Corporate governance - Vigil

No matter the industry, all companies are facing unprecedented challenges as they plan to reopen offices after the pandemic. With considerations including employee health, operations, legal, and technology, what key areas should boards focus on?

WASHINGTON — The U.S. Supreme Court ruled Thursday that the Trump administration cannot carry out its plan to shut down the Deferred Action for Childhood Arrivals program, which has allowed nearly 800,000 young people, known as "Dreamers," to avoid deportation and remain in the U.S. The decision is a big legal defeat for President Donald Trump on the issue of immigration, which has been a major focus of his domestic agenda. The ruling said the government failed to give an adequate justification for ending the federal program. The administration could try again to shut it down by offering a more detailed explanation for its action, but the White House might not want to end such a popular program in the heat of a presidential campaign.

The role that green investing can play must not be misunderstood or overstated. In the mayfair office of Chris Hohn, the boss of tci, a hedge fund, an enormous photograph of a melting iceberg hangs on one wall. Robert Gibbins, the founder of Autonomy Capital, another London hedge fund, says his desk is adorned with the deformed remains of a car bumper, melted by an Australian wildfire. An interest in modish office decor is a long-standing feature of high finance. An interest in climate change, though, was until recently rare; the preserve of boutique investment houses and pokey back offices in the large asset managers. Now it is all the rage. One reason for this is the realisation that extreme weather events pose threats to businesses seeking investment. Last year pg&e, a Californian utility, was forced into bankruptcy for its role in sparking wildfires. Another reason is that governments are taking steps to limit the emission of greenhouse gases that could have real impacts on firms’ future revenues. A third is pressure from clients. Large asset owners, including Japan’s Government Pension Investment Fund, the world’s biggest, are badgering the companies which manage their money to attend more to the environmental, social and governance (esg) bona fides of the companies they put money into. A fourth factor is that asset managers are facing shrinking margins. By offering their clients various sorts of greenery they can also charge higher fees. [...] In order to see how much of this might be amenable to investor-led action The Economist analysed emissions disclosures from over 5,000 publicly listed companies which between them account for about 90% of the value of the world’s stockmarkets. The number of companies making such disclosures has been rising steadily in America (from 53% of the companies in the s&p 500 five years ago to 67% today); over the same time it has shot up in Europe and Japan, from 40% to 79% of companies in the Euro Stoxx 600 and from 13% to 46% on the Nikkei 225.

When a company controlled by the Chinese government bought a stake last month in Norwegian Air, a troubled airline, it was just the kind of opportunistic acquisition that European political leaders were worried about. Officials in Brussels and in numerous European capitals have been hurriedly erecting legal obstacles to such deals. Their fear: that Chinese investors backed by Beijing will exploit the pandemic to snap up financially distressed European companies at bargain prices. On Wednesday, the European Commission, the European Union’s executive branch, unveiled proposals intended to prevent foreign investors from using government subsidies to outbid competitors for European assets. The proposal is clearly aimed at China, which often provides financial support to key industries. Unlike the United States, which screens foreign investment for security threats, Europe has few tools to scrutinize deals. The proposals are “like security at the door,” Margrethe Vestager, the European competition commissioner, said at a news conference in Brussels. “They are about checking for trouble before it happens.” [...] The action comes as countries including Austria, the Czech Republic, Germany and Poland are in the process of giving themselves more power to examine acquisitions and block investments seen as a threat to national interests. [...] European countries still want Chinese money. Even with new restrictions, it will be easier for Chinese investors to buy assets in Europe than in the United States, which screens foreign investments for threats to national security. But European governments have become warier of Chinese intentions and are demanding that China give European companies the same freedom to invest in Chinese companies that Chinese investors have in Europe. China often requires foreign companies to share sensitive technology and operate through joint ventures with Chinese partners. [...] Ms. Vestager said that the commission was not singling out China or trying to keep foreign investors out. “There is no specific country we are thinking of,” she said. “We want reciprocity and a level playing field.”

In an effort to get a piece of the market’s rebound from the coronavirus downturn, retail investors are piling into bankrupt companies like car rental company Hertz.  The Securities and Exchange Commission told Hertz, which filed for bankruptcy during the pandemic, that the regulator has issues with the company’s plan to sell stock. “In this particular situation we have let the company know that we have comments on their disclosure,” SEC Chairman Jay Clayton said Wednesday on CNBC’s “Squawk on the Street.” Later on Wednesday Hertz said in a securities filing that it suspended the planned sale of up to $500 million worth of stock.

UK corporates facing a significant recession have been warned their financial disclosures must fully recognise the risks to their survival. Investors expect painful transparency for company prospects, according to the UK financial reporting watchdog. The Financial Reporting Council (FRC) this week issued guidance in two reports for companies about to make financial disclosures that will reflect their position as a result of the Covid-19 pandemic. The reports underline the need to produce detailed going concern statements and the importance of risk information. FRC chief executive, Sir Jon Thompson, highlighted expectations among investors. “These are unprecedented times and investors rightly expect clear and timely disclosures from companies setting out the impact of Covid-19 on their business and long-term prospects. Good quality reporting is vital in times of uncertainty and will help investors make informed decisions about where support for companies is most needed,” he said. [...] In May the FRC called on companies to disclose events that may lead to corporate failure. “If boards identify possible events or scenarios (other than those with a remote probability of occurring) that could lead to corporate failure, then these should be disclosed,” it said.

Covid-19 heralds big changes for how boards and teams work amid a global digital transformation. A stewardship approach can help to manage fracture points.

'When things are going well and everyone's making money, it's harder to identify fraud because there's less scrutiny, but now there will be some nervous hedge funds out there'. Hedge funds desperate to stay afloat amid the choppiest markets in years are likely to flout the law, leading to a wave of litigation in areas including misconduct, excessive fees and fraud. [...] Frauds tend to be revealed amid a crisis — Bernie Madoff’s $64.8bn Ponzi scheme came to light not long after the financial fallout of 2008 as investors tried to retrieve their funds. It remains the largest financial fraud in US history and led to Madoff receiving a 150-year prison sentence. [...] Austin said the recent decline in face-to-face meetings and lack of physical research, driven by workers in lockdown, will be a contributing factor towards what he says will be a surge in litigation. "Social distancing has made due diligence more challenging," he said. "Going to premises, interviewing people in person — that has stopped." [...] "This crisis stemmed from a pandemic where the fundamentals of the economy were otherwise sound," Mavrides told FN, adding, " I've not heard of any incidences of fraud and I don't sense any trend of inappropriate conduct or any litigation concerns by the SEC or others. The industry has always been well self-policed and since the 2008 crisis, that's even more the case." Yet the SEC had been looking into potential wrongdoing among hedge funds and asset managers even before the virus fallout took hold in markets.

Typically, when a company offers stock to the public, it emphasizes the positive. Fundamentally, the pitch is this: Buy us and prosper. Maybe even get rich. But Hertz Global Holdings put out a prospectus this week that projected a different outcome: Gamble on us and be prepared to end up with something worthless. Hertz, you see, is bankrupt. But it said it hoped to sell $500 million in shares, maybe even $1 billion, anyway. For sheer audacity, what Hertz was trying just takes my breath away. It caught the eye of the Securities and Exchange Commission, too. On Wednesday, Jay Clayton, the agency’s chairman, said on CNBC, “We have let the company know that we have comments on their disclosure,” and added, “In most cases, when you let a company know that the S.E.C. has comments on their disclosure, they do not go forward until those comments are resolved.” [...] Trading in the company’s shares stopped briefly at 11:44 a.m. and in a new filing, Hertz said it had suspended its new stock offering, while it discussed matters with the S.E.C. The S.E.C. declined to expand on Mr. Clayton’s statement, and Hertz did not respond to repeated requests for comment. What is unusual in the Hertz stock venture is that the company is still in the early stages of what are formally known as Chapter 11 bankruptcy proceedings. Companies in bankruptcy do not, as a rule, sell stock, precisely because creditors have a higher claim on assets than shareholders do. By the time the creditors have been paid a fraction of what they are owed, there may be nothing left for shareholders.

The information shared through quarterly reporting moves markets. Institutional investors highly value the transparency and outputs of frequent periodic reporting. Investor Relations Officers (IROs) consistently identify the earnings call as the most important venue through which to communicate their story to the capital markets. Within the C-suite, preparing for the earnings call—and its associated package of disclosures—requires a significant commitment of time and resources. [...] Quarterly reporting has been identified as a potential source or amplifier of short-term market pressures. Management’s focus on hitting quarterly financial targets can cause overweighting by both the C-suite and equity markets of in-year or in-quarter performance benchmarked to a narrow set of financial indicators. This underweights strategic issues with a longer-term time horizon, or those that are harder to quantify in the near-term, and consequently results in insufficient analysis and reporting of these issues in the earnings call. [...] The significance of conventional earnings call disclosures is also in question. The work of Baruch Lev suggests that the relevance of meets, beats, and misses of consensus EPS estimates seems to have diminished. There is growing informed skepticism about the usefulness of investment strategies focused on quarterly earnings analysis, and an emerging interest in a more appropriate focus on key value drivers relevant to the sector in which the business operates. As we know, key drivers of business value, particularly over the medium and long terms, may not be well captured by existing financial metrics.

The value and relevance of environmental, social, and governance (ESG) is an important question because of the increasing popularity of using ESG factors to evaluate investments in companies. In August 2019, for example, the Business Roundtable, which includes nearly 200 major-company CEOs, released a statement that a corporation’s concerns should go beyond shareholder value and include sustainability and other societal benefits. By 2019, the total assets under management (AUM) of signatories to the United Nations Principles for Responsible Investment have grown from just a few hundred-billion dollars to more than $90 trillion – almost three times the market capitalization of companies in the United States. But research to date on how ESG relates to financial returns has been inconclusive and even contradictory. My co-author, Kyle Welch, and I performed a study comparing corporate ESG, employee satisfaction, and financial returns. Employee satisfaction has also been linked to positive financial impact but has rarely been studied with ESG. We found that while ESG alone showed no impact on returns, and employee satisfaction had a small positive effect, the combination of these factors yielded the largest impact on firms’ share value and financial performance.

Hedge funds are spreading their short bets across a larger number of troubled companies, according to the analysis firm that compiled the figures. The number of “short positions” taken by hedge funds against UK stocks has surged by 25% in the first five months of the year, as prominent UK-listed companies continue to be targeted in the aftermath of market turbulence generated by Covid-19. There were 1,569 short positions of at least 1% reported to the UK’s Financial Conduct Authority (FCA) between 2 January to 25 May 2020, 305 of 2% or more and 70 of 3% or higher, according to analysis by ETF provider GraniteShares. The FCA, the UK’s financial watchdog, tracks any company that adopts a short position of more than 0.5% in a UK stock. This compares with 1,255 short positions of at least 1%, 291 of 2% or more, and 93 of 3% for the same period in 2019. [...] The FCA said in late March that it will not ban short selling in Britain, citing “no evidence that short selling has been the driver of recent market falls”, despite the major volatility fuelled by the Covid-19 pandemic, and said the UK’s markets “have continued to operate in an orderly fashion”. Its comments came after regulators in France, Italy, Spain, Belgium, Austria and Greece imposed bans on short sales to help reduce the impact of Covid-19 on the markets. Those bans were lifted in May after regulators in the six countries cited the less-turbulent conditions.

Insurance broker Marsh is warning company directors they may soon be unable to get directors & officers insurance cover, as premiums surge by up to 600 per cent. Marsh said the average D&O premium paid by its ASX-listed clients increased by 225 per cent in the first three months of the year. That was more than double last year's average increase, and continued a long period of premium hikes. Treasurer Josh Frydenberg has moved to regulate the litigation funding industry, but Marsh says more will be needed to fend off D&O market failure.  Alex Ellinghausen. [...] Marsh called the increases "unprecedented" and "unsustainable" and said they showed no sign of slowing. It pinned much of the blame on the rapid rise of shareholder class actions bankrolled by litigation funders. [...] It warned that boards would increasingly struggle to attract talented directors, and said the COVID-19 pandemic was likely to exacerbate the situation as it would potentially increase the risk of shareholder class actions. "We are in the midst of the most volatile and restrictive D&O insurance market in the history of the segment," Marsh said. "It is a shift disproportional to other classes of insurance and one with serious implications for corporate Australia and the Australian economy." [...] Last month the government temporarily eased the continuous disclosure requirements for companies in an effort to protect directors from litigation as a result of missteps arising from the extreme uncertainty of the pandemic. Marsh and others have said this move, while welcome, will not make a lasting impact on the current trend.

The Edge has uncovered 15 of America's worst S&P CEOs of the last decade, as well as giving useful tips for investors on how to do your homework to avoid them. President Truman had a desk sign that read "The Buck Stops Here" and when he left office 67 years ago, he told his successor Eisenhower, "The President has to decide. He can't pass the buck to anybody." That message should still be true for CEOs accustomed to passing blame for company failings nowadays — but often they get away with impunity for wrecking good companies. The Edge has uncovered the 15 worst-performing S&P 500 companies of the last decade, providing insights into CEO actions and some useful tips for investors on how to do your homework to avoid them. In the past year alone, CEOs of household names including Ebay EBAY, Harley Davidson HOG, McDonald's MCD, Mastercard MA and MGM have all left office under varying clouds. Most Popular In: Hedge Funds & Private Equity With almost $27 trillion in collective market capital, the 505 companies that make up the current S&P are the most accurate representation of the U.S. stock market. However, with nearly $2 trillion wiped from its value since December 2019 alone, there is trouble brewing for S&P companies post Covid-19, so investors need to know how to avoid the pitfalls of underperforming companies.