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Oct 18, 2019

The week in GRC: Investors challenge SEC on proxy adviser guidance, and FINRA releases exam findings

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

CNN reported that Boeing’s board of directors voted on October 11 to remove CEO Dennis Muilenburg’s role as chair. The board said the move was an effort to strengthen ‘safety management’, and Muilenburg will continue as CEO, president and a director. The board elected independent lead director David Calhoun to serve as non-executive chair.

‘The board said splitting the [chair] and CEO roles will enable Muilenburg to focus full time on running the company as it works to return the 737 MAX safely to service, ensure full support to Boeing’s customers around the world and implement changes to sharpen Boeing’s focus on product and services safety,’ the company said in a statement. Muilenburg said he was ‘fully supportive of the board’s action.’

– Climate change activists targeted BlackRock in London on Monday, demanding that the world’s major financial institutions stop funding what they describe as a looming environmental catastrophe, according to Reuters (via CNBC). Extinction Rebellion has been staging civil disobedience in London. Activists glued themselves to the doors of BlackRock’s offices while others staged a mock dinner party with rolled-up banknotes on their plates, a Reuters reporter said.

Extinction Rebellion wants non-violent civil disobedience to force governments to cut carbon emissions and avert a climate crisis. There was no immediate comment from BlackRock. Bank of England governor Mark Carney has said the financial industry must transform its management of climate risk.

The Wall Street Journal reported that executives who were asked to give feedback on rules governing how companies account for goodwill in their financial statements say the standards have imposed unnecessary costs and are too subjective. That feedback could help FASB decide whether to propose changes to existing standards on goodwill, which is created when one company acquires another for more than the value of its hard assets.

FASB’s research is focused on the goodwill rules’ impact on public companies, but the board is considering making larger changes that would affect all companies, according to its invitation to comment.

Reuters reported that Florida’s state pension fund, CalSTRS, Elliott Management, Aberdeen Standard Investments and dozens of other asset managers are pushing back publicly after the SEC issued guidance in August seen by some observers as putting proxy advisers on a tighter leash.

‘We are concerned that the SEC approach risks replacing the current, effective free-enterprise approach with a system that defers too much to incumbent management teams and boards of directors by diminishing investor oversight and accountability mechanisms,’ the group wrote in a letter to the SEC.

The SEC wants proxy advisers to say more about how they reach their recommendations and how companies can react if they spot errors in them. ‘We think there’s an attempt to bias proxy reporting to company management,’ said Ken Bertsch, executive director of the Council of Institutional Investors, which is spearheading the investors’ response. ‘The practical effect of all this will be to limit competition in the proxy advisory business.’

CNN said that, according to the latest Women in the Workplace survey from and McKinsey & Company, the percentage of C-suite executives who are female has risen to 21 percent, up from 17 percent five years ago. In addition, 44 percent of companies now have three or more women in their C-suite, up from 29 percent in 2015.

But despite these improvements, gender disparity at the top is not evaporating due to a promotion gap that occurs early on in women’s careers, the report stated. ‘The biggest obstacle women face is the first step up to manager, or [the] broken rung. Women are less likely to be hired and promoted to manager,’ the researchers wrote.

– Blackstone Group said it would launch a tender offer for Unizo Holdings, doubling down on its $1.6 billion offer after that proposal was rejected by the Japanese hotel chain, according to Reuters. Blackstone said it would consider ‘any possible options’ including initiating the bid if Unizo would not agree with its proposals by October 23. Unizo recently rejected a buyout proposal from Blackstone as well as one from a ‘locally renowned’ fund that it did not identify.

A Unizo spokesperson said the company had received the offer from Blackstone but it had not decided yet how to respond.

– A new study from S&P Global Market Intelligence reported that public companies with female CEOs or CFOs were often more profitable and produced better stock price performance than many companies with men in those roles, according to CNN. The study looked at new CEO and CFO appointments for companies on the Russell 3000 Index over the past 17 years.

Two years after appointing a female CEO, investors saw companies as less risky and the companies had better momentum in their stock prices, the study found. Investors also saw companies with women CFOs as less risky and those companies were more profitable. Looking across the 17-year period, the study found that companies with female CFOs generated a combined $1.8 trillion more in gross profits than their sector averages during the women’s tenures.

– The SEC said that Robert Burson, an associate regional director of enforcement in the agency’s Chicago office, is retiring after 29 years at the regulator. Burson, who is leaving at the end of this month, joined the division of enforcement staff in Chicago in 1990 and became associate regional director in 1996.

‘For 29 years, Bob has worked tirelessly to protect Main Street investors and preserve the integrity of our markets,’ said Stephanie Avakian, co-director of the division of enforcement, in a statement. ‘His career is a model for attorneys in enforcement and across the commission.’

– The Financial Industry Regulatory Authority published the 2019 report on its examination findings and observations, highlighting what it called ‘effective practices that could help firms improve their compliance and risk-management programs.’

‘Our position as a self-regulatory organization affords us the unique opportunity to provide firms with resources that help them more easily comply with rules and regulations and protect investors – and this report aims to do just that,’ said Bari Havlik, executive vice president of member supervision, in a statement.

CNN reported that Senator Ron Wyden, D-Oregon, introduced legislation that would imposes stiff penalties on companies and executives who fail to protect consumer data. The bill, known as the Mind Your Own Business Act, threatens to put top executives in jail for up to 20 years if their companies are caught lying to authorities about having misused Americans’ personal information. It also means those companies would face special tax penalties tied to executive salary.

In addition, the legislation would give the Federal Trade Commission broad new powers to fine companies by up to 4 percent of annual revenues for violating the proposed law.

– According to the WSJ, US companies that do business in Turkey are bracing for more possible restrictions and loss of revenue in the wake of President Donald Trump’s authorization of new sanctions on the country. The development could further complicate compliance as geopolitical tensions grow. The US Department of the Treasury Department on Monday imposed sanctions against Turkey’s defense, interior and energy ministers as well as its Ministry of National Defense and Ministry of Energy and Natural Resources. The Treasury also warned that individuals or entities engaging with the ministries risk being blacklisted.

Although these designations are limited, the executive order signed by Trump authorizes the Treasury Department to issue a broader range of sanctions, which could pose more significant challenges to multinational companies.

– The WSJ reported that, according to people familiar with the matter, AT&T is in talks with Elliott Management to resolve the activist investor’s campaign for change at the company. The two sides have held a series of wide-ranging discussions since Elliott disclosed a stake in AT&T five weeks ago and urged the phone and media company to make changes intended to boost its share performance. AT&T and Elliott could reach an agreement as soon as this month, although the talks could also fall apart, the people said.

Elliott last month sent a letter challenging AT&T’s leadership, criticizing its move into the media business and calling on the company to review units that might not fit with its long-term strategy. AT&T CEO Randall Stephenson said the company was already following some of the ideas advanced by Elliott and defended the company’s media strategy.