Corporate governance - Vigil

• Inflation, labour shortages and rising interest rates will drag on Canadian growth, pushing the economy into a moderate contraction in 2023.
• The jobless rate will rise next year but to less severe levels than in previous downturns.
• Though higher rates will restrict growth, they’re necessary to tame inflation and cool an overheating economy.
• Household spending that accelerated out of pandemic lockdowns will slow as higher prices, interest rates and unemployment hit households.
• The bottom line: This recession will be moderate and short-lived by historical standards—and can be reversed once inflation settles enough for central banks to lower rates.

Canada’s second largest pension fund has an ambitious goal for a net-zero portfolio by 2050, and plans to get there in part through its practice of linking its employee pay to sustainability performance. The Caisse de dépôt et placement du Québec (CDPQ), which manages more than $400-billion in assets, has an executive compensation system linked to achieving environmental, social and governance (ESG) targets. In 2018, it also became one of the first global institutional investors to tie variable compensation – pay given to an employee based on their results – to the achievement of climate targets. It applies to all employees. Linking pay to sustainability performance is a powerful tool because bonuses are an important driver in the industry, says Bertrand Millot, CDPQ’s head of sustainability.

Disney has a Hulu problem. In 2019, the entertainment giant struck an unusual agreement with Comcast. Two months earlier, Disney had acquired Fox’s 33% stake in Hulu as part of a $71 billion acquisition, giving it a majority stake in the streaming service. That put Comcast Chief Executive Brian Roberts in an odd position. Comcast owned the other 33% of Hulu. Roberts thought the value of Hulu would increase as the world shifted to streaming video, but he didn’t want or need to own a passive stake. [...] In fact, the better Hulu performs, the more Disney will have to pay Comcast to buy the rest of it in 2024.

26 Russell 3000 companies (2.7%) failed Say on Pay thus far in 2022, 9 of which are in the S&P 400. 17 companies failed since our last report (bolded in the table later in this post). The failure rate has increased 80 basis points since our last report (1.9%). [...] The current Russell 3000 average vote result of 90.4% is similar to the index’s average vote at this time last year (90.4%); the current S&P 500 average vote result of 88.3% is below the index’s average at this time last year (89.6%), and is consistent with the year-end vote result in 2021.

The troubling trend is spilling over into every corner of the global economy, with dramatic effects. McKinsey Global Publishing looks into the stories emerging from the data. Every morning a new headline underscores growing economic concerns: Highest inflation since the 1970s. Central banks aggressively raising rates. Consumer sentiment at record lows. Commodity prices near all-time highs. Clearly inflation has, at a minimum, altered the economic mood, and potentially reset the path of global and national economies worldwide for years to come. Here, we use the best and most recent publicly available data to offer seven charts illustrating inflation’s insidious progress.

Even as the market sours, startups are still hitting billion-dollar valuations. Our market map visualizes the 1,170 private companies worth $1B+ across artificial intelligence, e-commerce, fintech, and more. The number of global unicorns (private companies valued at $1B+) soared in 2021 amid a frothy funding environment. The momentum continued into 2022 — with the list reaching 1,000 unicorns for the first time in February — until macro trends like inflation, rising interest rates, and geopolitical shocks pumped the brakes on the IPO market and sent some previously high-flying tech stocks into free-fall. This market volatility has put downward pressure on some of the world’s most highly valued companies, threatening valuations and creating a roadblock to public debuts.

In 2021, boards of companies in the FTSE 350 saw a record number of appointments, the largest share of seats ever going to women, and great improvements in ethnic diversity. This report is part of Heidrick & Struggles’ long-standing study of trends in board composition in countries around the world. Produced by our CEO & Board Practice, these reports track and analyze trends in non-executive director appointments to the boards of the largest publicly listed companies... [...] There are greater expectations that companies will and should do more to positively impact social and political issues. The war in Ukraine is a clear example: companies have been pressured by a range of stakeholders to forgo profit for the greater good. We also expect corporations to be a large part of the solution to the climate change emergency, to come to the table with clear, science-based targets and prove that they are delivering on them.

Ben & Jerry’s is suing parent company Unilever to stop the sale of its Israeli business to a local licensee, a move the consumer products giant said would keep the ice cream products available in Israel and its occupied territories. [...] Unilever announced last week that it sold the Israeli branch of its Ben & Jerry’s business to American Quality Products, which licenses the ice cream products in Israel. American Quality said it would continue selling Ben & Jerry’s under Hebrew and Arabic names throughout Israel and its occupied territories. Despite the right of Ben & Jerry’s independent board to make decisions about the brand’s social mission, Unilever said in announcing the sale that it had the right to enter into the agreement because it had reserved primary responsibility for financial and operational decisions.

Environmental, social and governance-related (“ESG”) matters are high on the global agenda with a focus not only on climate change, but also on wider environmental issues, such as biodiversity, and social and governance issues, such as, diversity and inclusion and accountability. [...] In terms of financial markets, investors are increasingly seeking sustainable financial products and ESG investing, traditional investing combined with sustainable or otherwise philanthropic aims, has seen huge growth in recent years. Regulated firms are also seeking to improve their own ESG performance more generally to build stronger relationships with their stakeholders, including those who use their services. Whilst the growing emphasis on ESG presents opportunities for financial services providers, it also brings with it a number of risks, which need to be properly managed with a view to avoiding future regulatory investigations and enforcement. In this briefing, we look at some key areas of regulatory risk around ESG and suggest some practical steps that can be taken to manage these, with a focus on the UK and US regulatory regimes.

Cybersecurity incidents are becoming increasingly common and disruptive. In the Blakes 2022 Cyber Trends Study, we identified that ransomware attacks continue to be highly prevalent, representing over half of the observed incidents in 2021. Further, ransom payments continue to rise, with payments over US$100,000 becoming increasingly common and many payments exceeding US$1-million. In nearly half of all cybersecurity incidents we surveyed, the attacker was able to exfiltrate data. [...] Outlined below are some key considerations to help organizations prepare for the increasingly high risk of a cybersecurity incident. The list is by no means exhaustive but aims to provide a useful framework as organizations turn their mind to cyber-preparedness.

Sidley Austin LLP has emerged as the go-to law firm for companies fending off activist shareholders this year, pulling in more work than any of its peers. The firm helped companies handle 30 activist campaigns in the first half of 2022—only seven engagements shy of its year-end tally of 37 for 2021, according to new Bloomberg data. Its clients included US Foods Holding Corp. and Hasbro Inc., which repelled an investor’s bid for a new board member. Total shareholder stakes in Sidley’s matters were valued at $6.9 billion as of June 30, surpassing the $5.2 billion the firm handled for all of last year. The statistics encompass the value of stock that activist investors hold when pursuing campaigns. Activist investors are waging more campaigns after a lull during the height of the Covid-19 pandemic, said Kai Liekefett, a Sidley partner who helps lead the firm’s shareholder activism practice. “Our practice has been booming,” Liekefett said. “I never had a more busy proxy season in my life.”

Merck is in advanced talks to acquire Seagen Inc. and is aiming to agree on a purchase of the cancer biotech in the next few weeks, according to people familiar with the matter, in a deal that could be worth roughly $40 billion or more. The companies are discussing a price for Seagen above $200 a share and are seeking to seal a deal on or before the announcement of Merck’s quarterly earnings, set for July 28, the people said. Seagen’s stock closed at $175.13 on Wednesday. There is still no guarantee the companies will reach agreement on a takeover deal. New Jersey-based Merck has a market value of around $235 billion. Acquiring Seagen would help broaden its lineup of cancer drugs, currently led by the blockbuster immunotherapy Keytruda, the company’s top-selling product with $17.2 billion in sales last year.

A massive online database apparently containing the personal information of up to one billion Chinese citizens was left unsecured and publicly accessible for more than a year -- until an anonymous user in a hacker forum offered to sell the data and brought it to wider attention last week. The leak could be one of the biggest ever recorded in history, cybersecurity experts say, highlighting the risks of collecting and storing vast amounts of sensitive personal data online -- especially in a country where authorities have broad and unchecked access to such data. The vast trove of Chinese personal data had been publicly accessible via what appeared to be an unsecured backdoor link -- a shortcut web address that offers unrestricted access to anyone with knowledge of it -- since at least April 2021, according to LeakIX, a site that detects and indexes exposed databases online.
Access to the database, which did not require a password, was shut down after an anonymous user advertised the more than 23 terabytes (TB) of data for sale for 10 bitcoin -- roughly $200,000 -- in a post on a hacker forum last Thursday.

We have raised the likelihood of our Gulf tensions risk to high, on worsening prospects for a revived Iran nuclear deal. We keep the likelihood of our Russia-NATO conflict, Major cyber attacks and Global technology decoupling risks at high levels. The global BlackRock Geopolitical Risk Indicator (BGRI) aims to capture overall market attention to geopolitical risks, as the line chart shows. The indicator is a simple average of our top-10 individual risks. Its level has declined from its March peak, as inflation and monetary policy have become the main focus of markets. For sure, market attention to selected individual risks such as Russia-NATO conflict remains elevated and has kept the global gauge above its five-year average. We see this level of attention as justified, given geopolitical competition and potential conflict in the world.

History tells us that the Bank of Canada has a 0% success rate in fighting inflation by quickly raising interest rates. If a pilot told me that they’d only ever attempted a particular landing three times in the past 60 years with a 0% success rate, that’s not a plane I’d want to be on. Unfortunately, that looks likes the plane all Canadians are on now. [...] History tells us this never results in a “soft landing”. [...] Judging from history, it would be normal to see 850,000 Canadians lose their job in the upcoming fight against inflation if it were driven by rapid interest rate increases. In the worst historical case, equivalent job losses today would exceed 1.3 million.

One morning in early June, a fire broke out at an obscure facility in Texas that takes natural gas from US shale basins, chills it into a liquid and ships it overseas. It was extinguished in 40 minutes or so. No one was injured. It sounds like a story for the local press, at most — except that more than three weeks later, financial and political shockwaves are still reverberating across Europe, Asia and beyond. That’s because natural gas is the hottest commodity in the world right now. It’s a key driver of global inflation, posting price jumps that are extreme even by the standards of today’s turbulent markets — some 700 per cent in Europe since the start of last year, pushing the continent to the brink of recession. It’s at the heart of a dawning era of confrontation between the great powers, one so intense that in capitals across the West, plans to fight climate change are getting relegated to the back-burner. In short, natural gas now rivals oil as the fuel that shapes geopolitics. And there isn’t enough of it to go around.

Investors are looking beyond voting at AGMs and adopting a broader range of tools for engaging with listed companies, according to new research from the UK’s Financial Reporting Council (FRC). The study polled the views of 55 asset managers and owners following the introduction of the UK Stewardship Code 2020, which placed new responsibilities on investors over their engagement practices. ‘While engagement and voting around shareholder meetings continue to be important, respondents describe making more use of other techniques and engaging on a wider range of themes than those on the AGM agenda,’ write the report authors.