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May 03, 2024

The week in GRC: NBIM will continue to advocate for ESG goals and Glass Lewis urges Shell investors to oppose climate proposal

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

CNBC reported that Norges Bank Investment Management (NBIM) says it will continue to advocate for investments based on ESG factors despite political backlash. Analysts expect the outcome of this year’s US presidential election to determine whether the pushback against ESG investment strategies will have a deep and lasting effect.

Nicolai Tangen, CEO of NBIM, said the sovereign wealth fund continued to push for the ESG agenda. ‘We think it is part of long-term investing,’ he said. ‘You really need to care [about] the impact companies have on the environment, otherwise you’re not going to make good long-term [investments]. So that’s important. And we think the fact that some other people are pulling away gives us a better opportunity to kind of phase in. So: really interesting times.’

The global universe of sustainable funds rebounded slightly in the first quarter. Data published via Morningstar showed that sustainable funds attracted nearly $900 mn of net new money in the first quarter, compared with restated outflows of $88 mn in the final three months of 2023.

– Ancora Holdings scored a victory in its proxy battle with Norfolk Southern when Glass Lewis recommended investors in the railway replace its CEO and others with six of the activist investor’s board director candidates, Reuters (paywall) reported. Glass Lewis said CEO Alan Shaw and other long-serving directors carry much of the blame for Norfolk Southern’s underperformance and that it is time for a board shake-up. ‘Ancora has presented a compelling case for supporting a substantial overhaul of the company’s current leadership,’ the Glass Lewis report noted.

Norfolk has rejected all of Ancora’s nominees, saying they would not bring fresh skills or experience, but proposed plans in February to add two new directors to its board. The company also contested the Glass Lewis recommendation: ‘The flawed report overlooks the fact that Norfolk Southern’s board has been an agent of change to advance shareholders’ interests, executed significant corporate governance enhancements and directed transformational initiatives that continue to improve safety and operational performance.’

– At many of the biggest US companies, CEOs and other executives are getting tens or hundreds of thousands of dollars more in flight benefits than company disclosures suggest, according to The Wall Street Journal (paywall). The contrast underscores the gap – already wide with the stock and options that make up the bulk of CEO pay – between the reported costs of executive compensation and the benefits executives receive.

Executive jet use is also under greater scrutiny after the Internal Revenue Service announced a plan to audit personal aircraft use by executives and wealthy individuals. The corporate jet features prominently among the perks the biggest US companies offer their top executives. Boards often require CEOs to fly corporate, both for work and otherwise, calling it safer and more efficient. Spending on the perk has doubled since 2019 at companies that reported providing it last year.

Reuters reported that according to a new survey, nearly half of law firm associates believe law school did not sufficiently prepare them for practice. Among the 546 junior associates surveyed in January and February by legal recruiting firm Major Lindsey & Africa and legal data intelligence provider Leopard Solutions, 45 percent said law school did not adequately prepare them for their current role. Thirty-one percent said their law firm experience didn’t meet their expectations coming out of law school, according to the study.

When asked what they would change about their law school experience, the most common response was more practical skills and a greater focus on transactional practices. Leopard Solutions CEO Laura Leopard attributed some of the dissatisfaction among those surveyed to the fact that many of them were in law school or began their law firm careers during the Covid-19 pandemic.

– The WSJ reported that auditors are pushing back against proposals by the Public Company Accounting Oversight Board (PCAOB) that they say would significantly expand their responsibilities with unnecessary extra work, but which many investors say would help provide the transparency they have long sought. The PCAOB wants audit firms to take on a greater role in detecting fraud and start disclosing nearly a dozen new metrics about their operations and audits. Another proposal calls for more details on audit fees and cyber-security risks, plus a confidential submission of financial statements.

In general, auditors support the PCAOB’s efforts in trying to modernize auditing standards. But three recent proposals would load firms with added work and costs.

– ISS recommended that Norfolk Southern shareholders support five of activist Ancora’s seven board nominees, withholding an endorsement from CEO pick Jim Barber but describing him as a ‘credible director and CEO candidate nonetheless,’ CNBC reported. ISS’ endorsement came one day after Glass Lewis endorsed most of the activist investor’s slate of nominees.

ISS said in its report that it was clear ‘the dissident has presented a balanced slate consisting of qualified nominees, and has generally targeted the appropriate management nominees.’ The proxy adviser recommended shareholders support CEO Alan Shaw’s re-election to the board over Barber.

Norfolk Southern took issue with some of ISS’ logic, arguing that the endorsement of Ancora nominees was also a vote of confidence in Shaw’s operating plan. ‘The ISS recommendation relating to Ancora’s nominees jeopardizes the election of Norfolk Southern’s board candidates, who are critical to the effective oversight of the company,’ Norfolk Southern said.

Reuters reported that Glass Lewis recommended shareholders vote against the re-election of three directors to Boeing’s board, including outgoing CEO Dave Calhoun, citing dissatisfaction over efforts to overhaul the company’s safety culture. ‘We believe the board, and in particular the aerospace safety and audit committees, has not appropriately addressed potential shareholder concerns regarding safety, legal and regulatory risks and could do more to mitigate the company’s reputational damage,’ Glass Lewis said.

The proxy adviser recommended that Boeing shareholders vote against the re-election of the three directors ‘to strongly signal dissatisfaction with the company’s oversight of its safety culture and its efforts to transform’ it.

Boeing declined to comment but responded by referencing comments on the need to improve safety and quality in its recent proxy statement,

– Forced laborers are being moved from China’s Xinjiang region to other parts of the country in growing numbers, the WSJ reported a Biden administration official as saying, a problem that could challenge companies’ efforts to comply with a US supply-chain crackdown. Thea Lee, the deputy undersecretary for international affairs at the US Department of Labor, said the Chinese government is increasingly transferring Uyghur forced laborers and other minorities whose homes are in Xinjiang to work elsewhere in the country.

‘Social audits in China should not be seen as an authoritative source for companies reflecting on-the-ground human-rights conditions,’ Lee said. ‘The business community needs to be aware that any audits and, frankly, any business operations, undertaken inside China carry heightened labor and human-rights risks.’

The relocations come as the US government works to enforce a ban on the import of most goods with ties to Xinjiang, a law passed because of forced-labor concerns. The Chinese government has denied that human-rights abuses are taking place in Xinjiang and accused the US government of interfering in the country’s internal affairs.

Reuters reported that Allen & Overy and Shearman & Sterling said they have completed their merger, the largest transatlantic law firm combination in years. The merger creates a new firm, A&O Shearman, with nearly 4,000 lawyers and 3,000 other employees across 47 offices, generating combined revenues of roughly $3.5 bn. Transatlantic mergers between such large, established firms have continued to be relatively rare even after decades of legal industry consolidation due to difficulties such as client conflicts and mismatched rates and compensation.

– The Commodity Futures Trading Commission has named Ted Kaouk, the body’s existing chief data officer and director of its data division, as its first chief AI officer, the WSJ reported. Kaouk will help develop the agency’s strategy to oversee and enforce the financial markets. President Joe Biden late last year issued a new executive order aiming to assert more oversight over new AI systems. In response, the White House Office of Management and Budget in March issued its first guidance to federal agencies on their adoption of AI systems, imposing safeguards such as mandatory actions to assess and test AI systems and their biases.

– According to Reuters, Glass Lewis recommended that Shell shareholders vote against a resolution filed by a group of 27 investors urging the company to set tighter climate targets. Led by activist shareholder Follow This, the resolution faces a vote at Shell’s AGM on May 23 and calls for Shell to align its medium-term carbon emissions reduction targets with the Paris Climate Agreement, including Scope 3 emissions.

‘We do not believe adoption of this proposal would benefit the company or its shareholders at this time,’ Glass Lewis said, citing Shell’s greenhouse gas emission reduction goals and disclosure on its actions. The proxy adviser said it saw ‘insufficient evidence that would lead us to believe [Shell] is significantly lagging its peers.’ Shell’s board also urged investors to vote against the resolution.

The 27 investors backing the latest resolution in a letter sent on Thursday encouraged others to support it. ‘Without increasing votes, Shell will not reduce emissions in this crucial decade,’ it said in the letter. ‘This resolution is not only about the imperative of addressing climate change, but also about preserving investors’ financial bottom line and upholding their fiduciary responsibility to their beneficiaries.’

– Two different ISS services said Norfolk Southern-invested unions and pension funds should back activist Ancora’s full seven-director slate at the railroad company’s AGM later this month, according to CNBC. ISS’ Taft-Hartley Advisory Services and Social Advisory Services, which focus their recommendations on regulated unions and socially responsible investors, respectively said in their reports that an Ancora majority would help address ‘negligence’ by the current board and address its ‘serious concerns with accountability’.

A Norfolk Southern spokesperson said the ISS team behind the Taft-Hartley report did not engage with the company’s management, unlike the main ISS research team, which ‘concluded that shareholders should support a majority of Norfolk Southern’s director nominees’.

‘That ‘benchmark’ ISS recommendation is a clear endorsement of Alan Shaw’s leadership and the company’s balanced strategy,’ the spokesperson said.

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...