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Feb 18, 2022

The week in GRC: ISS urges vote against Apple CEO’s compensation and SEC faces decisions over Scope 3 disclosures

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

Reuters reported that Toshiba Corp is planning an extraordinary general meeting of shareholders on March 24 to seek their initial approval to divest its devices business. The final, legally binding vote to determine whether to break up the company will not happen until next year, but next month’s meeting will be a key test of shareholder support for the board’s restructuring plan. Singapore-based 3D Investment Partners has submitted a separate proposal for the meeting, urging Toshiba to explore other options and solicit buyout offers from private equity firms and potential strategic buyers. The company is opposed to 3D’s proposal.

The board chose the break-up plan over buyouts after a thorough review that involved talks with private equity firms over conditions and pricing for a potential deal to take the company private, CEO Satoshi Tsunakawa said. But if the breakup plan fails to win majority support all options will be considered, including a deal to take the company private, he said.

– Lockheed Martin Corp called off plans to acquire rocket engine maker Aerojet Rocketdyne Holdings for $4.4 bn amid opposition from US antitrust enforcers, according to Reuters. The Federal Trade Commission sued to block the deal in late January on the grounds that it would allow Lockheed to use its control of Aerojet to hurt other defense contractors. Missile maker Raytheon Technologies was an outspoken opponent of the proposed acquisition.

Lockheed CEO James Taiclet said the acquisition would have improved efficiency and speed and cut costs for the US government but that terminating the agreement was in its stakeholders’ best interest. Aerojet said in a separate statement that it still expects a strong ‘future performance’ despite the scrapped merger.

CNN said that according to a report by a group of 28 non-government organizations, financial institutions channeled more than $1.5 tn into the coal industry in loans and underwriting from January 2019 to November 2021, even as many have made net-zero pledges. Reducing coal use is a key part of efforts to cut greenhouse gases and bring emissions down to net-zero by the middle of the century, and governments, companies and financial institutions have pledged to take action. But the research found that banks continue to fund 1,032 firms involved in the mining, trading, transportation and utilization of coal.

‘Banks like to argue that they want to help their coal clients to transition, but the reality is that almost none of these companies are transitioning,’ said Katrin Ganswind, head of financial research at German environmental group Urgewald, which led the research. ‘And they have little incentive to do so as long as bankers continue writing them blank checks.’

The study said banks from six countries – China, the US, Japan, India, the UK and Canada – were responsible for 86 percent of global coal financing over the period.

– Investment firm Sachem Head Capital Management is trying to take control of US Foods Holding Corp’s board and has nominated seven directors, arguing that the food distributor has been lagging its peers, Reuters reported. Sachem Head said the nominations are ‘the last option available to us to protect the interests of our fellow stockholders.’ It said US Foods had failed to make operational improvements and lift margins.

In a letter to other shareholders, Sachem Head’s portfolio manager, Scott Ferguson, wrote that new board directors are needed to hold current or future management accountable. Ferguson nominated himself and six others with expertise in supply chain issues, the food industry and strategic and financial issues.

US Foods Holding had previously said it split the role of board chair and CEO, taking a step that often appeals to big investors such as pension funds that would eventually vote in proxy fights.

– The Financial Stability Board (FSB) said policymakers must act quickly in crafting rules covering the digital asset market, given its tightening link with the traditional financial system, the Financial Times reported. ‘There is clearly a higher degree of urgency,’ said Klaas Knot, the Dutch central bank governor who became chair of the FSB in December, describing how the board had previously been ‘comfortable’ saying there was no material risk from crypto because of its size and lack of connectivity to traditional financial markets.

‘Now what we are seeing is… not only has there been a rapid increase in scale, but also the touchpoints with traditional financial intermediation have increased and therefore it needs more focus from the FSB,’ he added.

So far, global regulators have greeted crypto with a patchwork of measures, including a severe crackdown in China, and the UK’s efforts to restrict crypto advertisements and register crypto companies for money laundering and counter-terrorism compliance. The FSB also warned that big banks and other systemically important financial institutions were ‘increasingly willing’ to gain exposure to crypto and pointed to global stablecoins as causing particular risks to financial stability.

The Wall Street Journal noted that most public companies report the value of their property, accounts receivable and inventory but not human capital, while investors want employers to consistently report specific data points using standardized measurements so they can compare one company with another.

A growing number of large companies include some workforce statistics in annual sustainability reports, but the data isn’t standardized. Almost none quantify such information in quarterly or annual financial statements. Some fund managers are using big data, looking through websites such as Glassdoor and LinkedIn to estimate workforce trends in the companies they cover.

Others are repeating long-standing calls for regulation that would require companies to report employee data, including pay, training, job satisfaction, demographics and hiring and promotion rates. CalPERS is a leader of the campaign for mandatory reporting. The pandemic has highlighted how critical human capital risks are to companies and their investors, a CalPERS spokesperson said. The SEC is expected to unveil a rule in the coming months that would require disclosure of standardized human capital data.

– According to the FT, ISS has recommended that Apple shareholders vote against CEO Tim Cook’s $99 mn pay and bonuses package. ISS has told its clients in a letter that there ‘is a significant concern’ with the stock award Cook received last year, which was his first since 2011. ISS last recommended against Apple’s pay in 2015.

Apple declined to comment on ISS’ recommendations. In its annual proxy statement, published last month, the company’s board pointed to revenues and profits in 2021 that ‘significantly exceeded’ the company’s targets, triggering the maximum payouts under executives’ performance-based bonuses. Apple said its board’s remuneration committee ‘will continue to consider shareholder feedback and the results of say-on-pay votes when making future compensation decisions.’

ISS’ negative recommendation for Apple comes after a record number of S&P 500 companies last year failed to garner 50 percent support for a pay vote at annual meetings.

– The WSJ reported that activist investor Alta Fox Capital Management is seeking to add several directors to Hasbro’s board and is urging the toy manufacturer to make changes, including a spinoff of its fast-growing unit housing games such as Dungeons & Dragons. Alta Fox has nominated five directors to its board, according to a letter that will be sent to the company’s shareholders. It believes Hasbro could double its valuation by spinning off the unit that houses the Dungeons & Dragons business.

Hasbro said in a statement that it will review Alta Fox’s nominees. It said it is excited to welcome its new CEO, Chris Cocks, who previously led the unit housing Dungeons & Dragons, known as the Wizards of the Coast and Digital Gaming division. ‘[Chris] brings extensive omni-channel experience and a proven track record for value creation at Wizards to supercharge Hasbro’s growth and capitalize on all elements of our Brand Blueprint across consumer products, Wizards and digital gaming and entertainment,’ the company said.

– According to the WSJ, the SEC is preparing rules that would require all public companies to disclose their greenhouse gas output but is struggling to figure out how much detail to demand about emissions produced by businesses’ suppliers and customers. At issue are Scope 3 emissions, which are mostly greenhouse gases produced by a company’s suppliers and by customers using its products. How to handle these indirect emissions has emerged as a sticking point inside the SEC as it deliberates on the new rules. According to CDP, supply-chain emissions alone from companies in its environmental disclosure database are, on average, 11.4 times as much as operational emissions.

SEC officials drawing up the landmark rules face a balancing act. Many investors want the information so they can judge the risks faced by companies from climate change and regulations designed to mitigate it. But some business groups say rules requiring Scope 3 disclosures would be burdensome and that available data isn’t always good enough to make accurate disclosures. The SEC is struggling to square this circle, according to people familiar with the matter.

An SEC spokesperson declined to comment.

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...