Corporate governance - Vigil

Fewer Canadians received employment income in 2020 as COVID-19 upended the labour market, but pandemic support programs more than offset losses for many households, leading to a drop in income inequality, according to census results published Wednesday. There were roughly 114,000 fewer Canadian adults who received employment income in 2020 than in 2019, with median earnings falling 2.1 per cent to $37,200. The decline in those receiving employment income was starkest for older Canadians, aged 55 and higher. Even so, median after-tax household income grew 9.8 per cent to $73,000 in 2020 from 2015 – much faster than growth of 4.5 per cent from 2010 to 2015. Statistics Canada said the acceleration was owing to pandemic relief programs that compensated for earnings losses, along with increases in child benefits.

What’s the purpose of a shareholder say-on-pay vote if the company doesn’t have to do anything about it? Well, it spares the company’s directors the embarrassment of what happened to the folks running NexGen Energy Ltd. NexGen is a Vancouver-based owner of Saskatchewan uranium mining properties that saw a majority of its nine directors get roughly 18 per cent to 25 per cent of votes withheld from them at the company’s annual meeting last month. The typical Canadian director election – in which you can only either say “yes” or withhold your vote – has directors getting approval of 95 per cent or more. Why such upset? It’s partly because NexGen does not conduct a say-on-pay vote, more formally known as an “advisory vote on approach to executive compensation.” [...] Instead, individual NexGen directors bore the brunt for the board’s decisions. Which is appropriate, because they worked hard to earn the personal rebukes, including accepting outsized pay packages totally inappropriate for a company of its size. Or any size, really.

A company’s transaction strategy can mean success, survival, or downfall. It’s up to the board to keep the company on the right track. With rising inflation rates, geopolitical uncertainty, continued supply chain interruptions, and a lingering pandemic, deal volume began to slow significantly as 2022 progressed. Navigating this rapidly-evolving market presents a challenge for any business leader. But in any environment, a well-tailored deals strategy will open opportunities. And the current environment still poses a fiercely competitive deals marketplace as companies look to unlock value in new ways.

The first update to the UK Corporate Governance Code in four years will see the creation of a stronger framework for reporting on internal controls and board responsibilities. A “long-awaited” shakeup of the UK corporate governance code will be enacted in a bid to strengthen director accountability for fraud and other misdemeanors, the Financial Reporting Council (FRC) has confirmed. In a position paper published on Tuesday, the audit regulator outlined its intended actions in five main areas, including changes to codes, standards and guidance, strengthening auditing and accounting standards, and setting expectations for the markets to drive behavioral changes.  [...] The most divisive component of the response saw plans to make company directors personally liable for internal controls over financial reporting (considered to mirror the US Sarbanes-Oxley Act) scrapped in favour of a beefed-up corporate governance code. Thompson lamented the omission in a statement made at the time, calling it a “missed opportunity”.

Dividend payouts set another record in the second quarter, a reassuring sign to investors who have flocked to steady, income-generating stocks during the market downturn this year. The companies in the S&P 500 paid out a record $140.6 billion in dividends in the most recent quarter, according to S&P Dow Jones Indices. That’s up from $137.6 billion in the first three months of the year and $123.4 billion in the same quarter last year. [...] Payments this year are projected to grow at a faster pace than usual, as companies have logged strong sales and are passing on a slice of the elevated profits to shareholders, according to Mr. Silverblatt. He estimates dividend payments will jump more than 10% in 2022 from last year’s record $511.2 billion, which would mark the first double-digit increase since 2014. [...] “If companies want to pull back, it’ll be towards those buybacks. They’re not going to pull their dividends,” Mr. Silverblatt said. “Dividends are the last thing you cut. You don’t want to tell the whole world you have a cash-flow problem.”

The global focus on climate change, alongside pandemic challenges and social justice movements, which helped highlight social concerns, have helped drive sustainability activities to the top of the agenda across the corporate world. As BNY Mellon discovered in a recent survey, investor pressure on issuers echoes these societal changes. Consequently, issuers and investors are increasingly focused on the disclosure and engagement practices related to environmental, social, and governance (ESG) topics. [...] Disconnects and Demands: 

• Disconnect: Investors want more than what issuers are currently offering, but issuers think they are offering everything that’s being asked.
• Disconnect: There is a shift in investor thinking from viewing ESG as a risk-mitigation exercise toward it being a driver of returns. Hence, issuers need to focus on and understand growing or changing investor demands.
• Demand: Investors want more transparency on ESG topics, more quantitative (vs. qualitative) data and more consistency in reporting.
• Demand: Investors want more focus on material issues and those with the greatest impact.
• Demand: Up until now, there has been a strong focus on environmental issues but investors also want issuers to focus on social and governance issues in ESG reporting.

Japan's former Prime Minister Shinzo Abe, who was assassinated on Friday, had aimed to transform the economy. He was the country's longest-serving prime minister, before standing down in the late summer of 2020. Perhaps the most high profile policy of his time in office was "Abenomics", the economic programme that bears his name. Although the raft of stimulus measures and major reforms did reinvigorate the world's third largest economy, it also fell short of expectations. Mr Abe took office in 2012 at a time when Japan was in recession and Abenomics was seen as helping it return to growth during his first term. However, his efforts to revive Japan's economy faced a major challenge when the country went into recession in 2020. That and other slowdowns raised questions about the effectiveness of his approach.

There’s a growing view that investors can and should use their power as shareholders of the world’s major businesses to influence how those businesses operate for the benefit of society. Whether it’s on the environment, diversity, or treatment of workers in supply chains, investors are increasingly willing to use their powers of engagement and voting to pursue goals that go beyond the traditional objective of financial returns, in a trend that is sometimes called Environmental, Social, and Governance (ESG) activism. In the UK, ShareAction is perhaps the leading exemplar of this trend. Their stated goal is to harness the power of investment to build a world where the financial system serves our planet and its people. One way in which they do this is to use shareholder resolutions to put pressure on companies on a range of issues, but most prominently climate, workforce, and supply chain issues, through engagement and through tabling shareholder resolutions.

This client alert provides an overview of shareholder proposals submitted to public companies during the 2022 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests. In November 2021, the Staff issued Staff Legal Bulletin No. 14L (Nov. 3, 2021) (“SLB 14L”). In SLB 14L, the Staff rescinded Staff guidance and reversed no-action decisions published during the tenure of former Division Director Bill Hinman, upending the Staff’s recent approach to the application of the economic relevance exclusion in Rule 14a-8(i)(5) and the ordinary business and micromanagement exclusions in Rule 14a-8(i)(7). Moreover, SLB 14L indicated that the Staff would take a more expansive view to whether proposals raised significant policy issues that transcended ordinary business and would be more lenient in interpreting proof of ownership letters. 

Recent progress—and the continued push—toward greater boardroom diversity comes at a pivotal time for corporate America. The ability to challenge long-held assumptions; understand megatrends; and effectively calibrate strategy, risk, and talent in the context of heightened stakeholder expectations puts a premium on thinking differently. To better understand how directors view the opportunities and challenges of enhancing diversity in the boardroom, the KPMG Board Leadership Center surveyed more than 700 directors around the world. Among the U.S. respondents to the survey, it’s clear that:

• Many directors would make moderate changes to their board’s composition if starting from a clean sheet
• Directors have concerns about blind spots and missed opportunities due to a lack of diverse views.
• Sixty-nine percent of directors say board diversity of composition and thinking is relevant or very relevant to the company’s consideration of its role in society.
• While a majority of directors say board leadership is effective at drawing out the views of all members, achieving better boardroom discussions is a work in progress.
• Racial and ethnic diversity and technology and digital experience continue to be in high demand.

Companies are asking the Securities and Exchange Commission to tweak its proposed climate-disclosure rule to give deal makers enough time to report information about acquired companies. Executives and lawyers said they worry the proposal, which would force public companies to disclose information about climate risks and emissions, could delay or even scuttle merger or acquisition deals. [...] Depending on what the final version says, climate-related disclosures could extend the due-diligence period or make a deal less appealing overall if buyers are forced to report on acquired businesses without having the time to fully integrate them into their financial statements, executives and lawyers said.

The Bank of Canada increased its benchmark interest rate by one percentage point on Wednesday, the most aggressive rate hike since 1998 and a larger move than investors and private-sector economists were expecting. The central bank’s governing council voted to raise its policy rate to 2.5 per cent from 1.5 per cent. This is the fourth consecutive interest rate increase since March, and puts the Bank of Canada ahead of its peers when it comes to tightening monetary policy in the face of the most significant inflation shock in a generation. “With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the governing council decided to front-load the path to higher interest rates,” the bank said in its rate decision statement. The bank signaled that interest rates will need to keep rising to cool down Canada’s overheated economy and slow the pace of consumer price growth.

The U.S. and China, the world’s two greatest greenhouse gas emitters, have each caused global economic losses of more than $1.8 trillion from 1990 to 2014, according to a new Dartmouth College study that connects emissions from individual countries to the economic damage of climate change in others. The report, published in the journal Climatic Change on Tuesday, found that a few top emitter countries are responsible for causing major economic losses for poorer countries that are more vulnerable to global warming. [...] Just five of the world’s top emitters of greenhouse gases caused $6 trillion in global economic losses through warming from 1990 to 2014, according to the report. Russia, India and Brazil individually caused economic losses surpassing $500 billion each during the same period. “This research provides an answer to the question of whether there is a scientific basis for climate liability claims — the answer is yes,” said Christopher Callahan, a Ph.D. candidate at Dartmouth and a study author, in a statement. “We have quantified each nation’s culpability for historical temperature-driven income changes in every other country.”

U.S. inflation reached 9.1% in June, its highest rate in nearly 41 years, the Labor Department said. The consumer-price index’s pace for June eclipsed May’s annual rate of 8.6% that led Federal Reserve officials to shift to a faster pace of benchmark interest-rate increases, according to meeting minutes released last week. Core prices, a measure that strips out volatile food and energy components, increased by 5.9% in June from a year ago, a slightly slower pace than May’s 6%, the Labor Department said Wednesday. On a month-to month basis, core prices accelerated slightly to 0.7% in June compared with the prior month, when they rose by 0.6%. [...] Persistent high inflation is putting a strain on businesses and consumers who, after decades of price stability, aren’t used to it.

Twitter Inc. sued Elon Musk on Tuesday for violating the $44-billion US deal to buy the social media platform and asked a Delaware court to order the world's richest person to complete the merger at the agreed $54.20 per Twitter share, according to a court filing. "Musk apparently believes that he — unlike every other party subject to Delaware contract law — is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away," said the lawsuit. On Friday, Musk said he was terminating the deal because Twitter violated the agreement by failing to respond to requests for information regarding fake or spam accounts on the platforms, which is fundamental to its business performance. Musk, who is the chief executive officer of electric vehicle maker Tesla Inc., did not immediately respond to a request for comment. The lawsuit accused Musk of "a long list" of violations of the merger agreement that "have cast a pall over Twitter and its business." Twitter also accused Musk of "secretly" accumulating shares in the company between January and March without properly disclosing his substantial purchases to regulators, and said he "instead kept amassing Twitter stock with the market none the wiser."

Boris Johnson has refused to endorse any of the candidates running to replace him as Tory leader and PM. Speaking for the first time since he announced last week that he was quitting, he said his successor should continue his own "great agenda". Eleven candidates have come forward so far, most of them currently ministers in Mr Johnson's government. Backbench Tory MPs are expected to set out the party's rules for the contest later on Monday. Votes by Conservative MPs will narrow the field to two candidates by the time Parliament starts its summer break at the end of next week, with around 160,000 party members then having the final say over the next few months.

Key observations from H1 2022 report include:​ Despite a challenging investing environment in 2022, activity remains elevated – Q2 was the second most active quarter in the past five quarters (behind only a record-setting Q1)
Global campaign activity for Q2 (53 campaigns) down 27% vs. Q1, in line with Q1/Q2 pattern of recent years. Technology companies accounted for one out of every four activist targets in Q2, resulting in Technology being the most targeted sector in H1 (21% of all campaigns, well above 14% multi-year average). First-time activists accounted for 37% of all activists launching campaigns in H1, the highest level in recent years

Musk informed Twitter he is terminating his deal to acquire the company, citing material breach. Twitter intends to take Musk to court to force him to buy the company for $44 billion. There are many ways the Musk-Twitter conflict could end. In the latest twist in the Elon Musk-Twitter saga, the world’s richest man told the social media company he no longer intends to buy it. Twitter chairman Bret Taylor promptly fired back that the company intends to go to court to enforce the $44 billion deal’s closure at the agreed upon price and terms. Predicting how the drama will ultimately conclude is difficult, especially with the mercurial dealmaker involved. It’s impossible to guess all of the different permutations, which could eventually involve secondary issues such as financing. But here are eight possible scenarios.

Billionaire investor William Ackman, who had raised $4 billion in the biggest-ever special purpose acquisition company (SPAC), told investors he would be returning the sum after failing to find a suitable target company to take public through a merger. The development is a major setback for the prominent hedge fund manager who had initially planned for the SPAC to take a stake in Universal Music Group last year when these investment vehicles were all the rage on Wall Street. In a letter sent to shareholders on Monday, Ackman highlighted numerous factors, including adverse market conditions and strong competition from traditional initial public offerings (IPOs), that thwarted his efforts to find a suitable company to merge his SPAC with.

Corporate culture is an important determinant of companies’ behavior and success and, as a result, has drawn much attention, particularly from the business press. While some companies have received praise for their corporate cultures, others such as Wells Fargo, Valeant Pharmaceuticals, Toshiba, and Hertz have been severely criticized for maintaining cultures that have led to some of the most egregious misconduct in recent years, despite each of these companies having formal ethics and compliance guidelines (Zach 2015). But while the broad impact of corporate culture is clear – it affects everything from ethics decisions (Audi et al. 2016) and economic performance (Guiso et al. 2015) to management control systems (Widener 2004) and accounting practices (Ji et al. 2017) – it lacks a widely accepted definition or a useful way to measure it, making attempts to study it challenging.