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Oct 25, 2019

The week in GRC: States sue Exxon over climate change, and UK regulator urges investors to consider ESG

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

The Wall Street Journal reported that Exxon Mobil and New York Attorney General Letitia James were headed to court this week regarding accusations that the company deceived investors, in a rare trial over how oil companies account for the impact of climate change. The attorney general’s office accuses the company of telling investors that it was taking into account the future costs of regulations it expected governments to adopt in response to climate change even though Exxon’s internal calculations didn’t match its public representations. The attorney general’s office said the company’s misrepresentations led investors to overvalue its stock.

Exxon has denied wrongdoing and said a reasonable investor wouldn’t expect to know such internal details. The company has claimed the case is politically motivated, which the attorney general’s office has denied. The oil industry has said it is difficult to estimate the future costs of climate-change regulation, which is unclear politically and varies between countries, as investors seek more information.

– Hudson’s Bay Co said it had agreed to a higher offer from a group of shareholders led by its executive chair Richard Baker to take the Canadian department store chain private, according to Reuters. The group has offered C$10.30 ($7.90) per share in cash for the 43 percent of shares it does not own. The group led by Baker, who owns 6.32 percent of shares, had offered C$1.74 billion, or C$9.45 per share, in June, but a special panel of the company said it was ‘inadequate.'

CNN reported that Under Armour CEO Kevin Plank resigned and will be replaced by COO Patrik Frisk, effective January 1, 2020. Plank, who has been CEO since the company’s founding in 1996, will serve as an executive chair and brand chief. Plank in a statement called Frisk the ‘right person’ to be Under Armour’s CEO.

‘As my partner during the most transformative chapter in our history, he has been exceptional in his ability to translate our brand’s vision into world-class execution by focusing on our long-term strategy and re-engineering our ecosystem through a strategic, operational and cultural transformation,’ Plank said.

– According to the WSJ, a last-minute $260 million settlement between four drug companies and two Ohio counties averted a trial over who is to blame for the opioid crisis. The deal will direct $215 million to Ohio’s Cuyahoga and Summit counties from McKesson Corp, Cardinal Health and AmerisourceBergen Corp. The counties will also receive $20 million in cash and the donation of $25 million in addiction-treatment drugs from Teva Pharmaceutical Industries. A fifth defendant, Walgreens Boots Alliance, didn’t reach a deal. The trial against it was postponed.

The three drug distributors have argued that they complied with federal regulations and that they must balance their mission to deliver medicine against efforts to prevent and detect illegal diversion of those drugs. In a joint statement, they said that although they disputed the allegations against them, settling with the counties ‘is an important stepping-stone to achieving a global resolution and delivering meaningful relief.’ Teva said separately that it is ‘pleased to positively contribute to solving the nationwide opioid epidemic.’

Walgreens distanced itself from the other defendants, saying it never manufactured, marketed or wholesaled prescription opioid medications, or sold any opioid medicines to pain clinics, internet pharmacies or ‘pill mills.'

– According to the WSJ, advisers to globally expanding US companies are recommending that they prepare to use several short-term lending benchmarks when the London interbank offered rate (Libor) disappears. A group of banks and regulators in 2017 agreed on a replacement created by the Federal Reserve known as the secured overnight financing rate (SOFR). Companies must move away from Libor by the end of 2021.

Companies have been slow to prepare for the change. They must assess any inventory that had exposure to Libor and amend contracts for existing financial instruments such as credit cards, corporate loans and derivatives.

‘We don’t expect that 100 percent of the Libor-based positions today will migrate 100 percent to SOFR,’ EY partner Jeff Vitali said. ‘It is going to be a scenario where entities will have to prepare, be flexible and build flexibility into their systems, models and processes that can handle multiple pricing environments in the same jurisdiction.’

CNN reported that Mark Parker will step down as Nike’s CEO next year after 13 years in charge. Parker has been a Nike employee since 1979 and was appointed CEO in 2006. His successor will be John Donahoe, a current Nike board member and CEO of cloud computing company ServiceNow. Parker, who was previously chair of the Nike board, will become executive chair after he steps down on January 13, 2020. The company says Donahoe will help drive Nike’s digital transformation, which has been a core element of Nike’s business strategy in recent years.

In a note to employees, Parker wrote: ‘To be clear, I’m not going anywhere. I’m not sick. There are no issues I’m not sharing. I strongly believe the best way for us to evolve and grow as a company is to bring in a phenomenal talent to join our team who has long been part of the Nike family.’

– SoftBank Group said it agreed to take a majority stake in WeWork after securing a deal that could hand co-founder Adam Neumann almost $1.7 billion and cut most of his ties with the firm, according to the WSJ. The deal will give SoftBank a roughly 80 percent ownership stake in WeWork.

Former CEO Neumann, who has remained chair of WeWork parent We Company, will step down from the board but remain an observer and hold a minority stake. SoftBank executive Marcelo Claure will succeed Neumann as executive board chair, WeWork said.

– Infosys said the SEC has launched an investigation into whistleblower claims that the Indian software services company used ‘unethical practices’ to boost revenue and profit, Reuters reported. Infosys said the Securities and Exchange Board of India has also asked it to submit information concerning the complaints. Infosys previously said it was investigating claims including that CEO Salil Parekh bypassed reviews and approvals for large deals out of concern over the negative impact of reduced profit on Infosys’ share price.

Parekh declined to comment. Infosys on Thursday also said a securities class action lawsuit has been filed against it in a US federal court based on the complaints, and that it intends to defend itself ‘vigorously.'

– According to the WSJ, the UK’s Financial Reporting Council (FRC) released a new code for asset owners and managers, asking them to consider ESG factors at companies they are investing in. The FRC’s new stewardship code forces participating pension funds, insurance firms, fund managers and other service providers to show how they protect and enhance the value of their investments for the long term.

Complying with the code is voluntary. But the UK’s Financial Conduct Authority will require asset managers that don’t follow the code to provide additional explanations, likely prompting them to apply the code. Starting in January, those that sign up to the code will have to report annually on their stewardship activity.

Reuters reported that the state of Massachusetts sued ExxonMobil, accusing the company of misleading investors and consumers for decades about the role fossil fuels play in climate change. Massachusetts Attorney General Maura Healey filed the lawsuit shortly after Exxon lost its efforts to delay the filing until after it has finished defending itself in a trial that began Tuesday over similar allegations brought by the state of New York.

The lawsuit in Suffolk County Superior Court in Boston alleges Exxon systematically misled investors about climate risks to its business and deceived auto drivers and other consumers about the role fossil-fuel products play in causing climate change.

In court papers, Exxon called the decision by Healey to sue now ‘gamesmanship’ to distract its lawyers during the New York trial and part of a ‘partisan’ campaign against it. ‘We look forward to refuting the meritless allegations in court,’ the company said in a statement. In the New York case, Exxon denies wrongdoing and says it has a robust system to manage the risk of increasing climate change.

– According to CNBC, index provider MSCI is refuting criticism that it’s helping funnel US investment dollars into Chinese companies involved in human rights violations. ‘MSCI is not an investor, or an asset manager or an investment adviser,’ MSCI CEO Henry Fernandez said. ‘We are an intermediary. We are an agent helping our investors figure out how to invest around the world in a good way... We cannot tell clients what decisions to make.’

He added: ‘If there’s a law that restricts the flow of assets by the US into some country, then we’ll create specialized indices for those clients in that one country that take those legal and regulatory restrictions into account.’