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The Investment Industry Regulatory Organization of Canada is proposing to merge with the Mutual Fund Dealers Association, a move IIROC says would reduce duplication and save millions of dollars that could instead be invested in growth and innovation in the investment industry. The plan, made public Tuesday, was developed to present to the Canadian Securities Administrators to consider in a planned review of the industry’s self-regulatory organizations later this year. However, it immediately drew a rebuke from the head of the MFDA, which is advocating to start from scratch to create a new self-regulatory organization for the industry. The idea of merging the MFDA and IIROC, which oversees firms and financial advisers, has been suggested over the years to reduce overlap. The latest such suggestion came last fall in a report from the C.D. Howe Institute.
Last week witnessed a critical but largely unremarked advance for plaintiffs seeking to impose liability on major public companies for the social costs of climate change. The Ninth Circuit’s ruling in City of Oakland v. BP PLC cleared the path for state-court litigation against corporate defendants on the theory that producing, distributing, using, or profiting from fossil fuels constitutes a “public nuisance.” The cities of Oakland and San Francisco sued large energy companies in California state court, seeking an order requiring them “to fund a climate change adaptation program for the cities.” [...] Corporations and directors can nevertheless manage their exposure by actively evaluating climate-related risk, considering sustainability initiatives, implementing appropriate operational and board monitoring procedures, and documenting all these efforts. But the time to act is now—when the climate-related liability and fiduciary risk for most companies is visible but not yet acute.
[...] Much has been made of last year’s statement by the Business Roundtable, a club for the CEOs of the largest corporates in the US, indicating a shift from shareholder to stakeholder priorities. However, members of the group—among them Amazon and BlackRock— have since then been challenged to live by the principles they signed up to. Writing for the Harvard Law School Corporate Governance Forum, Sanford Lewis, director at the Shareholder Rights Group, a group of US investors, said the pandemic will be a “litmus test” for the Roundtable to live up to its principles. But he also wondered whether US corporates need a new set of “rules and concepts” for stakeholder governance. One route may be to allow employees on boards. Another route may be turning corporates into “benefit companies”—a suggestion also made in a previous post by governance experts. Disclosure of performance against environmental, social and governance metrics is another way to go. Lewis wrote: “In the pandemic recovery process, stakeholder governance vehicles will likely garner new consideration in boardrooms, investment houses, union halls, civil society, and legislatures. There may be an opportunity for companies to unify their stakeholders to invest in the company’s long-term survival and to pull together through this crisis.”
McKinsey’s annual employer survey provides insights into one of the most pressing concerns for employers, the behavioral health of their workforce. As employers address the humanitarian crisis of COVID-19, they remain concerned over the health of their employees, including behavioral health (mental health and substance use). In a national survey of around 1,000 employers, we explore the most concerning factors for employee health and employer plans to respond. Behavioral health is among the top workforce health concerns with 9 out of 10 employers surveyed noting that COVID-19 is affecting their workforce behavioral health and/or productivity. We also explore variations in responses across different types of employers along with potential actions for healthcare payers and/or employers to consider to address the behavior.
Many people would look at the covid-19 pandemic and conclude that democracies are bad at tackling infectious diseases. America and the eu had months to prepare after China sounded the alarm in January. Both have subsequently suffered more than 300 confirmed deaths per 1m people. China’s Communist Party reports an official death rate that is 99% lower, and has trumpeted its apparent success in containing the outbreak domestically. Yet most data suggest that political freedom can be a tonic against disease. The Economist has analysed epidemics from 1960 to 2019. Though these outbreaks varied in contagiousness and lethality, a clear correlation emerged. Among countries with similar wealth, the lowest death rates tend to be in places where most people can vote in free and fair elections. Other definitions of democracy give similar results. We cannot replicate this analysis for covid-19 yet, as it is still spreading at different rates around the world. Western democracies were hit early, in big cities with large flows of people from abroad. Daily deaths are now declining in these places but rising in developing countries, which tend to be less connected and more autocratic.
State and federal authorities are reportedly preparing to bring antitrust charges against Google, focusing on anti-competitive behavior in the company’s online advertising business. Yale SOM’s Fiona Scott Morton, former chief economist in the Antitrust Division of the U.S. Justice Department, recently co-authored a paper laying out a roadmap for potential action against the company, drawing on information released in an investigation in the UK. We talked to Scott Morton about Google’s role in online advertising and how it limits competition. [...] When these very big antitrust investigations are being undertaken by the government, they are confidential, because the government’s asking lots of questions about the way businesses run and asking for data that’s not public and strategic thinking that’s not public. A big investigation like this could last for years. And that means that the people who are the consumers affected and the taxpayers affected don’t have any knowledge of what’s happening. They don’t have a sense of what the story is. They don’t have a sense of what the government’s theory of harm is and what markets were disrupted and why.
MONTREAL, Ont. -- Former Bank of Canada governor Stephen Poloz is joining the board of directors at technology and consulting firm CGI Inc. [...] Poloz, who recently stepped down from the top job at Canada's central bank after serving a seven-year term, was named to the Enbridge Inc. board of directors last week. Before serving as governor, Poloz was chief executive of Export Development Canada. CGI executive chairman Serge Godin says Poloz and Powell will provide valuable perspective and insights as the company continues to expand its business globally. "Stephen Poloz's deep knowledge of financial markets, the global economy and international trade will be an invaluable asset to CGI as we continue to help worldwide organizations grow their businesses," Godin said in a statement.
While the Novel Coronavirus is a humanitarian catastrophe its crippling effect on the world economy has, and will continue to, disrupt the way business is being conducted globally. Amongst a host of business re-structuring exercises that we will no doubt see in the near future, it is critical that corporate leaders come to grips and re-invent themselves as to how they are going to react, and what they are going to do, when faced with hard decisions. While choosing their options, they will need to act with compassion and keep to the highest levels of governance – for they will be under immense scrutiny and pressure both during and after the pandemic. There is no doubt that boards, their conduct, actions and inaction will be analyzed threadbare, through the lens of hindsight, by various stakeholders, when the dust settles. Conduct of the board should be able to demonstrate a balancing act between a number of opposing forces and arrive at a result which is good for the company, satisfies regulators, pacifies workmen, presents a positive image to the society and builds shareholder value. This article explores this evolving landscape in two parts. The first part outlines some tough choices that boards will have to make, while the second one sees whether the board is equipped to make these decisions and, if not, what it needs to do to make that happen.
OTTAWA — Canada needs to clarify its foreign investment rules, as the COVID-19 pandemic puts the country at heightened risk of strategic takeovers by aggressive foreign actors like China, several international affairs experts say. In testimony before a House of Commons committee on Monday, experts repeated the long-held claim that Canada needs to more clearly define what it considers its “strategic interests,” particularly when the economic fallout from the pandemic has made many Canadian firms ripe for acquisition. Ottawa has in recent months signalled that Canadian assets are at a higher risk of foreign takeovers, and has moved to review proposed acquisitions more closely. Charles Burton, senior fellow at the Ottawa-based Macdonald-Laurier Institute, said potential takeovers by Chinese state-owned enterprises (SOEs) are particularly worrisome, as they could be used on behalf of the Communist Party of China to advance its foreign strategic interests Canada steps up scrutiny of foreign investment in essential industries in coronavirus pandemic. “Most of them, if not all of them, are serving the interest of the Chinese state, and are not simply about enhancing the profitability of the company in Canada through a shrewd investment,” he said. Ottawa has for years struggled to strike a balance between attracting foreign investment and fending off politically-motivated takeovers by foreign states.
Mergers and acquisitions (M&As) are some of the most challenging and risky endeavours board members encounter—so make sure you know the pitfalls. Big mergers and acquisitions (M&As) make their first splash in the headlines based on the huge price tags attached to them. “Abbvie acquires Allergan, $63bn”, “United Technologies acquires Raytheon, $121bn”, “Comcast to buy Sky, $39bn”. The list goes on. [...] So what practical advice can I offer to board members? To start, they should not have blind faith in the valuations of external advisers (e.g. investment banks), which are often driven more by success fees than an interest in seeing a deal flourish. [...] Acquisition targets being overvalued is one of the main reasons companies destroy value mergers. Board members should be able to confidently supervise executives on potential transactions and challenge their opinions regarding a deal. They should be thoroughly knowledgeable about the specifics of each deal, and how to best create value through it.
[...] The Supreme Court has called the grand jury a “kind of buffer or referee between the Government and the people” and asserted that an “independent and informed grand jury” is a “necessity to society.” The Department of Justice Manual provides that the grand jury “is an independent body, whose functions include not only the investigation of crime and the initiation of criminal prosecution but also the protection of the citizenry from unfounded criminal prosecutions.” The rules permit the prosecutor to seek an indictment based solely upon hearsay evidence, so long as the grand jury knows that the evidence is indeed hearsay to the witness presenting it. Criticism of the grand jury as a barrier to unfounded prosecutions has included the statement by New York Judge Sol Wachtler: “If a district attorney wanted, a grand jury would indict a ham sandwich.”
As we reported in COVID-19: Revisiting Shareholder Rights Plans, the turmoil in U.S. equity markets created by the COVID-19 pandemic has resulted in many companies facing depressed stock prices, leaving them vulnerable to unsolicited acquisition proposals or activist activity, which has led to heightened interest in shareholder rights plans (also known as "poison pills"). Such depressed stock prices may also cause companies with significant net operating loss carryforwards ("NOLs") to consider implementing an NOL rights plan, which is similar to a traditional shareholder rights plan but has distinct differences. WilmerHale's Tax Group, along with the Mergers and Acquisitions practice, has prepared a high-level overview of the purpose and advantages of NOL rights plans.
[...] The coronavirus has effectively muzzled activist protests. Since the work-from-home revolution took hold, there’s nobody in those glass buildings to protest anyhow. And, by order of social distancing rules, AGM meetings (those that haven’t been canceled) have nearly all gone virtual, presided over by a few company executives and their IT staff. In Germany, a last-minute federal law required companies to change the rules for AGMs. Koch and his fellow Bayer activist shareholders weren’t completely muted. Bayer allowed shareholders to submit questions to the board in advance; 245 were read aloud at the AGM. But speechifying, a tradition at shareholder meetings, was nowhere to be found on the agenda. “I know shareholders would have wanted their chance to speak” as in the past, said Tino Andresen, a Bayer spokesperson. “But we did answer all their questions. Two-hundred-forty-five is quite a big number.” Dissatisfied with the new rules, Koch posted a trio of protest videos to YouTube. Combined, they have generated less than 500 views. He was hoping for a bigger bang. “They did respond to my question,” he said, “but it’s not what I had in mind.” [...] COVID-19 has largely silenced this kind of stakeholder activism, though. Companies are experimenting with more interactive Q&As, but when you’re trying to push for meaningful change, Zoom hardly cuts it
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In May, the Senate unanimously passed a bill—the Holding Foreign Companies Accountable Act—designed to improve financial reporting by China-based firms trading on U.S. exchanges. Fraud at these firms—including most recently Luckin Coffee—has cost American investors tens of billions of dollars over the last decade. The bill thus targets a real problem. Unfortunately, its remedy is likely to hurt—not help— the American shareholders of these firms. To reduce fraud, the Sarbanes-Oxley Act of 2002 requires audits of every U.S.-traded firm to be inspected by the Public Company Accounting Oversight Board. But U.S.-traded firms based in China, whose market capitalizations collectively exceed $1 trillion, refuse to comply. They and Beijing say PCAOB inspection of China-based audit records would violate state-secrecy laws. Why hide these records from the PCAOB? Inspections would likely turn up improper payments to officials, putting them at risk and embarrassing the Chinese Communist Party. [...] But if the proposed legislation becomes law, its cure could be worse than the disease. Both Chinese controlling shareholders and the Chinese government are likely to exploit such a trading ban to further their own objectives, at the expense of Americans holding shares in these firms.
As governance responsibilities dramatically evolve in response to today’s economic upheaval and social unrest, so too must the board’s approach to necessary turnover among its ranks. The adoption of a thoughtful “offboarding” strategy may allow the board to achieve its turnover goals in a less disruptive, but more accelerated manner than by traditional means. For the many reasons discussed here, it is critical for the board’s governance committee to take a closer look at what offboarding might achieve as a governance tool. Director offboarding is a focused board process to achieve a structured separation from certain directors without prompting controversy or ill will. It is intended to allow the board to achieve necessary turnover more quickly and expansively than through term limits or mandatory retirement age, and more gently than through removal. These are critical considerations in today’s governance environment. Offboarding is not to be confused with “onboarding,” which refers to educational, training and cultural measures to prepare an incoming director for board service. [...] The National Association of Corporate Directors (“NACD”) has been a strong advocate of offboarding, noting that “[T]he concept of directorship is not to serve as long as you want to; it is to serve as long as you’re needed.” As defined by NACD and others, “offboarding” processes are grounded in a shared understanding amongst all directors of why an individual was appointed, and of the board’s expectations of performance. From the beginning of board service, directors are ideally made aware of the potential that they may be asked to leave the board before their term has formally concluded.
Picture cyber-attacks on your organisation as being like any other scam—tenacious, infuriating and often playing on human weakness or error to achieve access to your most important resources. [...] Board members need to be clear on how their organisation’s data and IT infrastructure is protected. To begin with, a threat register should consider criminals, “hacktivists”, competitors, hostile states, and insiders, alongside the following four top cybersecurity tips:
(1) Build a human firewall. People are the first line of defence. Lead by example and develop all of your policies and teams to be cyber-aware. Preparedness can’t simply be delegated to the IT department or executive. It has to be the responsibility of everyone.
(2) Update systems regularly. This should be done continuously to ensure the latest software versions and patches are in place to help systems become as airtight as possible.
(3) Ensure continuous security. There is no single event or graduation ceremony that guarantees the job is complete. Everyone within and connected to the organisation needs to appreciate that this is a continuously evolving process.
(4) Plan for the worst-case scenario. Who will take the lead on responding to an attack? How can the problem be solved? Who needs to be informed? What can be learnt and done to prevent similar cyber-attacks in the future?
A $900,000 fine is a reminder for companies to use care in tracking and disclosing all elements of executive compensation. Between 2015 and 2019, Argo Group International Holding, Ltd. reported some $1.2 million in perks and similar personal benefits paid to its former CEO, including retirement contributions, insurance, housing and home leave allowances, medical premiums, and financial planning services. But according to the SEC’s June 4 settled order, Argo failed to disclose four times that amount of other perks—more than $5.3 million—including “personal use of corporate aircraft, rent and other housing costs, personal use of corporate automobiles, helicopter trips, other personal travel costs, use of a car service by family members, club and concierge service memberships, tickets and transportation to sporting, fashion and other entertainment events, personal services provided by Argo employees, and watercraft-related costs.”[1] The SEC also concluded that Argo failed to maintain internal controls to ensure that transactions were properly recorded as compensation rather than as business expenses. The company’s weaknesses included:
(A) providing expense reimbursement to the CEO without requiring an adequate explanation of a business purpose;
(B) allowing the CEO to approve his own expense reimbursements; and
(C) failing to implement any mechanism to ensure the CEO paid for his personal use of corporate aircraft.
WASHINGTON, - The National Association of Corporate Directors (NACD), the authority on boardroom practices representing more than 21,000 directors, today released the NACD May 2020 COVID-19 Pulse Survey, which revealed the trends and governance challenges that corporate directors expect to tackle over the next three months. [...] As directors and their organizations expand their focus on employee health and corporate survival to now also preparing for recovery and success in a new normal, several findings emerged:
(A) Boards see the changing nature of work as the top post-recovery issue. Looking three months ahead, directors reported that changes to the employee experience are most likely to impact recovery in their organizations.
(B) Directors see strategy as the top challenge over the next three months. Shaping a post-crisis strategy was the top governance challenge listed by nearly 6 in 10 (60%) of respondents.
(C) Directors expect to continue more engagement with management. As the need for more frequent communication between boards and management has increased, so has the time commitment for many directors.
(D) Boards remain confident in their organizations and management teams. Consistent with findings from our March survey, boards continue to give high marks to their management teams.
Hedge funds in Hong Kong are exploring exit strategies from Asia's financial hub as Beijing's new security law threatens data privacy and capital control, the Financial Times reported. More than 420 hedge funds operate out of the semi-autonomous region, and manage almost $91 billion in assets, higher than the combined value of hedge funds managed by Singapore, Japan, and Australia. "What would make people like us move? Loss of social media freedom, loss of free internet access to wherever, capital controls would scare the blazes out of us, and . . . if it was harder to get visas," one hedge fund's chief investment officer for Asia told the FT. Analysts expect Singapore to emerge as a big winner from the draconian Chinese law. [...] Hong Kong, which is a former British colony, was given back to China 23 years ago in 1997. Under an agreement, China accepted governance of Hong Kong under the "one country, two systems" code which enabled a certain amount of autonomy for the city, and allowed it to cement its place as one of the world's key financial centers.
If nothing else, our collective experience over the past several months has shown us that society, and therefore our economies and our businesses, cannot be resilient if we do not meet the needs of the most vulnerable. The inadequacies and inequities of our current economic system have been laid bare for all. A crisis creates an opportunity to let go of habits that no longer serve us. Already, this crisis has demonstrated that businesses have more capacity for adaptation than we thought. But the success of companies re-tooling their manufacturing to provide personal protection equipment should not give us the false sense of confidence that businesses need only to "rally" to address complex issues. This pandemic has revealed the need to fundamentally question the role of business in society and its impacts on the larger socio-economic system. It has become abundantly clear that the path forward cannot be a return to the past. We must address the structural and cultural inequalities that underpin our current economy. Nothing short of a reimagining will do. Corporate directors are vital to this shift.
(Bloomberg Opinion) -- There’s a long-running joke among my team’s deals writers and editors that in the corporate world, all roads eventually lead to mergers. Whatever is happening on the outside or on Wall Street — economic downturns, upturns, elections, currency fluctuations, CEO departures, CEO arrivals, good earnings, bad earnings, you name it — the case can somehow always be made, almost comically, that it’s an impetus for more corporate tie-ups. Warren Buffett would say that’s thanks to all the fee-hungry bankers playing to CEOs’ vain propensity for empire-building. Others say it’s the animal spirits at work. Whatever the case, the global pandemic is giving businesses plenty of reasons to get back to dealmaking. Yes, even social distancing may draw some companies closer together. How they do it will just require a bit more ingenuity in a post-handshake, post-Covid-19 world. [...] M&A globally is down 50% this year after the coronavirus quite literally brought the economy to a halt. [...] The M&A handshake may be over, but tech-savvy companies are already embracing the deal-by-video-chat method. [...] And for deals in which physical assets and property are key, investors have cited the prospect of drones being used to conduct due diligence and avoid unnecessary travel and virus risks. Whether that’s a practical solution remains to be seen.
Here are the key trends we are seeing mid-season:
1. Shift to Virtual Meetings
U.S. public companies are expected, as a result of the pandemic, to hold a record number of 1,500 virtual meetings this year as compared to only about 300 in 2019.
2. Increased Support for Certain Governance and E&S Proposals
For the first time in recent seasons, the governance proposals submitted were about equal in number to environmental, social and political (E&S) proposals.
3. Resurgence of Poison Pills
At least forty companies have adopted poison pills this year as an antitakeover defense due to the sudden stock price declines caused by the pandemic.
4. Stock Buybacks and Dividends
Buybacks and dividends have come under enhanced scrutiny post-pandemic as evidenced by the CARES Act restrictions on businesses receiving loans and loan guarantees.
5. Executive Compensation Changes
We’ve seen some companies cut their executive or director compensation (mainly in the salary, and not long-term, component) to increase liquidity or demonstrate shared sacrifice with rank-and-file employees.
6. Focus on Both Board and C-Suite Diversity
Board diversity remains a hot topic with investors and proxy advisory firms, with one firm committing to issue for the first time voting recommendations against directors seeking reelection to corporate boards with zero women.
7. Director Overboarding an Increasing Investor Concern
Several institutional investors have tightened their overboarding policies with some now counting an independent chair role as two board seats.
Firms’ increasing reliance on information technologies has reshaped the global economy and disrupted entire industries while also presenting new and rapidly evolving sources of risk. Recent successful cyberattacks have harmed consumers, shareholders, and market professionals, often resulting in the illegal appropriation of corporate trade secrets like blueprints, chemical formulas, and customer information (Rowe (2016)). Yet, despite the widespread recognition of these emerging threats, little is known about their effects on corporate innovation, limiting policymakers’ ability to assess their economic consequences and to develop appropriate responses. [...] These results suggest that the existing regulatory framework is sufficient protection against intellectual property theft having their intangible capital stolen by domestic or international rivals. Yet we also document that the rise of cybersecurity risk causes firms to file for simpler patents to accelerate their innovation cycle (Popp, Juhl, and Johnson (2004)), ultimately achieving lower R&D-investment returns (Knott (2008)). Indeed, by “over-patenting,” managers disseminate material information about their current innovation activities, reducing the cost for low-innovation firms to follow the industry leaders’ growth strategy (Johnson and Popp (2001)). Regulators’ concerns about the potential negative effects of cybersecurity threats are thus at least partially justified, as our results suggest that existing trade-secret protection laws might be ineffective – or insufficient – to sustain the profitability of R&D investments.
As with the coronavirus itself, some people seem to be more vulnerable than others to the infodemic. “Doctors need three qualifications: to be able to lie and not get caught; to pretend to be honest; and to cause death without guilt.” So wrote Jean Froissart, a diarist of the Middle Ages, after an outbreak of bubonic plague in the 14th century. Fake news then meant rumours that the plague could be cured by sitting in a sewer, eating decade-old treacle or ingesting arsenic. The “infodemic” around covid-19, declared by the World Health Organisation (who) in February, is not the world’s first outbreak of misinformation. This time the myths include the notion that the disease can be cured by drinking methanol, which has led to more than 700 deaths in Iran, and that it is spread by 5g transmitters, which has convinced arsonists in Britain to carry out more than 90 attacks on phone towers. Just as the virus lodges in people’s lungs, dangerous ideas are infecting their minds. One big difference between the infodemics of the 1300s and 2020 is the rapid worldwide transmission of today’s nonsense, enabled by the internet.
This survey examines the vibrant academic literature on environmental, social, and governance (ESG) investing. While there is no consensus on the exact list of ESG issues, responsible investors increasingly assess stocks in their portfolios based on nonfinancial data on environmental impact (e.g., carbon emissions), social impact (e.g., employee satisfaction), and governance attributes (e.g., board structure). The objective is to reduce exposure to investments that pose greater ESG risks or to influence companies to become more sustainable. One active area of research at present involves assessing portfolio risk exposure to climate change. This literature review focuses on institutional investors, which have grown in importance such that they have now become the largest holders of shares in public companies globally. Historically, institutional investors tended to concentrate their ESG efforts mostly on corporate governance (the “G” in ESG). These efforts included seeking to eliminate provisions that restrict shareholder rights and enhance managerial power, such as staggered boards, supermajority rules, golden parachutes, and poison pills. In addition, this review of ESG literature determines the following: - There is no consensus on the exact list of ESG issues and their materiality.
- The ESG issue that gets the most attention from institutional investors is climate change, in particular their portfolio companies’ exposure to carbon risk and “stranded assets.”
- Investors should be positioning themselves for increased regulation, with the regulatory agenda being more ambitious in the European Union than in the United States.
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