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Mar 09, 2018

The week in GRC: Disney shareholders reject CEO pay, and ISS objects to Tesla’s Musk equity award

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

The New York Times reported that US regulators asked chip maker Qualcomm to delay an annual shareholder meeting to give them more time to investigate whether a takeover bid by Broadcom would threaten US national security. Broadcom had sought to pave the way for its bid by switching its headquarters to the US. That reincorporation is due to be completed by early May, and Broadcom has argued that its status as a soon-to-be American company means the deal should not be subject to review.

The Committee on Foreign Investment in the US (Cfius) asked Qualcomm to delay the election of directors by 30 days to give it time to ‘fully investigate’ the proposed deal. Broadcom said Monday it had been informed Sunday night that Qualcomm had filed a voluntary request for a Cfius review in January. Qualcomm did not respond immediately to a request for comment.

– A study by non-profit As You Sow said the world’s largest fund managers have rubber-stamped pay packages for many of what it classes as the US’ most overpaid CEOs, according to the Financial Times. The study found that BlackRock voted against the pay packages of just 11 CEOs of the 100 who appeared on the overpaid list, while Vanguard voted against 12. Andrew Behar, chief executive of As You Sow, said it was time for the biggest fund managers to realize ‘how they’re abandoning their fiduciary duty by continuing to approve absurd pay packages.’

BlackRock said that as well as engaging and voting on pay, it looks ‘to hold compensation committee members accountable where we see a disconnect between pay and performance.’ Vanguard said it takes ‘very seriously our obligation to act as a voice’ for fund investors. ‘More so than voting, we believe engagement provides an opportunity to fully understand issues and target feedback and messaging to companies,’ it said. ‘Where we do detect material risks, such as misaligned compensation structures, we act with our voice and our vote.’

The Wall Street Journal looked at how companies are beefing up due diligence of acquisition targets to avoid costly cyber-security surprises, particularly when intellectual property or customer data drive the deal. Gaps in data protection, undiscovered breaches, regulatory violations and other holes in a company’s technology operations can threaten M&A deals. Such problems can also decrease the value of a deal or leave an acquirer liable for problems after a merger.

– The WSJ reported that the founding family of Nordstrom experienced a second setback in trying to take the company private, when a special committee of the board rejected its roughly $8 billion buyout offer as too low. The family said a go-private transaction would give the company the flexibility it needs to ‘navigate a challenging retail landscape at a critical time when the public market for retail stocks is highly volatile and increasingly focused on short-term results and risks.’

The special committee said it had directed its advisers and company management to not allow the group to conduct further due diligence unless it ‘promptly and substantially’ improves its offer.

– Europe’s largest cardboard box maker Smurfit Kappa has rejected an unsolicited cash and shares offer from International Paper of the US, the Financial Times reported. The Dublin-based company did not disclose the value of the bid but said the proposal ‘fails entirely to reflect the group’s strong growth prospects and attractive industry outlook.’ Smurfit Kappa chair Liam O’Mahony said: ‘The board of Smurfit Kappa has unanimously rejected this unsolicited and highly opportunistic proposal. It does not reflect the group’s true intrinsic business worth or its prospects.’ There was no immediate comment from International Paper.

– Federal Reserve vice chair Randal Quarles says US financial regulators are working quickly to make ‘material changes’ to the Volcker Rule, according to Bloomberg. ‘The Volcker Rule is an example of a complex regulation that is not working well,’ he said. The US Department of the Treasury called for Volcker Rule changes when it released a series of reports last year on ways to revise financial industry rules. The five agencies responsible for the rule have been meeting since then to formulate a plan, including at the agency-head level, Quarles said.

Reuters reported that the SEC fined Intercontinental Exchange’s NYSE and two affiliate exchanges a total of $14 million for multiple alleged regulatory failures related to disruptive market events. The charges stemmed from five separate investigations and include the first-ever charge for violating a sweeping set of business continuity and disaster recovery regulations adopted by the SEC in late 2014, the agency said. The NYSE’s alleged violations included erroneously implementing a market-wide regulatory halt and negligently misrepresenting stock prices as ‘automated’ despite extensive system issues ahead of a total shutdown, the SEC said.

NYSE, NYSE Arca and NYSE American settled without admitting or denying wrongdoing. ‘For retail investors to have confidence in our markets, exchanges must provide accurate information and comply with legal requirements, including being equipped for unexpected market disruptions,’ said Stephanie Avakian, co-director of the SEC’s enforcement division.

‘We take our regulatory obligations seriously and remain focused on building and maintaining industry-leading technology and ensuring our markets operate with the utmost integrity,’ an NYSE spokesperson said.

– In the year since State Street’s Fearless Girl statue was put in place near Wall Street, more than 150 companies the firm has targeted for not having a female director have added at least one, Bloomberg reported State Street as saying. The company sent letters and engaged in an unprecedented withholding of votes from directors responsible for nominating their colleagues at more than 400 companies.

‘We still have a long way to go but we’re happy to see the impact we’ve had so far,’ said Rakhi Kumar, who leads ESG investment strategy at State Street. ‘This is about diversity of thought and backgrounds. Women could be 50 percent of your customer base, and 30 percent of your employees. How are you representing the views of half of society?’

– The WSJ reported that, according to people familiar with the matter, Univision Communications’ board is preparing to search for new leadership and is undertaking a business review that could lead to large cost cuts after the broadcaster cancelled its initial public offering. CEO Randy Falco recently told the board he would like to retire at the end of 2018 when he turns 65, board chair Haim Saban said.

‘We at the board of Univision have reluctantly agreed to Randy’s wishes out of respect and the high regard we have for him as a partner,’ Saban said.

‘It was the absolute highlight and privilege of my life to serve for the past eight years as the CEO of Univision,’ Falco said. He is set to work with the board over the next year in restructuring the company and transitioning to new leadership.

Bloomberg looked at a report from Bank of America that found investing in companies with more women in leadership roles can help lower the volatility of your portfolio. Firms with more gender diversity among managers have consistently seen lower share-price swings and reduced earnings volatility, as well as higher returns on equity, the bank said. The findings were particularly strong for technology companies, according to the note. Having a diverse board is an important aspect of corporate governance and helps companies better represent themselves with and relate to their customers, the strategists wrote.

– The SEC warned that crypto-currency exchanges risk operating illegally because they don’t disclose how they prioritize investors’ orders or pick tokens that trade on their markets, the WSJ reported. The investor alert represents the SEC’s latest effort to herd the US market for raising funds in crypto-currencies into a zone the government regulates. ‘The SEC is going to regulate not only the products but also the places where they trade and who trades them,’ said Tyler Gellasch, a former SEC official who is now executive director of Healthy Markets Association. ‘There ought to be some pretty deep soul searching for those operating some of these trading platforms.’

– The Financial Times reported that shares of hundreds of European companies will be temporarily barred from dark pools as Mifid II comes into effect. The London share market was hardest hit, including more than three quarters of the FTSE 100 and more than two thirds of the mid-cap index, according to data published by European regulators. Germany’s Xetra Dax 30 was the major market least affected by the restrictions, the data found. The rules are designed to limit the volume of equities trading done in dark pools and encourage activity to shift to public exchanges.

– UK finance minister Philip Hammond said regulators could help soothe banks’ nerves during Brexit once a transition deal for the UK’s withdrawal is agreed with the European Union at a summit this month, according to Bloomberg. Hammond said the European Commission and regulators in both the UK and mainland Europe can step in to reassure firms once the political deal on the transition is achieved.

Bloomberg reported that ISS recommended voting against Tesla’s plan to give Elon Musk an equity award valued at $2.6 billion, saying the extraordinary size couldn’t be justified. Glass Lewis & Co also urged shareholders to reject the plan at Tesla’s March 21 special meeting.

Baillie Gifford & Co and T Rowe Price Group, which combined hold about 14 percent of the company’s stock, have voiced support for Musk’s award, saying that it’s well-aligned with performance and that Tesla’s future success is closely tied to its CEO. A Tesla spokesperson declined to comment.

Reuters reported that Walt Disney shareholders in a non-binding vote rejected an executive compensation plan that could give CEO Bob Iger up to $48.5 million a year over four years plus an equity grant worth about $100 million. Fifty-two percent of shareholders voted against Disney’s compensation plan for Iger and other executives, the company said at its annual shareholder meeting in Houston. Forty-four percent cast ballots in favor and 4 percent abstained. ‘The board accepts the result of today’s non-binding vote and will take it under advisement for future CEO compensation,’ Aylwin Lewis, chair of the board’s compensation committee, said in a statement.

It is unusual for shareholders to vote against executive compensation. Just 1.2 percent of S&P 500 companies failed to win majority support for their advisory pay resolutions in 2017, according to ISS Analytics.