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Feb 15, 2019

The week in GRC: Smaller companies face board diversity heat, and Amazon NYC U-turn highlights risks in public opinion

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

The Wall Street Journal reported that no more than five of PG&E’s board directors will be up for re-election at the company’s annual shareholder meeting. PG&E’s ‘board intends that a majority of the directors of the company will be new independent directors’ come the time of the meeting, the company’s board said. ‘We recognize the importance of adding fresh perspectives to the board to help address the serious challenges the business faces now and in the future.’

The utility company filed for bankruptcy last month. PG&E’s board said that by the time of its annual meeting it expects the board to have 11 independent directors.

Bloomberg said that, according to Cat Rock Capital Management, Just Eat should merge with a rival online meal-delivery company because the board has shown that it can’t find a suitable CEO. Cat Rock owns roughly 2 percent of Just Eat. The Greenwich, Connecticut-based investment firm sent an open letter to Just Eat’s board of directors saying it made a mistake in appointing Peter Plumb as CEO in 2017. Just Eat should use global consolidation to its advantage and a merger would deliver ‘real value’, according to Cat Rock.

A spokesperson for Just Eat said it takes communications with all of its shareholders ‘extremely seriously’, adding that it’s ‘carrying out a thorough CEO appointment process and we will update the market as appropriate.’ Plumb stepped down last month.

– According to CNN, veteran hedge fund manager Mark Yusko is deeply skeptical of the stock buyback boom sparked by US President Donald Trump’s tax overhaul. ‘I call it the tax deform bill. It was just a free handout to rich people who pay a lot of money to lobbies,’ said Yusko, the founder and CEO of Morgan Creek Capital. Instead of using its tax savings to speed up the economy, Corporate America is just ‘buying back stock to stimulate the stock price,’ Yusko said, noting that share buybacks were outlawed by the SEC before 1982. ‘I think they should still be deemed insider trading and illegal.’ Democrats in Congress have also taken aim at buybacks.

– The WSJ reported that Impactive Capital, a new activist fund being launched by two industry veterans, will be one of the exceptions to the almost exclusively white and male upper ranks of hedge fund firms. Its co-founders and managing partners are Christian Asmar, who is Hispanic, and Lauren Taylor Wolfe. Both spent roughly a decade at activist hedge fund firm Blue Harbour Group before leaving to strike out on their own.

Less than 5 percent of hedge fund firms are owned by women and less than 9 percent are owned by minorities, according to a recent report from Bella Research Group and the John S and James L Knight Foundation. Asmar and Taylor Wolfe are launching Impactive with $250 million from CalSTRS and hope to use two recent developments: investors’ increased focus on companies’ ESG track records and their professed disdain for short-termism.

Other activists such as Blue Harbour and Trian Fund Management have marketed themselves as arbiters of sound corporate governance for years and some, including ValueAct Capital Partners and Jana Partners, have or plan to launch ESG funds.

CNBC reported that Senator Marco Rubio, R-Florida, is pushing a new proposal that tackles stock buybacks. His proposal would eliminate the preferential tax treatment of capital gains as a way to discourage companies from pursuing share repurchases. Instead, Rubio wants to tax capital gains as if they were dividends, which are subject to a wide range of rates.

Rubio is the chair of the Small Business Committee, which released a report on the issue arguing that equal rates would remove companies’ incentives to buy back stock in the first place. Under the plan, any money spent by companies on buybacks would be considered, for tax purposes, a dividend paid to shareholders – even if investors did not sell their stock. All shareholders would receive an imputed portion of the funds equivalent to the percentage of company stock they own.

– According to Reuters, Pernod Ricard CEO Alexandre Ricard said his company will embrace change and continue ‘constructive’ talks with activist investor Elliott Management, and dismissed speculation that the company could become a takeover target. Pernod Ricard is under pressure from Elliott Management to improve profit margins and corporate governance. Pernod has vowed to lift its margins and shareholder returns in a three-year strategic plan that Elliott described as a first small step.

Ricard said he welcomed Elliott’s perspective. ‘We met in January. We will continue to have an open dialogue with Elliott in the coming weeks or months, as we do with other shareholders,’ he said. A spokesperson for the fund firm declined to comment. Pernod Ricard said talks with Elliott centered around governance and margin improvement, adding that Pernod is a consolidator rather than a takeover target.

– The WSJ reported that the founders of Lyft are preparing to take near-majority voting control of the ride-hailing company when it goes public this year, despite together owning a stake of less than 10 percent. The founders, John Zimmer and Logan Green, who serve as president and CEO, respectively, are working with underwriters and lawyers on a plan to create a class of shares with extra votes that they will hold, according to people familiar with the matter. In a move that appears to be aimed at shoring up its governance, Lyft is expected to appoint one of its existing board members as non-executive chair, one of the people said.

Unlike many of the other hot Silicon Valley start-ups, the Lyft co-founders had not put a super-voting structure in place while it was private company. Instead, they’ve held voting power in proportion to their economic stake.

– According to Reuters, boardroom diversity is making uneven progress, with women increasingly taking a seat while racial and ethnic minorities are rarely represented. Twenty-seven percent of new directors at companies in the Russell 3000 Index were women during 2016-2018, up from 21 percent in the previous three-year period, according to estimates by ISS Analytics. In 2018 alone, the figure was 32 percent.

Although women are still underrepresented, their gains have been more substantial than those of African-Americans and Latinos. These groups comprised only 5 percent and 2 percent, respectively, of new directors in 2016-2018, little changed from the previous three-year period.

– Also on the topic of diversity, the WSJ noted that the number of large public companies with all-male boards has dwindled in recent years in the face of investor pressure – and that this pressure is now beginning to impact smaller companies. Proxy advisers are urging community banks, regional energy companies and other small and mid-sized enterprises to increase gender diversity on their boards or risk losing shareholder support.

Glass Lewis & Co, under a policy that takes effect this year, will recommend that investors vote against re-electing directors who chair nominating committees at companies with all-male boards. The firm said it would target companies in the Russell 3000 Index during annual meeting season. ‘Companies that don’t have women on their boards are outliers,’ said Courtney Keatinge, senior director of ESG research at Glass Lewis. ‘And we want to make sure those outliers are called out.’

Investors are increasingly viewing lack of diversity on boards as a sign of broader problems with a company’s recruitment process, according to ISS, which plans to implement a similar policy in 2020.

– Levi Strauss filed paperwork for an IPO of shares and, according to people familiar with the matter, it hopes to raise more than $600 million, the WSJ said. The family-controlled business seeks a total valuation in excess of $3 billion, the people said. The offering would return the company to the public markets more than three decades after it went private in a leveraged buyout. In its IPO filing, Levi said it was looking to make acquisitions that would ‘drive further brand and category diversification.’

The family will retain significant voting power through a dual-class share structure, which has been popular with technology companies such as Facebook and Lyft.

– When companies make salary information public, it can have a long-lasting effect by increasing the number of women the company hires, according to CNN. A recent study examined trends in employment and pay at Danish companies before and after a 2006 law was passed that required firms to disclose gender wage statistics. In addition to seeing a narrowing of the overall wage gap at the firms, researchers found pay transparency also led to more women being promoted, as well as more women hires. This, they say, could mean pay transparency contributes to an overall increase in employee gender diversity.

‘You are more willing to apply to and work for a firm where you know your work is equally recognized, where you’re paid in a fair way, as opposed to a firm where you’re not,’ says Elena Simintzi, an assistant professor in finance at the University of North Carolina Kenan-Flagler Business School.

– The WSJ reported that, according to people familiar with the matter, shareholder activist Carl Icahn owns roughly 10 percent of Caesars Entertainment Corp and plans to push the casino operator to consider selling itself after it received at least two approaches. Icahn believes Caesars has desirable properties and that the outlook for Las Vegas is positive, the people familiar with his plans said. He believes the company would be better managed in the hands of a rival and wants Caesars to let shareholders decide whether it should be sold, rather than leave it up to the board.

– The WSJ noted that’s decision to cancel plans for a new headquarters in New York highlights one of the biggest risks companies face when planning ambitious expansions: securing public support. In announcing its decision, the company referred to polling data indicating that 70 percent of New Yorkers supported its plans to open a campus in Long Island City, Queens. A poll released Tuesday found that just 56 percent of voters across the state supported the project.

But polls are only an indicator; reality is often more complicated and can shift during the dealmaking process. If that happens too late in the process, a deal can go sour, civic goodwill can be lost and a company’s reputation could be damaged, according to site-selection consultants. They say that, before big companies move into new cities, it is wise for them to build local coalitions and give local officials and community members a private venue to air concerns.