Corporate governance - Vigil

The coronavirus may have ended the office era. Even though governments allowed businesses to reopen, few workers have returned to offices. It is not clear how many will ever return. Tech giant Facebook, for example, plans to shift up to half of employee to remote work arrangements. Adjusting to this new normal requires firms to revisit and revise many practices and processes. One of the most essential processes in corporate life is “onboarding” new directors: preparing them for their role at the company through a strategic process. Some analysts have even asked whether it is possible to onboard directors now. Yes, it is. In a new article, we describe how firms can adapt best practices in onboarding to the online context.

Due to be completed in 2022, Boston University’s $141m data-sciences centre will tower over the city like an uneven Jenga tower, providing 350,000 square feet of space. The University of Reading in Britain has nearly finished a £50m ($65m) life-sciences building, designed to make more space for subjects that are attracting lots of students. The University of New South Wales (unsw) in Australia has pumped more than A$500m ($360m) into new facilities, as part of a project intended to push it into the top 50 of global rankings. If these plans made sense in a world where students were crossing borders in droves, today they seem barmy. All three institutions are now considering cuts. Boston has said that it is likely some staff will have to be laid off or furloughed. Reading has announced that 15% of full-time jobs at the university are on the line. unsw has already cut 8% of its staff and closed two of its eight faculties. At all three universities plans for new facilities are on hold. Covid-19 has put immense pressure on all universities. But the problems are about to get particularly severe for those in America, Australia, Canada and Britain that have come to rely on international students to fill their coffers. There are now more than 5m such students, up from 2m in 2000. In Australia foreign students provide a quarter of universities’ income (see chart 1). In Canada the tuition fees for a science degree at McGill, one of the country’s top universities, cost C$45,656 ($34,000) a year for an overseas student, compared with C$2,623 for a local.

The Committee introduced its Principles for the sound management of operational risk in 2003, and subsequently revised them in 2011 to incorporate the lessons from the financial crisis. In 2014, the Committee conducted a review of the implementation of the principles which indicated that several principles had not been adequately implemented, and that the principles did not sufficiently capture certain important sources of operational risk. The Committee is proposing a limited number of updates to: (i) align the principles with the recently finalised Basel III operational risk framework; (ii) update the guidance where needed in the areas of change management and information and communication technologies; and (iii) enhance the overall clarity of the principles.

SoftBank Group Corp. has given up pretending to operate anything. Once the owner of two telecom companies and a collection of other operating businesses, the Japanese conglomerate would report quarterly operating profit and net income. That’s how most normal companies do it. In days past, the former category included profits from Sprint Corp. and Softbank Corp., as well as operating income from the SoftBank Vision Fund, but excluded gains or losses from other investments. On Tuesday, SoftBank announced it will no longer bother reporting operating income, instead “gain (loss) on investments will be used in order to show investment performance in the consolidated financial results.” The catalyst was the sale of Sprint to T-Mobile US Inc., meaning that the U.S. mobile operator is no longer a consolidated entity. The change makes sense. SoftBank hasn’t “operated” anything for a while, instead cobbling together a growing pile of investments both within the Vision Fund (such as ByteDance Ltd. and Uber Technologies Inc.) and outside (including Alibaba Group Holding Ltd. and domestically listed telco Softbank Corp.). [...] For investors, the reporting shift highlights the truth of what SoftBank Group has become: a fancy, highly managed fund — a hedge fund, perhaps — whose returns ought to be benchmarked against indexes of its peers and not as the technology company Son once ran.

Microsoft Corp has emerged as the most likely buyer of the U.S. operations of TikTok, the popular Chinese short-video app that U.S. President Donald Trump is preparing to effectively ban on national security grounds. A deal would be in line with Microsoft’s stance toward China where the firm has a sizeable presence - unlike fellow U.S. tech heavyweights such as Facebook Inc (FB.O) and Alphabet Inc’s Google which appear to have given up on China’s consumer-facing market with its miscellany of government strictures. The country accounts for over $2 billion in annual revenue, Microsoft President Brad Smith said earlier this year.
#1. WHAT DOES MICROSOFT DO IN CHINA?
Microsoft employs roughly 6,000 people in the country, with offices in Shanghai, Beijing and Suzhou. [...]
#2. DOES MICROSOFT SELF-CENSOR IN CHINA?
Bing and LinkedIn in China appear similar to their global counterparts but Microsoft censors search results and content the Chinese government considers sensitive. [...]
#3. HAS MICROSOFT HAD SCRAPES WITH CHINA’S GOVERNMENT?
Microsoft has bemoaned rampant piracy of Windows in China for decades and has occasionally filed lawsuits and complaints even against state-backed companies to address its concerns. [...]
#4. WHAT ABOUT BILL GATES?
Microsoft co-founder Bill Gates has spoken in mostly positive terms about China in recent years. In November, he held a public meeting with Peng Liyuan, wife of President Xi Jinping.

Norway’s central bank broke “guidelines, rules and laws” when it appointed Nicolai Tangen as the next head of its $1tn oil fund and failed to eliminate conflicts of interest from the former hedge fund manager, according to the main supervisor of Norges Bank. Julie Brodtkorb, the centre-right politician who chairs the supervisory council of Norges Bank, told a hearing in Norway’s parliament on Monday that central bank governor Oystein Olsen could have broken the law by not informing the finance minister that Mr Tangen would be allowed to keep a controlling stake in the hedge fund he founded, AKO Capital. She added that Norges Bank had reduced but not eliminated the risk of a conflict of interest between Mr Tangen’s ownership of 43 per cent of AKO and his running of the world’s largest sovereign wealth fund in a likely breach of its ethical guidelines. [...] Mr Tangen founded AKO, which has about $20bn in assets, in 2005 and is planning to reduce his stake from 78 to 43 per cent as well as give away any dividends while he heads the oil fund to his charitable foundation. Mr Olsen said that eliminated any potential for conflicts of interest “for all practical purposes”. [...] Mr Olsen had already conceded it was unfortunate that Mr Tangen’s name never appeared on the official applicant list despite being a serious candidate for months. Ms Brodtkorb said that was a breach of the public information law. [...] Mr Tangen has previously said it is normal way for hedge funds to be organised to avoid double taxation. Mr Olsen stressed that the management company that generates Mr Tangen's income is registered and regulated in the UK, where Mr Tangen has paid income tax.

Saudi Aramco is pushing ahead with plans to pay out $75bn in dividends this year despite a sharp drop in earnings, as the state energy group bets on a rebound for the pandemic-hit oil sector. Like its international peers, Saudi Aramco has had a brutal year as government-imposed lockdowns to curb the spread of coronavirus sent oil demand and prices tumbling. The company on Sunday reported net income of $6.6bn in the three months to June 30, a 73 per cent fall from the same period a year ago. It marks a drastic change in fortunes from December, when it raised a record $25.6bn in its initial public offering and became the world’s most valuable listed company — a status it recently lost to technology giant Apple. [...] Despite the uncertainty surrounding the global economy, Saudi Aramco said it would maintain the world’s biggest quarterly dividend at $18.75bn, most of it intended for the government in Riyadh, in line with its pledge for an annual $75bn payout. The shareholder handout is far bigger than free cash flow for the period of $6.1bn, which is down from $20.6bn a year ago. Mr Nasser told reporters that “our intention is to pay $75bn, subject to board approval and depending on market conditions”. Minority shareholders, who own 1.5 per cent of the company, will be “protected” for the next five years and given priority payments, he said. In June, Mr Nasser said that while the company would try to use cash to make dividend payments, it could also issue loans or bonds.

The past four months have brought unprecedented change to the capital markets and the world at large. As the global COVID-19 pandemic spread throughout the world, the economic disruption was significant, and a decade-long bull market was transformed almost overnight. The proxy season that has followed has been unlike almost any other, but also reassuringly familiar. Despite predictions to the contrary, activism in the United States remained persistent; many large activists were limited in their activity, but the occasional and first-time activists that picked up the slack found considerable success in achieving their objectives. Further, an increase in overall market volatility saw the return of poison pills as a viable defense mechanism (at least temporarily) but has also created new opportunities for activists in what had previously been somewhat of a stagnant market.

Throughout the Covid-19 pandemic, there’s been one hope that we’ve all relied on. We’re all waiting, with bated breath, for the day that scientists announce a successful coronavirus vaccine, because then we can get a jab and go back to the humdrum existence we enjoyed in 2019. And, according to Russia, that day is today. In the last 24 hours, Vladimir Putin has apparently approved the world’s first coronavirus vaccine. Big news indeed. But a lot of people are understandably confused at this announcement. We’ve been told for months that the race to find a vaccine is more of a marathon than a sprint. Even the optimistic targets of the most advanced vaccine programs are only aiming to start delivering doses at the end of 2020. How is it that Russia has managed to score the ultimate coup and finish testing a vaccine months before anyone else? It turns out, unfortunately, that they haven’t really. In actual fact, the only discernible difference between Russia’s vaccine and any of the others you’ve seen in the news is that this one has skipped most of the testing phases that come before licensing. We actually have no idea if it is safe and effective at all.

Board composition and performance continue to be under scrutiny by various stakeholders. Institutional investors are paying close attention to the individuals representing their interests in the boardroom, and how the board addresses its own succession. Hedge fund activists are also watching and certainly have not been shy about seeking change. And directors themselves are increasingly vocal about the performance of their peers. In fact, 49% of directors believe someone on their board should be replaced, identifying an opportunity to enhance boards’ skills; 23% believe two or more directors should.1 They say their top reasons are because directors overstep the boundaries of their oversight role, are reluctant to challenge management, have a style of interacting that negatively affects board dynamics and advanced age has led to diminished performance. So, how do boards use their annual assessment process to measure effectiveness, drive refreshment and raise performance? They shift to a continuous improvement mindset. Most boards conduct board and committee assessments as required by stock exchange listing standards. More and more boards are also conducting individual director assessments; 44% of S&P 500 boards include some form of individual director assessment, up from 22% ten years ago.2 While some boards are quite good at conducting their board assessments, others could stand to get more out of the exercise. The biggest roadblocks? Viewing it as a compliance exercise, using an approach that doesn’t really allow for honest feedback and failing to follow-up on the results.

The COVID-19 pandemic forces businesses to make significant and, at times, difficult decisions. In the current context, businesses may need to incur additional indebtedness or seek further equity investments, which can create opportunities. Looking at the decision-making process of corporations through the lenses of an institutional or private equity investor, this bulletin serves as a refresher with respect to the duties, responsibilities and liabilities of nominee directors and investors, and highlights certain key considerations for the negotiation of governance rights given that in connection with investments of a certain size, it is common for investors to be represented on the board of directors of investee corporations. [...] One size does not fit all. Prior to negotiating governance rights, institutional and private equity investors should assess and determine their objectives and goals for the particular investment. In the event that nominee directors are appointed by a shareholder, it is important for all directors to remember their duties to act in the interest of the investee corporation and not of its nominating shareholders. Although this may be difficult at times, it is essential to avoid a claim to the effect that the nominee director did not fulfil his or her duties.

Lucian Bebchuk and Roberto Tallarita recently published an op-ed in the Wall Street Journal, ‘Stakeholder’ Capitalism Seems Mostly for Show. “If CEOs really intended to amend their companies’ purpose, they’d at least consult their boards first.” [...] Bebchuk and Tallarita analyze CEO incentives, examine if they used their discretion to protect stakeholders, and discuss if we are likely to see meaningful change. They find the public commitments less than credible. Additionally, “stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance.”  Raising illusory public hopes will “impede or delay reforms that could bring meaningful protection to stakeholders.” That seems to be the exact intent. They were enabled by BlackRock’s Larry Fink and by a memo from Wachtell, Lipton, which declared 2019 to be a “watershed year” in corporate governance due to “the advent of stakeholder governance.” [...] Bebchuk and Tallarita conclude with more speculative remarks, which appear to dismiss the possibility of power sharing among stakeholders. I am not so dismissive. I can more easily see power sharing with employees than with suppliers, customer and communities. Even with employees, the easiest form of power sharing would be through employee stock owneship plans (ESOPs). Far greater use of ESOPs would help solve a host of issues, but that is another discussion. Thanks to Bebchuk and Tallarita for scholarly research.  The BRT’s embrace of stakeholderism is largely a distraction. Perhaps they are taking a page from Donald Trump, who seems to use that tactic very effectively.

A new study reveals that big US corporates are unlikely to look far from home for their next chief executive. Corporate mandarins often claim they trawl the world for new chief executives, recruiting the best from a single pool of talent. Evidence from the US suggests this is not the case and boards more often than not plumb for leaders closer to home. Looking at chief executive appointments in the S&P 500 from 1993 to 2012 they find a distinct reluctance among boards to place outsiders in the top job. They conclude a hefty 80.4% of appointments are insiders. And just to demonstrate that boards find it difficult to venture far afield, most outsiders appointed already have a connection with their new companies resulting in an overhwhelming 90% of new CEOs being “current executives, former executives, board members or co-workers”. The research produces a surprise result and will hamper those who often claim that big salaries are necessary because of international competition for the best executives. [...] So, what explains all of this? Why the preference for insiders? Cziraki and Jenter offer a number of reasons. First they suggest “firm-specific human capital” is at play. In other words, insiders already know the company and its business and win leadership for those reasons. Secondly, they suggest “asymmetric learning” may be operating: boards appointing CEOs know more about insiders close to home than they do outsiders, and their appointment decisions are steered accordingly. This might also explain why outsiders already known to an organisation are preferred over unknown outsiders.

Shares of Eastman Kodak plunged more than 40% at the low on Monday after a federal agency said it was reviewing a previously announced $765 million loan for the onetime photography pioneer to produce drug ingredients. “Recent allegations of wrongdoing raise serious concerns. We will not proceed any further unless these allegations are cleared,” the U.S. International Development Finance Corporation said in a tweet Friday. The review of funding comes as the Securities and Exchange Commission is reportedly investigating how the company disclosed the deal with the government, according to a report from The Wall Street Journal. The probe is also reportedly expected to review stock options that were granted to executive chairman James Continenza ahead of the announcement. After the initial drop in early trading, shares recovered somewhat to trade 27% lower before briefly being halted for volatility. The stock has been on a wild ride since the funding was announced on Tuesday, July 28. But trading activity picked up the day before the official announcement, which raised some eyebrows on the Street. [...] The loan, which was the first of its kind under the Defense Production Act, was meant to aid the company in its pivot to drug production. With the funding, Kodak said it would expand existing facilities in Rochester, New York and St. Paul, Minnesota under a new Kodak Pharmaceuticals arm, which would produce drugs to treat a wide variety of illnesses. [...] Kodak has previously said that it would cooperate with any potential inquiries, and on Friday the company said it was launching an internal investigation.

Activist fund Effissimo Capital Management, the biggest investor in Toshiba Corp (6502.T), was kept in limbo by Japan’s government over a key shareholder vote until the day before the industrial conglomerate’s annual meeting, two government sources said. The delayed approval to hold the vote on appointing outside directors to Toshiba’s board illustrates how Japan’s tighter rules on foreign ownership, introduced in June and designed to protect industries critical to national security, may also potentially be used to keep activist shareholders in check. Some investors have said the changes could deter foreign capital from coming to Japan. Effissimo, which owns around 10% of Toshiba, in May nominated its own co-founder, Yoichiro Imai, and two other candidates as outside directors for election to the board at the conglomerate’s July 31 annual general meeting. But under the new foreign ownership rules, Effissimo needed approval from the Japanese government to vote at the AGM for its co-founder to join the board of Toshiba, which is involved in nuclear power and defence equipment.The government gave Effissimo a green light to vote on July 30, just a day before the meeting, the two government sources said, speaking on condition of anonymity because the information is not public.” [...] The tighter rules require foreign investors to report holdings in Japanese companies of 1% or more, compared with an original 10% threshold. This was introduced to monitor more effectively Chinese investment in Japan, government officials previously told Reuters.

For 40 years or so, corporations listed on stock markets were expected to pursue diligently, if not exclusively, value creation for their shareholders. A number of factors had pushed corporations away from an earlier “stakeholder model,” prime among them the revolution in executive compensation. Then, in the new century, a perennial criticism of business corporations and “capitalism” suddenly took on new urgency, with the capitalist system being held responsible for the wealth and income inequality it produces and the environmental havoc it has wreaked. This time around, though, the complaints did not issue from some leftist organization but from the very heart of the system, from large institutional shareholders who have recently converted to the church of ecological sanctity and social responsibility. In this new view, corporations should henceforth be accountable for their financial performance, yes, but also for achieving set targets in matters of environment (E), society (S) and governance (G). The ESG concerns, tacitly fostering a “stakeholder” doctrine within corporations, has created new challenges for corporate governance.