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Oct 28, 2022

The week in GRC: Companies seeking guidance on corporate minimum tax and SEC’s Gensler defends clawback rule

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

– According to the Financial Times (paywall), executives at some US public companies will earn millions of dollars in equity-based bonuses this year because boards have reworked their compensation plans despite falling stock prices. Companies adjusted bonus plans in 2020 to account for the Covid-19 pandemic and have since revisited pay and eased performance assessments in response to inflation, energy crises and other macroeconomic problems, said Matteo Tonello, managing director at the Conference Board.

‘This phenomenon seems to be driven by the market for top talent, which continues to remain tight, and the hesitation to compound today’s uncertainties with the risks that a leadership change could pose to the business,’ he said. Other companies have this year replaced executives’ stock options with shares in a sign that issuers do not think their stock prices will rebound before the options expire.

Although shareholders overwhelmingly support executive pay at companies’ AGMs, there are signs investors are growing unhappy with bonuses. A record 67 companies in the Russell 3000 index failed say-on-pay votes this year over bonus concerns, up from 61 last year and 45 in 2020, according to the Conference Board and Esgauge.

– Altimeter Capital chair and CEO Brad Gerstner said in an open letter to the company and CEO Mark Zuckerberg that Meta has too many employees and is moving too slowly to retain the confidence of investors, CNBC reported. The Meta investor recommended a plan to get the company’s ‘mojo back’ including reducing headcount expenses by 20 percent and limiting its investments in ‘metaverse’ technology to no more than $5 bn per year.

‘Meta needs to rebuild confidence with investors, employees and the tech community in order to attract, inspire and retain the best people in the world,’ Gerstner wrote in the letter. ‘In short, Meta needs to get fit and focused.’ Gerstner added in the letter that Altimeter Capital doesn’t have demands and simply wants to engage with Meta management.

Meta didn’t immediately return a request for comment.

Reuters (paywall) reported that, according to people familiar with the matter, Blackwells Capital launched two separate proxy fights for board seats at Global Net Lease (GNL) and Necessity Retail REIT. The investment firm nominated the same two director candidates at each company and wants the firms to make sweeping corporate governance reforms and even consider selling themselves, the people said. Blackwells plans to nominate two more directors at GNL and Necessity Retail REIT in 2024, the people said.

Representatives for GNL and Necessity Retail did not immediately respond to requests for comment.

– The SEC named Jason Burt regional director of the agency’s Denver office, where he has been acting co-director since July. As regional director, Burt now leads a staff of more than 100 accountants, attorneys, investigators, litigators, securities compliance examiners and other personnel involved in enforcement actions and carrying out compliance examinations focusing on Colorado, Kansas, Nebraska, New Mexico, North Dakota, South Dakota and Wyoming. ‘Jason has proven time [and time] again how valuable he is to the SEC, both as an insightful leader and a stalwart colleague,’ said Gurbir Grewal, the SEC’s director of enforcement, in a statement.

– The SEC approved a rule that will require public companies whose financial statements contain errors to recoup their executives’ bonuses and other incentive pay, the WSJ reported. The rule was required by the Dodd-Frank Act to discourage fraud and accounting wrongdoing. The clawback rule’s implementation has been delayed for years amid resistance from Republican lawmakers and corporate executives.

SEC chair Gary Gensler said the rule will strengthen investor confidence in corporate reporting, as well as the accountability of managers. ‘Corporate executives are often paid based on the performance of the companies they lead, with factors that may include revenue and business profits,’ Gensler said. ‘If the company makes a material error in preparing the financial statements required under the securities laws, however, then an executive may receive compensation for reaching a milestone that in reality was never hit.’

The final version of the rule is broader than an original proposal from 2015, which would have triggered clawbacks only if companies found major accounting errors that required a restatement of previous years’ financial results. Under the rule approved this week, companies will also have to recover executive bonuses if they find smaller errors that affect only the latest year’s results.

CNBC reported that Bed Bath & Beyond appointed interim CEO Sue Gove to the position permanently. Gove is the founder of retail consulting and advisory firm Excelsior Advisors. Before she became a consultant, she had several financial and strategic roles, including president and CEO of Golfsmith International Holdings and COO of Zale Corp.

– The WSJ reported that Alphabet’s Google agreed to improve its compliance program in a settlement with the US Department of Justice (DoJ), which said the company lost data federal investigators sought in connection with a probe into a cryptocurrency exchange. The DoJ said a third-party independent compliance professional will monitor whether Google holds up its end of the deal. Under the agreement, Google will be required to reform and upgrade the compliance program that handles responses to legal demands such as subpoenas and search warrants.

Google estimates it has already spent more than $90 mn on systems and staffing to improve the program, and prosecutors have agreed a penalty isn’t warranted, according to the settlement.

‘Google has a long track record of protecting our users’ privacy, including pushing back against overbroad government demands for user data, and this agreement in no way changes our ability or our commitment to continue doing so,’ a Google representative said.

– According to the WSJ, two months before the new corporate minimum tax is set to go into effect, companies are asking the US government for guidance on its scope and the potential impact of transactions such as split-offs. From January 1, 2023, the tax will apply to large US companies averaging at least $1 bn in publicly reported annual profit over three years.

The tax, which is part of the Inflation Reduction Act, requires those companies to calculate their taxes with the existing 21 percent levy on corporate income as defined in the tax code and under a 15 percent rate based on their book or financial statement income. The new law stipulates companies pay the higher of the two and looks to address concerns around large profitable companies that face low tax burdens. Some companies in their most recent earnings statements said any impact from the tax will depend on future guidance from the government.

CNBC reported SEC chair Gensler as saying the newly adopted clawback rule should not discourage companies from going public. Gensler said the agency is following through on a rule mandated by Congress. ‘This was a straightforward thing Congress said,’ Gensler stated. ‘If you’ve got the wrong faulty financials and somebody’s getting paid on those faulty financials, then [he or she] ought not keep the money. I think it’s pretty straightforward.’

– According to the WSJ, the SEC imposed 13 fines greater than $100 mn on public companies during its latest fiscal year, which ended on September 30, up from the previous year’s three cases at that level. In some other recent years, the SEC didn’t levy any fines that large.

In its 2022 fiscal year, the SEC levied $2.2 bn in fines against exchange-listed companies, according to a WSJ analysis. That figure is much higher than the commission imposed in recent years, according to data from the NYU Pollack Center for Law & Business and Cornerstone Research. In 2018, for instance, the SEC imposed about $1.2 bn in fines against public companies, NYU and Cornerstone data shows.

‘The robust penalties levied this year are designed to deter and reduce securities violations, and should not be seen as an acceptable cost of doing business,’ said the SEC’s Grewal. He added that the agency plans to soon release its year-end enforcement results, which he said would likely confirm a year-over-year increase in total penalties.

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...