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Mar 02, 2018

The week in GRC: JPMorgan’s Dimon criticizes AGMs, and GE to revamp board

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

– The Financial Times reported that, according to Bain & Co, private equity firms are buying public companies at the fastest rate since before the financial crisis, with deals totaling $180 billion last year – almost double the level of 2016. The increase in deal-making is the largest since 2007 and comes as the sector is under pressure to deploy record sums of cash, analysts say.

Bain said the number of public-to-private deals, where a private equity group buys a listed company, rose to 152 last year, up from 94 in 2016. But the firm also said deals generating the industry’s preferred return threshold of three times the amount paid were at an all-time low.

The Wall Street Journal reported that United Parcel Service (UPS) is suing the EU’s antitrust watchdog for €1.74 billion ($2.15 billion) plus interest over the regulator’s court-annulled decision to block its merger with Dutch parcel-delivery company TNT Express. The European Commission formally blocked the planned $7 billion UPS-TNT deal in January 2013 over competition concerns, but this was overturned by an EU court last year on the basis of procedural missteps by the regulator. The commission is appealing that judgment.

UPS is now seeking compensation from the commission for the 2013 decision, which the company says prevented it from ‘materializing the benefits associated with that proposed transaction.’ The commission will defend itself in court, an EU spokesperson said.

– The Systemic Risk Council (SRC) warned that the US government’s focus on the resilience of banks and other financial groups rather than the markets in which they operate risks leaving ‘significant gaps’ in supervision that could cause another calamity, according to the FT.

In a letter to US Treasury Secretary Steven Mnuchin, SRC chair Paul Tucker said he was concerned that discussion was revolving largely around banks and, to a lesser extent, a few non-bank intermediaries and providers of infrastructure such as clearing houses. As a result, he said, there is a risk that policymakers overlook certain market activities, just as they did before the last crisis, when explosive growth in derivatives by banks and insurers went largely unchallenged. 

– General Electric (GE) will overhaul its board, removing several of the longest-serving members and nominating three outsiders, including an accounting expert and former top executives from American Airlines and industrial conglomerate Danaher Corp, the WSJ reported. The board changes come as GE looks to restructure under new CEO and chair John Flannery.

The company ended 2017 with a new management team and an intention to shrink the board from 18 directors to 12. The board changes will be voted on by shareholders at GE’s annual meeting in April. Eight directors are retiring in the reshuffle while lead director Jack Brennan, former head of Vanguard, will step down next year after being on the board since 2012.

The changes will also bring a reduction in gender diversity on the board as half of the exiting directors are women, so just two of the remaining 12 members – or 17 percent – are female at a time when institutional investors are pressuring companies to move away from over-representation of men. A GE spokesperson said the board is committed to bringing different backgrounds and perspectives into the boardroom and plans to ‘use future refreshment opportunities to enhance that diversity.’

– Hong Kong’s Securities and Futures Commission (SFC) set out its 2018 enforcement priorities. Corporate fraud is at the top of the list and other key priorities are insider dealing and market manipulation, intermediary and sponsor misconduct and anti-money-laundering internal control failures. ‘Corporate fraud remains our top enforcement priority and we are particularly concerned about false or misleading financial statements, initial public offering fraud and other sponsor failures,’ said Thomas Atkinson, the SFC’s executive director of enforcement.

– SEC commissioner Robert Jackson said public companies hoping that regulators will show them a shortcut to stifling shareholder lawsuits should instead have to go through a long slog, the WSJ reported. The SEC shouldn’t let a company doing an initial public offering restrict possible class action lawsuits by its shareholders, Jackson said.

Such a move should only follow a rulemaking process through which the agency gets public comments and studies the costs to investors of forcing disputes into private arbitration hearings, he added. ‘If we’re going to take away investors’ right to their day in court, I hope my colleagues on the commission can agree that we should, at least, do so in the light of day,’ Jackson said.

– Japan’s Financial Services Agency (FSA) is preparing for a regulatory overhaul that could lead to a shake-up in the nation’s banking industry, according to Bloomberg. The FSA is looking at how to change the legal framework so that all providers of financial services are subject to the same rules. This would allow emerging companies such as technology startups to compete directly with traditional financial institutions. For banks, the revamp could end their monopoly on deposit taking and lending but enable them to enter new businesses.

– The WSJ reported that, according to a person familiar with the matter, the Commodity Futures Trading Commission (CFTC) is expected to file ‘more than 10’ fraud and market-manipulation cases in the next weeks as agency chair J Christopher Giancarlo implements his back-to-basics approach. The stepped-up enforcement comes after the CFTC recorded a big drop in fines and enforcement actions during the fiscal year that spanned the transition from the Obama administration to the Trump administration.

A CFTC spokesperson declined to comment on pending enforcement actions, but said the agency was ‘charging a high number of complex manipulation cases.’

Bloomberg reported that Stifel Financial Corp has launched a shareholder activism defense practice led by Juan Bonifacino. The new unit aims to help mid-sized companies respond to activist campaigns and contested elections as well as prepare proactive defense strategies, Bonifacino said. ‘We’re going to be focused on a lot of companies that Stifel works with, which are middle-market companies,’ he said. ‘This is really companies that are typically below $2 billion, which is where most of the activism ends up occurring.’

– JPMorgan Chase chair and CEO Jamie Dimon has denounced annual shareholder meetings as ‘a complete waste of time’, according to the FT. Shareholder meetings tend to be the only opportunity for retail investors to connect with top managers, but executives at several big banks have in recent years been unnerved by encounters with interest groups that gain admission to meetings by buying or borrowing a small number of shares.

Last May, at JPMorgan’s annual meeting, Dimon was attacked over a range of issues, including the bank’s financing of private prisons and Dimon’s role on US President Donald Trump’s now-defunct business advisory council. Dimon said Tuesday that the meetings had become ‘a joke… hijacked by people who have only political interests and don’t have any interest in the future health of the company.’

– The WSJ reported that officials in Chicago want to make a company’s record on issues such as water usage, labor rights and diversity as important as creditworthiness when deciding how to invest its $8 billion operating budget. City of Chicago Treasurer Kurt Summers is seeking permission from the city council to use ESG factors to inform investment decisions. ‘You have to know these risks exist, especially as an investor of public dollars,’ Summers said. ‘Frankly, I see this as enhancing our ability to fulfill our fiduciary responsibility.’

– When activist shareholders join a boardroom, they often try to get a seat on the committee with the most control over the top brass – and as activists increasingly wrangle with directors over board appointments, the most popular pick is the compensation committee, according to a WSJ analysis. Pay drives executive behavior, so a compensation committee role ‘is the only one that really counts,’ says long-time activist David Batchelder.

In the WSJ analysis of 82 recent activist settlements at companies worth more than $1 billion, there were 51 pacts that included specific committee assignments. Shareholders became pay-panel members in more than half of those 51 examples.

– The largest asset managers have come under pressure in recent years to take a closer interest in how companies they invest in are run, leading to pronouncements to show their corporate governance credentials. The FT reported that George Walker, head of Neuberger Berman, says the firm does not feel pressure to play a stronger role, but sees opportunities to become a more engaged shareholder.

Neuberger was one of several asset managers to sign a letter in February to corporate CEOs, urging them to be more long-term-focused and improve their reporting on financial and ESG factors. But Walker believes this debate should be led by active managers. ‘I’m frustrated that the big passive guys are, at least in the press, stealing the stewardship mantle,’ he says. ‘I think their engagement is welcome but it’s ironic. In my mind, if you’re not even going to have a point of view on whether the security is a good one or not, perhaps you should let somebody else engage who does.’

– The Senate is expected this month to approve the most significant rollback of post-crisis financial rules since Republicans took control of Washington, DC last year, according to the WSJ. The bipartisan legislation would relax dozens of rules for small to medium-size banks, shaking up the banking industry with policy changes that could encourage deal-making and make it easier for banks to expand.

Bloomberg reported that Bank of England governor Mark Carney is calling for greater regulation to bring the era of crypto-currency ‘anarchy’ to an end. ‘The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system,’ said Carney, who is also head of the Financial Stability Board. He joins a growing chorus calling for greater oversight of the technology.

– Toyota has named the first woman to its board as part of its diversity efforts, according to the FT. The company said Teiko Kudo, a managing executive officer at Sumitomo Mitsui Banking, will join its board as an outside director pending shareholder approval in June.

‘Having speed and being open are key to survival in this era of profound transformation,’ Akio Toyoda, president of Toyota, said in a statement. ‘By appointing people with like minds but with a wide range of professional backgrounds… we can discuss things with an open mind and go beyond past ways of doing things to speedily implement bold new ideas.’

– The WSJ noted that in the two weeks since a gunman killed 17 people at a Parkland, Florida, high school, many companies have taken a stand on gun control, prompted partly by a movement with the online slogan #NRABoycott. But when companies take sides in a charged issue, they often have to grapple with a new set of risks to their reputation and business, not least the risk of offending a sizable portion of consumers on the other side.

Business leaders are increasingly under pressure, largely from younger generations of socially conscious and digital media-savvy consumers and employees, to take a stand on everything from immigration to gay rights to climate change. Nearly half of millennials believe CEOs have a responsibility to speak up about issues important to society, according to a 2017 survey by Weber Shandwick.

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...