Corporate governance - Vigil

When the Financial Times interviewed Warren Buffett last year, he predicted that future returns from his company Berkshire Hathaway and from the U.S. stock market as a whole would be “very close to the same.” Berkshire shareholders could be forgiven for thinking: if only. The famed stockpicker had his worst performance versus the S&P 500 in a decade in 2019, and 2020 is shaping up to be nearly as bad. Instead of taking advantage of the coronavirus crisis that hit markets in March, Buffett was a casualty. Instead of highlighting Berkshire’s balance sheet strength, the crisis exacerbated longstanding concerns over the company’s direction. Some longtime Buffett watchers argue that it is time to fundamentally rethink Berkshire’s mix of businesses and investments. The question comes more loudly now than at any time since Berkshire missed out on the dotcom boom: has Buffett lost his touch? Four things investors (even Warren Buffett) just have to accept they know nothing about — and one new thing
Costco should be Warren Buffett’s next bulk purchase
Investors sour on airline sector as Warren Buffett exits top U.S. carriers. Berkshire’s “chronic underperformance” requires answers, according to Cathy Seifert, an analyst who covers the company at CFRA Research, particularly in light of some questionable investment decisions in recent years.

Mr. Paulson’s decision had been telegraphed as assets at his firm fell and returns declined. John Paulson made billions of dollars anticipating the 2008 financial collapse. But after running into difficulties in recent years, Mr. Paulson will convert his hedge fund firm into a private investment firm that runs only his family’s money. Mr. Paulson’s decision to hand his investors’ their cash back and turn his firm into a family office has been long telegraphed as assets at his firm have fallen and returns declined. He had a strong year last year, in which his key merger hedge fund rose nearly 30%. But the fund is down over 10% so far this year, according to someone close to the matter. Investors have been leaving his funds for nearly a decade. Paulson & Co. managed less than $9 billion last year, most of which is his own money, down from $38 billion in 2011. Mr. Paulson is the latest investing star to make the move. Over the past few years, well-known investors including Leon Cooperman, Eric Mindich and Jonathon Jacobson have returned billions in client money and converted their own firms into family offices, amid a period in which the hedge fund industry has failed to keep up with broader stock and bond markets. Unusual volatility, efforts by the Federal Reserve to bolster markets, and a rush of news and other data that can be hard to digest, have all been factors making it harder for traditional investors to keep up. Mr. Paulson’s decision was first reported by Bloomberg News. The 64-year-old investor wouldn’t comment. “The last 26 years of running an asset management firm have been thoroughly rewarding,” Mr. Paulson said in a client letter. “Recent volatility notwithstanding, I am proud of our long-term returns.”

Our interviews show that many business leaders overestimate their capability to cope with stress. Here’s how everyone can come out of this crisis stronger. What preoccupies CEOs during the coronavirus pandemic? What challenges do they face? How do they deal with those challenges? What are the winning strategies? To answer these questions, we surveyed more than 300 CEOs and conducted over 30 interviews in Denmark, France, Germany, Hungary, Italy, Ireland, Poland, Russia and the UK. Our findings point to three types of CEO emotional reactions to this crisis: keen, tough and edgy. Keen CEOs, who make up approximately 10% of our respondents, spend sleepless nights thinking about the new opportunities the pandemic has created. They search for acquisition targets, design new products and services, and negotiate with suppliers and other partners to create new win-win arrangements. As one of them put it: “Today is exciting, full of opportunities and changes!” To them, the key challenges are keeping their team’s creativity up in times of remote working, reproducing as much as possible face-to-face interactions online, and retaining talent. One CEO said: “Our only challenge is the loss of the natural creativity that comes from bumping into one another and exchanging ideas and updates with someone you might not have deliberately set out to meet.” Our findings point to three types of CEO emotional reactions to this crisis: keen, tough and edgy
The second category—tough CEOs—downplay the impact of the crisis on themselves. These executives, comprising around 30% of our sample, consider themselves cool-headed leaders who are determined to persevere and lead their organisations to a better future.

Microsoft will provide free online classes and job-hunting resources to 25 million people by the end of the year as the global economy reels from the coronavirus pandemic. The training, available to workers around the world, is designed to teach digital skills Microsoft says people need to enter 10 occupations, such as help-desk technician, digital marketer and data analyst. Microsoft, in concert with data from its LinkedIn business, chose the 10 jobs because demand for them is growing and they pay well relative to other roles and most of the jobs have the potential to provide opportunities for those with or without a college degree, the company said. The effort is a response to two long-term trends, said Brad Smith, Microsoft’s president: Automation and artificial intelligence are changing the skills required for nearly every occupation, so workers without digital skills will fall further and further behind. At the same time, employer investments in training and education have declined or stagnated over the past two decades. Skills training in recent years has moved increasingly online, as providers of online classes, such as LinkedIn Learning, Udacity, Coursera and others, have emerged. They offer accessibility and often lower cost to individuals and employers than traditional education options. But employers in many cases remain resistant to accepting online credentials in place of work experience or degrees from accredited academic programs. When Microsoft executives were planning the initiative early in the year, they saw the effort as a response to a widening skill gap and the evolution of new technologies. Then the new coronavirus arrived.

Even family businesses with established, professional boards comprising of independent directors and sound governance processes may encounter challenges due to the family's role on the board. Serving on any board of directors is not without its difficulties, more so when it comes to family-owned businesses. Even those with established, professional boards comprising of independent directors and sound governance processes may encounter challenges due to the family's role on the board.

While public companies' boards are specifically focused on increasing shareholder value, family-boards are required to act on behalf of stakeholders with multiple and often conflicting agendas. The interpersonal dynamics at play in family businesses are also far more complex, often with significant ramifications that inevitably affect not only the family members involved but also the independent directors, creating a counter-productive culture of avoidance. Successfully running a family business or increasingly so, a single family office, requires not only appointing a strong, capable board but also awareness of the potential pitfalls that require careful navigation when plotting the best path for it. These are a few of the most common challenges that may arise during the process of setting up a professional board for a family business or office and how to overcome them.

OTTAWA -- On July 1 the renegotiated North American Free Trade Agreement comes into effect, three years after talks first began to rework the trilateral trade agreement between Canada, the United States, and Mexico. The new agreement—signed in November 2018— is referred to by Canadian officials as the Canada-United States-Mexico Free Trade Agreement or CUSMA for short, while U.S. President Donald Trump calls it the United States-Mexico-Canada Agreement or USMCA. The coming-into-force of this revamped deal comes after the agreement got a slight reworking in late 2019 to satisfy U.S. Democrats, and after it was ratified in all three countries’ respective legislative bodies. “With trade between NAFTA members valued at nearly $1.5 trillion in 2018, we can't overstate how vital it is to maintain free and fair trade between our three countries," said Prime Minister Justin Trudeau on June 29. The new trade pact brings with it a series of changes to several sectors. Here’s a rundown: 
(A) MORE DAIRY, WINE SELECTIONS
Under the new deal, American farmers will have increased access to the supply-managed Canadian dairy market. Specifically, Canada has increased the market access to 3.59 per cent, and the federal government agreed to get rid of what was known as Class 7 pricing on some dairy ingredients. The pricing arrangement allows domestic dairy processors to buy Canadian milk at lower prices. [...]
(B) CHEAPER SHIPPING RATES
Cross-border shipments of online purchases to Canada worth less than $150 will no longer be subject to duties. The deal raises the minimum purchase price that qualifies for duties and taxes, known as the de minimis threshold. It used to be $20 before duty was charged, and similarly the threshold for taxes is now $40.
(C) CARS COULD COST MORE

Changes were made to what is called the “rules of origin” for autos. Basically, this means that there is a new requirement where each car made has to have a certain amount of high wage labour put into it, as well as certain amount of North American-made materials.

School may be out for the summer, but close board oversight of corporate operations most certainly is not. After helping management address the implications of the initial Covid-19 wave this spring, directors could be excused if they thought the virus-related heavy lifting was over. That they could throttle back a bit, and concentrate their oversight on business resilience, rather than on crisis management. But the sudden and dramatic surge in Covid-19 infections across the country, and its resulting impact on business, may have changed all that. Not quite the Fourth of July message that corporate directors were expecting. [...] Boards need to lean in; to re-engage with the management team to confirm that the resiliency plan is working; that there are two hands on the operational wheel; that the situation is under control. And that means asking a series of discreet questions that will help the board assure itself that management is monitoring the horizon and that the organizational course is steady.

These questions might relate to such topics as (i) management’s ability to interpret the relevant infection rate data; (ii) where along the course of resiliency is the company, and is that position sustainable; (iii) the operational and financial implications of a more deliberate resiliency plan; (iv) the existence of contingency plans in the event of another lockdown; (v) the need for additional measures to protect the health and safety of the workforce; (vi) the stamina level of the executive leadership team; (vii) projections on corporate liquidity; (vii) the expectation of further government assistance; and (viii) whether management is receiving the support it needs from the board. And there are other, similar questions—all focused on kicking the tires of corporate stability and adaptability.

Shareholder activism is expected to bounce back in the second half of 2020 after many investors shied away from big boardroom battles in the first six months of the year as the coronavirus roiled markets. Just 32 new campaigns were launched at U.S. companies with a market value of more than $1 billion in the first half of the year, down more than 50% from a year ago, according to data compiled by Bloomberg. Smaller targets got less breathing room: campaigns against sub-$1 billion companies rose 7% globally, the data show. Overall, activists launched 290 campaigns in the first half of the year, down about 5% from the same period in 2019. Some activists chose to steer clear of campaigns while their potential targets were focused on staying afloat and protecting employees, said Pamela Codo-Lotti, head of cross-markets shareholder advisory and activism defense at Goldman Sachs Group Inc. Codo-Lotti expects activity to increase as activist investors gear up for board nomination deadlines toward year end. Goldman Sachs, which was the lead financial adviser for activist defense in the first half, predicts the upswing in activity will be driven by a rebound in mergers and acquisitions, which investors will be agitating for. “There is a real ‘game on again’ mentality to what we are seeing now,” Codo-Lotti said in an interview. “It’s really just a question of when to go public or when to be more aggressive.” Companies that have weathered the crisis worse than their competitors will be targets, Codo-Lotti said, after several activists used the volatility to build small positions. The rise in campaigns in sub-$1 billion targets is partly due to first-time activists and smaller hedge funds that couldn’t afford to wait as their portfolio companies foundered, Elizabeth Gonzalez-Sussman, a partner at Olshan Frome Wolosky LLP said. Olshan was the lead legal adviser to activists in the first half of 2020, the data compiled by Bloomberg show.

With much of the world focused on the immediacy of the COVID-19 pandemic, including its heavy human and economic toll, we have cast our eyes optimistically on the (near, we hope) future when companies regain sufficient confidence to re-enter the public M&A market in large numbers. Although attention has largely centred on businesses that are in a struggle for survival, certain businesses will emerge stronger owing to factors such as shifts in consumer needs and preferences or more durable balance sheets. As a result, the post-pandemic corporate landscape may be ripe for consolidation, with relatively larger and better-capitalized issuers seizing the opportunity to acquire their weakened competitors. It is also possible that in certain capital-intensive industries, such as mining, competitors may be more inclined to cast aside their differences and consolidate their balance sheets, a trend that is already showing some momentum. We will be tracking activity levels to assess whether the foregoing theories prove correct; however, our analysis of Canadian public M&A activity (both friendly and hostile) from 2012 to the end of 2019 suggests that expectations of significant consolidation activity should be tempered, at least insofar as it involves acquisitions of Canadian-listed issuers. In particular, we found that hostile bids declined by 50% after May 9, 2016, the date on which Canadian securities regulators implemented fundamental changes to the takeover bid rules, which were designed to “rebalance” the prevailing bid dynamics and place more power in the hands of target boards.[1] Digging deeper into the data, we found that financial buyers—who would already be expected to shy away from the potentially significant costs and uncertainty of launching a hostile bid—vacated the field entirely after the new rules were adopted. As a result, every hostile bid under the new regime has been commenced by a strategic purchaser. We found a similar downward trend in friendly acquisitions of Canadian-listed issuers, with such transactions declining by 24% in the same four-year period. In fact, this statistic masks a more significant 30% decline in the number of friendly acquisitions by strategic purchasers since the start of 2016.

Redesigning Corporations: Incentives Matter by Nicholas Benes is undoubtedly one of the most important corporate governance articles of 2020. Benes goes straight to the heart of irresponsible capitalism by addressing the unintended consequences of limited liability. A small tax on each trade of each company, refundable in 5 years if the company doesn’t declare bankruptcy, would increase the incentive for monitoring by investors. Similar incentives are proposed for executives. As Benes discusses, early corporations were granted “charters” offering limited liability. Although these early businesses served public or national interests and had good profit potential, they required large amounts of capital and were risky. Since chartered investors were only liable for the amounts they invested and were frequently granted monopolies (or at least endorsement by the crown), the risk to individual investors was substantially reduced. As we moved from the age of exploration to the industrial revolution, the demand for charters grew beyond the capacity of governments to review each one to ensure they at least met the pretense of serving specific public or national interests. Instead, charters were then granted by states for any legal purpose. The only public “good” corporations had to meet was to make enough profit to continue in business. Benes argues that while “the benefits of accelerating industrialization were huge, and the number of corporations was still very small” the trade-off of granting limited liability made sense. Deficiencies, such as child labor, pollution and the like were addressed, if at all, through an evolving regulatory framework.

Digitization has played a key role in reducing the spread of the virus and promoting a safe recovery. Now, it’s even more critical to the country’s longer-term economic health. Japanese leaders have long promoted productivity improvements to drive economic growth. That has become an even greater priority as the country’s low birth rates and rising life expectancy have reduced the domestic workforce (those aged 15 to 64 years) to 59.7 percent of the total population. Even with efforts to hire more women, retirees, and foreign workers to boost the labor pool, Japan’s demographic shift threatens to stall GDP growth for the next decade. The key to sustained economic growth is not just finding workers but also transforming how they work through automation. [...] Even with those productivity gains, Japan is likely to face a shortage in labor supply. To compensate for the challenge of a shrinking workforce, companies have to deliver more. Prior to the pandemic, Japan was on track to automate 27 percent of existing work tasks by 2030. While that could replace the jobs of 16.6 million people, it would still leave the country with a shortfall of 1.5 million workers in ten years (Exhibit 1). What’s more, the tight labor market could make it difficult for employers to free up people and resources to develop the new growth opportunities that could emerge with automation.

CEOs want their general counsel to improve on business strategy, new market expansion, and industry knowledge, according to a new BarkerGilmore LLC and Chief Executive Group survey. GCs should be encouraged to move outside of the legal environment by learning about products, competitors, and customers and use that knowledge to contribute to senior leadership discussions, BarkerGilmore advisers say. Four out of five CEOs want their general counsel to be a strategic business partner and valued leadership team member, according to a recent report by Chief Executive Group and BarkerGilmore. However, the report found that only 61% of public company CEOs and 40% of private company CEOs view their [current] GC as meeting the ideal. [...] Only 6% of public company CEOs and zero private CEOs believed their GCs add the most value in contributing to business strategy discussion. [...] Some questions CEOs need to ask:
(1) Has the CEO outlined their expectations to their GC?
(2) Have they created annual SMART goals together that reinforces that message?
(3) Does the general counsel have the resources that enables them to spend their time on strategy?

Even fast growing new startups need to have a semblance of corporate structure, leadership, oversight and evidence as they continue on their successful path. Whilst attending the recent IOD Open House event, I had the pleasure of attending a seminar hosted by Morrow Sodali on Corporate Governance. The discussion by, and between, the panellists was energised and topical with a thought provoking opening question: ‘What is good Corporate Governance?’ [...] There are a few notable practical applications that an effective board support model can implement and can be highly beneficial:
(A) Minuting discussions to reflect the key considerations, both those that were identified as key drivers, as well as those that were discussed then side-lined.  Having this documented ensures that subsequent discussions don’t go over old ground, particularly those that were deemed irrelevant to the topic, unless additional updated information is provided
(B) Documenting decisions clearly so that discussion can progress rather than stall in repetition.  How often do board meetings rehash the same topic because the decision wasn’t clearly defined and documented, thus disabling the ability to move on to implementation
(C) Evidencing reasons for the decision, including noting any concerns. Thus, if at a future date, a noted concern becomes more relevant or inapplicable, the decision can be reconsidered with any new information
(D) Minuting director dissent will ensure that future review will support any directors’ subsequent contention that they disagreed with a collective decision, whatever their subsequent actions may be identifying actions with specific deliverables, timelines and owners. This has the two-fold benefit of both documenting the application of decisions and also forming part of future agendas to ensure application is tracked.