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Sep 27, 2019

The week in GRC: SEC extends ‘test the waters’ provision, and more companies talk ESG on earnings calls

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

According to The Wall Street Journal, a new Congressional bill would offer cash rewards to people who voluntarily provide original information to the PCAOB on potential audit-related violations. The bill proposes establishing a whistleblower program at the PCAOB similar to the one at the SEC. It was passed on September 19 in the US House of Representatives and will be considered by the Senate next.

Under the proposal, a tipster or joint tipsters who have original information on potential violations of rules related to how public companies prepare and issue audit reports and the responsibilities of the auditors could receive a monetary reward for their information. Under the bill, the original information would need to be unknown to the PCAOB from any other source and could come from a tipster’s independent knowledge or analysis.

A PCAOB spokesperson declined to comment on the proposed legislation.

The Guardian reported that, according to an analysis of corporate disclosures, more than four fifths of the world’s largest companies are unlikely to meet the goals set out in the Paris climate agreement by 2050. A study of almost 3,000 publicly listed companies found that just 18 percent have disclosed plans that are aligned with goals to limit rising temperatures to 1.5ºC of pre-industrialized levels by the middle of the century.

The report covers companies across the global economy and was undertaken by investment data provider Arabesque S-Ray, which gave each company a temperature score based on its publicly disclosed plans. The analysts found more than a third of the world’s top 200 companies still do not disclose their greenhouse gas emissions.

Arabesque S-Ray CEO Andreas Feiner said companies ‘may appear to be taking steps to reduce their impact on climate change’ but many are choosing to keep the full scale of their emissions under wraps to avoid losing investment. The new temperature scores should help make investment more transparent by assigning a 3ºC increase to companies that fail to disclose their climate emissions, he said.

– A federal appeals court struck down the Federal Communications Commission’s (FCC) latest attempt to loosen US media ownership rules, according to Reuters. The Republican-led FCC in 2017 voted to eliminate the 42-year-old ban on cross-ownership of a newspaper and TV station in a major market, among other things. The court told the FCC to take up the issue again, saying the agency ‘did not adequately consider the effect its sweeping rule changes will have on ownership of broadcast media by women and racial minorities.’

FCC chair Ajit Pai said in a statement that despite instructions from Congress to review media ownership regulations, a majority of federal appeals court judges for 15 years ‘has taken that authority for themselves, blocking any attempt to modernize these regulations to match the obvious realities of the modern media marketplace.’ The FCC plans to challenge the decision, he added.

– The WSJ said German prosecutors filed charges against Volkswagen CEO Herbert Diess, chair Hans Dieter Pötsch and former CEO Martin Winterkorn for allegedly misleading shareholders in the months before the 2015 emissions-cheating scandal. Prosecutors alleged that the executives withheld information about the scandal from shareholders in an effort to prop up the company’s share price. The prosecutors argue that the three executives knew about the cheating and the potential damages in the summer of 2015 at the latest and should have told financial markets about the US investigation at that time.

Volkswagen and the three accused rejected the indictment as groundless. Diess, through his attorney, said he would continue to perform his duties as CEO and said the charges against him were unjustified. After an emergency meeting, the company’s top directors dismissed the charges against Diess and Pötsch as unfounded and said the company wouldn’t take any action against them.

Attorneys for Pötsch, who became chair in 2015, said the indictment was unfounded. Attorneys for Winterkorn said in a statement that the former Volkswagen CEO ‘had no prior knowledge of the intentional use of illegal engine control software in US diesel cars’ and dismissed the prosecutor’s indictment as unfounded.

– Google does not have to apply the EU’s ‘right to be forgotten’ law globally, the Court of Justice of the European Union ruled in a landmark case, Reuters reported. The ruling means that, while Google must remove links to sensitive personal data from its internet search results in Europe when required, it does not have to scrap them from searches elsewhere in the world.

‘Currently, there is no obligation under EU law, for a search engine operator [that] grants a request for de-referencing made by a data subject... to carry out such a de-referencing on all the versions of its search engine,’ the court said.

Google welcomed the decision, saying: ‘It’s good to see that the court agreed with our arguments.’

– According to the WSJ, large US companies are increasingly talking up ESG factors on earnings calls and betting that investors increasingly concerned with social responsibility will reward them for it. Twenty-four companies in the S&P 500 used the term ESG on earnings conference calls between June 15 and September 14, double the number that cited it in the first quarter, according to FactSet. Only two years earlier just two companies referred to ESG in the second quarter of 2017. The increased number still represents only 5 percent of the companies in the index, however.

The financial sector had the highest number of companies mentioning ESG, followed by real estate and utilities. ‘As we go forward, there’s going to be more pressure on companies to do something about their climate-change story,’ said Occidental Petroleum president and CEO Vicki Hollub on the company’s August 1 earnings call.

CNN reported that e-cigarette company JUUL said CEO Kevin Burns will be replaced by KC Crosthwaite, who was previously chief growth officer at tobacco company Altria, a major investor in JUUL. In that role, Crosthwaite oversaw an expansion into alternatives to traditional cigarettes. Altria bought a 35 percent stake in JUUL last year.

‘Kevin transformed our start-up into a global business, and we are incredibly grateful for his commitment to and passion for our mission,’ JUUL founders Adam Bowen and James Monsees said.

– The WSJ reported that Adam Neumann resigned as CEO of WeWork parent We Company and will relinquish control of the shared-office company. Neumann and his advisers agreed following a tumultuous few weeks for the start-up that the best path forward was for him to drop the CEO role, according to people familiar with the matter. ‘Too much focus has been placed on me,’ Neumann said in a staff email following the announcement.

Neumann will remain non-executive chair and be succeeded by two of his deputies: Artie Minson, CFO of We Company will focus on finance, legal and human resources, and Sebastian Gunningham will tend to marketing and technology.

– The SEC voted to adopt a new rule that extends a ‘test the waters’ accommodation previously available to emerging growth companies to all issuers. Under the new rule, all issuers will be allowed to gauge market interest in a possible IPO or other registered securities offering through discussions with certain institutional investors before or after filing a registration statement.

– The SEC also voted to adopt a new rule and form amendments that are intended to modernize the regulation of ETFs by creating a ‘clear and consistent framework’ for the vast majority of ETFs operating today. The changes will, among other things, allow ETFs to come to market more quickly without the time or expense of applying for individual exemptive relief. ETFs relying on the rule and related exemptive order will have to comply with certain conditions designed to protect investors, including conditions regarding transparency and disclosure.

– The US House of Representatives voted to advance legislation that would allow banks to provide services to cannabis companies in states where it is legal, according to Reuters. The bill now goes to the Senate. It received nearly unanimous support from Democrats and was backed by nearly half of all Republicans. The bill clarifies that proceeds from legitimate cannabis businesses would not be considered illegal and directs federal regulators to write up rules for how they would supervise such banking activity.

Banks have told lawmakers that they need clarity on whether they can do business with cannabis companies where it is legal at the state level despite the fact that marijuana remains illegal in the eyes of the federal government.

– The WSJ said the International Accounting Standards Board issued changes to its rules on hedge accounting to offer additional relief to companies affected by global reference-rate overhauls, including the planned shift away from the London interbank offered rate (Libor).

The changes seek to prevent companies from having to discontinue hedge accounting amid concern that uncertainty over reference-rate changes could affect their ability to make forward-looking analysis, the board said. Under the amendments, companies will have to disclose additional information to investors about hedging relationships they have that are directly affected by the transition from Libor.

The changes are scheduled to go into effect January 1, 2020, although companies can adopt them sooner.– According to the WSJ, two large shareholders have sent a letter to Marathon Petroleum calling for the removal of the company’s CEO, Gary Heminger. Paul Foster and Jeff Stevens, former board members of refiner Andeavor, which Marathon acquired last year, support a proposal by Elliott Management to split the company into three units. But Foster and Stevens went a step further in the letter sent to the company in calling for Heminger to be replaced.

A Marathon spokesperson said the board unanimously supports Heminger as the company’s chair and CEO, citing a ‘track record of delivering value to shareholders and all of the company’s constituencies.’

CNN reported that Wells Fargo has hired Bank of New York Mellon CEO Charles Scharf as its new leader. Scharf, previously CEO of Visa, is due to take over at Wells Fargo on October 21. ‘Charlie has demonstrated a strong track record in initiating and leading change, driving results, strengthening operational risk and compliance, and innovating amid a rapidly evolving digital landscape,’ said Wells Fargo chair Betsy Duke in a statement.

‘I am honored and energized by the opportunity to assume leadership of this great institution, which is important to our financial system and in the midst of fundamental change,’ Scharf said in a statement.

Wells Fargo is under so much pressure from the US authorities that even the hiring of the new CEO was subject to review by the Office of the Comptroller of the Currency.

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...