votes, 89 percent supported the deal.

– The WSJ reported that Renault said Ghosn, under arrest in Japan for allegedly understating his compensation, will remain chair and CEO of the company after it found no financial wrongdoing in France. The Renault investigation has so far looked at the period 2015-2018, and its preliminary conclusion is that Ghosn’s compensation and its approval were ‘in compliance’ with the law as well as France’s corporate governance code for listed companies.

Ghosn receives two separate salaries from Renault and Nissan. The Renault investigation is looking only at his remuneration from the French car maker. The probe is being led by Eric Le Grand, chief ethics and compliance officer at Renault, and Claude Baland, the company’s senior ethics adviser. The two men briefed the board on Thursday. Ghosn has denied wrongdoing, according to NHK. The office of his lead Japanese lawyer has declined a request for comment.

– According to Bloomberg, buyout firms have spent the most on deals this year since before the credit crisis. Private equity firms announced $448 billion of deals in 2018 through December 7, up roughly 8 percent from the same period last year. Blackstone Group led the way with the $17 billion purchase of a unit of Thomson Reuters.

‘These deals have come in spite of what was until recently fully priced equity markets, which we feel have been dampening overall public-to-private deal activity,’ said Max Justicz, head of financial sponsors in the Americas at UBS Group. Firms posted almost $650 billion in deals in 2007.

– Global revenue at the Big Four accounting firms rose more than 10 percent in 2018, the strongest annual growth in at least a decade, the WSJ reported. The four firms – PwC, Deloitte Touche Tohmatsu, EY and KPMG – had $148.2 billion in combined global revenue in fiscal 2018, up 10.4 percent from $134.3 billion the previous year in US dollar terms.

– The WSJ reported that shares in a few US companies have rallied following recent announcements of increased share repurchases. Facebook, Mastercard, Lowe’s and United Rentals are among the companies that have unveiled bigger or resumed share buybacks this month.

Buybacks make corporate profits appear stronger by lowering the number of shares outstanding, buoying per-share earnings even without overall profit growth. A company’s demand for its own shares can also lead to stock-price gains.

– The WSJ also said that Caterpillar’s CEO Jim Umpleby has been named chair of the company’s board. The move reverses Caterpillar’s decision to split the CEO and chair positions last year. Some corporate governance experts argue that having a separate CEO and board leader can improve oversight and decision-making for many companies. Some corporate advisers and executives say one leader holding both roles can manage more decisively. About 40 percent of companies in the S&P 500 keep the positions separate, according to MyLogIQ.

Caterpillar said on Thursday that the board reviews the leadership structure every two years and agreed to give Umpleby both roles at the board’s December 12 meeting. Dave Calhoun of Blackstone Group will become presiding director, a position chosen by independent members of the 12-member board.

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...