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Aug 16, 2019

The week in GRC: IPO boards said to undermine diversity push, and in-house lawyers expect climate-related legal risks

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

The Wall Street Journal reported that Rite Aid appointed Heyward Donigan as CEO, saying her experience leading healthcare companies would help the pharmacy company. Donigan was previously CEO of Sapphire Digital, a website for analyzing healthcare plans previously known as Vitals. At Rite Aid, she is one of roughly 34 women leading Fortune 500 companies. Pennsylvania-based Rite Aid is the third-largest US pharmacy chain with 2,466 stores in 18 states.

According to Reuters, Cloudera said it would give two board seats to Carl Icahn as part of an agreement with the activist investor to limit his ownership in the data analytics company to 20 percent. Icahn had disclosed a 12.6 percent stake in Cloudera earlier this month and said he could seek seats on the company’s board. He raised his stake to 18.4 percent as of August 9.

Nicholas Graziano, portfolio manager of Icahn Capital and director at Xerox Holdings, will join Cloudera’s board along with Jesse Lynn, general counsel of Icahn Enterprises, increasing the board’s composition to 10 members. Cloudera said Icahn’s firm had agreed not to nominate any directors at its AGM and would vote all its shares in favor of the company’s director nominees.

Goldman Sachs CEO David Solomon said US gun laws need to change, according to CNN. He said government officials need to ‘try to improve the framework we all operate in,’ because it's an issue that private businesses can't fix. He added that although boycotts ‘create discussion,’ it's ultimately up to legislators to make substantial policy changes. His public call for action came after two mass shootings this month took place within 24 hours of each other. Soloman said that Goldman Sachs does not work with companies that make assault weapons, bump stocks and high-capacity magazines.

Reuters reported that US Senate finance committee chair Chuck Grassley, R-Iowa, has asked Swiss drug company Novartis to provide details on data manipulation related to its $2 million gene therapy, Zolgensma, by August 23. In a letter dated August 9 to Novartis CEO Vasant Narasimhan, Grassley asked the company to provide all records on its internal inquiry into Zolgensma data discrepancies.

Novartis said it has received the senator’s letter and was reviewing the request. The company admitted that it knew about the data discrepancies as it sought approval of its gene therapy, but delayed notifying authorities until it had completed an internal investigation.

Vanguard has thrown 29 stocks out of funds created to invest in companies with strong ESG records, according to the Financial Times. The asset management firm said the companies were included ‘erroneously’ in an ESG index designed by FTSE Russell, according to a letter to shareholders in the funds. There was an ‘issue in the screening methodology used by our benchmark provider, FTSE Russell,’ Vanguard said in the letter.

Marketing materials for the funds say they ‘specifically exclude’ companies that profit from adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling and nuclear power — as well as companies that ‘do not meet standards of UN global compact principles’ and fail on certain ‘diversity criteria.’

‘In aggregate, these stocks represented a very small percentage of the holdings of the funds,’ a Vanguard spokesperson said. ‘We sincerely regret the error occurred. FTSE has since implemented additional oversight and controls to ensure the benchmark aligns with its objective.’

The WSJ said that, according to a study, audit firms on average suffer a drop in future client growth and revenue growth after detecting a material weakness in a company’s financial reporting. Companies appear to avoid hiring auditors that have a history of critical audits at other companies, although firings because an auditor found a material weakness aren’t as apparent, the study found. Therefore, some auditors have trouble attracting new clients, according to the study, which was led by University of Arkansas accounting professor Stephen Rowe and accounting PhD candidate Elizabeth Cowle.

Rather than criticize company executives, the study blames boards of directors, whose audit committees make decisions on hiring or firing auditors. ‘When audit committees are working with management to choose an auditor, it would be nice if they were more aware of the company’s bias and evaluated all factors when making the decision,’ Rowe said.

Reuters said a Haynes & Boone study found that bankruptcy filings by US energy producers so far this year have already nearly matched the total for the whole of 2018 amid volatile oil and gas prices that are pushing companies to seek protection from creditors. Twenty-six firms with debts totaling $10.96 billion have filed for court restructuring through mid-August, according to the law firm’s report. Last year, 28 companies filed for bankruptcy, listing $13.2 billion in debt, and 24 firms sought protection in 2017 with $8.5 billion in debt.

According to Bloomberg, WeWork’s IPO plan would see it go public with an all-male board, a feature of many new companies that is diluting gains for women in public company boardrooms. Roughly 40 percent of open director roles at S&P 500 companies were filled by women last year. But in public offerings since April, women have only occupied about 18 percent of the new spots, according to executive recruiter G Fleck/Board Services. In a study of 100 IPO boards from 2014 to 2017, half went public without a single female director, said Mali Gero, co-founder and senior adviser of 2020 Women on Boards.

WeWork co-founder and CEO Adam Neumann heads the company’s seven-member board. His co-founder and wife, Rebekah Neumann, and co-founder Miguel McKelvey are senior executives at the company but not on the proposed board. WeWork declined to comment.

Almost 50 percent of European in-house lawyers polled recently said they expect their organization to face legal risks due to climate change did – but only 15 percent said their legal departments were well prepared to deal with such threats, the FT reported.

The survey was carried out by the Dutch Association of In-House Counsel and law firm Houthoff, and most of those questioned were Dutch. The Netherlands has become a central battleground in a new class of lawsuits spreading round the world amid growing concern about the need to tackle climate change. If in-house counsel in a climate hotspot such as the Netherlands are not fully prepared for this, it seems unlikely that their counterparts in other countries are any more prepared.

Reuters reported that a former senior official at a Chinese financial regulator has been named chair of Tianjin Rural Commercial Bank, as more government officials take top roles at regional lenders to improve corporate governance. Xu Qinghong, a former deputy of the policy bank department at the China Banking and Insurance Regulation Commission (CBIRC), was named by Tianjin Rural Commercial’s board members as its new chair on August 8, a filing from its official website showed. The appointment is still pending final approval from the CBIRC, the bank said.

CNBC reported that Cathay Pacific CEO Rupert Hogg is to step down. The airline has been under huge political pressure from the Chinese government after one of its pilots was found to have taken part in the Hong Kong protests and another was said to have misused company information related to the protests. Both were subsequently fired.

In a statement to the Hong Kong Stock Exchange, Cathay Pacific’s board confirmed that Hogg would step down as CEO despite there not being any matter that shareholders needed to be made aware of. ‘He has also confirmed that he has resigned to take responsibility as a leader of the company in view of recent events and that he is not aware of any disagreement with the board,’ the statement added.

Hogg will be replaced by Augustus Tang. The airline also confirmed that Paul Loo has resigned as an executive director and chief customer and commercial officer and will be replaced by Ronald Lam. Hogg said in a separate statement: ‘These have been challenging weeks for the airline and it is right that Paul and I take responsibility as leaders of the company.’