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Apr 26, 2024

The week in GRC: FTC approves ban on non-compete agreements and CEO turnover spikes in Q1

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

– The Financial Times (paywall) reported that the US Federal Deposit Insurance Corp (FDIC) is developing proposals aimed at ensuring asset managers do not seek too much influence over the banks in which they hold large stakes. Republican board member Jonathan McKernan and Democratic chair Martin Gruenberg are each drafting measures that would demand new requirements of funds that hold more than 10 percent of a bank’s shares to make sure they remain passive investors.

The FDIC’s interest has caused concern in the asset management sector. Industry groups argue that tougher regulation could raise compliance costs and lower demand and liquidity for bank stocks if the new rules make it harder for investors to take large stakes. At present, when large asset managers cross the 10 percent threshold they must certify by letter to US banking regulators that they are not seeking to control the bank’s management and operations, although they can vote on directors and shareholder resolutions.

McKernan said he wants to monitor asset managers’ compliance with those passivity letters. Gruenberg is pushing a broader proposal that would include more investors, according to people familiar with the matter. An FDIC spokesperson declined to comment.

Reuters (paywall) reported that investors have filed a resolution at Norwegian oil company Equinor, which is majority owned by the government, to bring its strategy and capital spending into line with the Paris Agreement on climate. The move is the latest this proxy season after several oil and gas companies have scaled back climate ambitions.

The Equinor resolution also underlines Norway’s dual position as a major oil and gas exporter that wants to continue producing fossil fuels while also being active diplomatically to cut global greenhouse gas emissions. Equinor’s board urged shareholders to reject the resolution, saying its energy-transition strategy was aligned with the Paris Agreement, adding that the company was being ‘flexible’ in executing the strategy and adapting to market conditions.

CNBC reported that activist investor Jana Partners disclosed in a letter that it has built a ‘significant’ position in semiconductor manufacturer Wolfspeed and called on the company to resolve what it called a ‘staggering erosion of shareholder value’ up to and including a sale. Jana called on the board to set and execute on metrics and key goals for two of Wolfspeed’s chip fabrication plants and identify a ‘clear funding path’ for future expenses, including CHIPS and Science Act funds.

In the letter, Jana wrote that the company’s ‘differentiated manufacturing capabilities’ and status as an ‘American supplier supporting the energy transition’ gave it significant intrinsic value.

Wolfspeed said in a statement that its board would ‘carefully review’ Jana’s letter. ‘The company continually evaluates options to enhance long-term value and is committed to acting in the best interests of all our shareholders,’ it said.

Reuters reported that the US Federal Trade Commission (FTC) approved a rule to ban non-compete agreements, which it says limit worker mobility and suppress wages. The rule will take effect in August. Supporters say the rule is necessary to rein in the increasingly common practice of requiring workers to sign non-compete agreements even in lower-paying service industries such as fast food and retail. The FTC said banning non-competes will increase worker earnings by up to $488 bn over the next decade and will lead to the creation of more than 8,500 new businesses each year.

FTC chair Lina Khan said non-competes not only restrict workers’ opportunities but can also infringe on other fundamental rights by blocking them from changing jobs. ‘Robbing people of their economic liberty also robs them of all sorts of other freedoms, chilling speech, infringing on their religious practice and impeding people’s right to organize,’ Khan said.

The agency’s two Republican commissioners, Melissa Holyoak and Andrew Ferguson, said federal law does not allow the commission to adopt broad rules prohibiting conduct it deems anti-competitive. Major business groups have criticized the rule, saying non-competes are a necessary way for companies to protect trade secrets and that they promote competitiveness. The US Chamber of Commerce said in a statement that it will file a legal challenge to the rule.

– According to CNBC, Starbucks and the union that represents its baristas are due to resume contract negotiations. The two sides’ return to the bargaining table follows their February announcement that they found a ‘constructive path forward’ during mediation discussions related to litigation over the union’s use of Starbucks’ branding. It marked a major shift for the company, which had spent the previous two years battling Workers United and the broader movement to unionize its cafes. Starbucks and the union, which is affiliated with the Service Employees International Union, have previously met to bargain, but those talks quickly ended in stalemate.

– A Tesla investor who successfully sued to void CEO Elon Musk’s $56 bn pay package asked a Delaware judge to prevent the company from avoiding the court’s authority by moving its legal home to Texas, Reuters reported. Richard Tornetta’s legal team asked Delaware chancellor Kathaleen McCormick to rule on his request before Tesla’s June 13 AGM, where shareholders will vote on reincorporating in Texas and approving Musk’s 2018 pay package. ‘Defendants cannot now seek to run from this jurisdiction and undo years of litigation because they are unhappy with the outcome,’ the plaintiff’s legal team said in a filing.

Musk and Tesla did not immediately respond to Reuters’ requests for comment.

– According to the WSJ, the foreign aid bill signed into law by President Joe Biden on Wednesday has some regulatory surprises for companies trying to navigate US sanctions on Russia and other foreign adversaries. Although much of the focus on the aid package has been on the $95.3 bn it provides for US allies, the legislation makes a key change to US sanctions laws by doubling the amount of time regulators and prosecutors have to investigate sanctions violations. That could lead to more cases and bigger fines against companies, attorneys say.

‘It’s a very far-reaching and impactful statutory change and it’s one that happened very quietly and has surprised a lot of sanctions practitioners and people in industry,’ said Jason Prince, a partner at law firm Akin Gump Strauss Hauer & Feld.

When companies discover a possible sanctions violation, they often do a five-year lookback to see whether it was a one-off or indicative of a systemic problem. Companies may now have to do a 10-year lookback, including for companies they are looking to acquire, said Timothy O’Toole, a member of law firm Miller & Chevalier.

– Shareholders of Petrobras voted for the Brazilian state-run oil company to pay out 50 percent of the extraordinary dividends it withheld in March, easing investor concerns about the destination of those funds, Reuters reported. The vote settles a matter that arose when the company’s government-controlled board decided to withhold the extra dividends, which surprised markets. Petrobras is set to pay out roughly R$22 bn ($4.26 bn) relative to its 2023 results, while the remaining 50 percent will be kept in a fund for future disbursement.

CNBC reported that according to research from Russell Reynolds Associates, global CEO turnover rose in the first quarter of 2024, with 52 departures and 68 new appointments among companies tracked in global stock indices such as the S&P 500, FTSE 100 and others. What the analysis refers to as ‘failed CEO appointments’, or CEOs who lasted less than two years, accounted for 15 percent of outgoing CEOs in early 2024. 

But turnover rates are worse for women. Roughly one in four female CEOs (24 percent) leave their post within two years, according to Russell Reynolds Associates data going back to 2018. That’s more than twice the share of the 10 percent of men who leave their CEO job in that window. With an even shorter timeline, female CEOs are four times as likely as male chief executives to leave the role within a year.

– According to Reuters, the US Federal Communications Commission (FCC) voted 3-2 to reinstate landmark net-neutrality rules and reassume regulatory oversight of broadband internet rescinded under former president Donald Trump. FCC chair Jessica Rosenworcel said the agency ‘believes every consumer deserves internet access that is fast, open and fair.’ Reinstating the net-neutrality rules has been a priority for President Biden – Democrats were thwarted for almost three years because they did not take majority control of the five-member FCC until October.

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...