Key Governance Developments
June - September 2018
Governance considerations increasingly impact corporate credit ratings
Governance considerations, along with social and environmental issues, with which they are often closely entwined, are becoming increasingly central to the work of national, regional and global credit rating agencies, which are playing closer attention to corporate risks in these areas. Analysts point to the governance failings underlying Volkswagen's efforts to cheat diesel emission tests in the US, which led to the group being downgraded and ultimately facing a bill amounting to many billions of dollars in legal penalties, customer compensation and technological fixes, not to mention untold damage to its reputation. Conversely, says US asset manager Neuberger Berman, improved corporate governance - partly down to EU legislation - is spurring higher returns for investors in European companies by removing obstacles to organisational and strategic change.
Rating agencies step up focus on ESG corporate risk factors
Credit ratings agencies are incorporating environmental, social and governance considerations into their methodology, with the UN-backed Principles for Responsible Investment particularly influential in the systematic integration of ESG factors in credit-risk analysis in Asia and facilitating dialogue between regional and global agencies to identify risks to creditworthiness. Environmental elements are the most critical input into rating methodology because of the risks of events associated with environmental degradation, regulatory measures that leave companies with stranded assets, and disinvestment by sustainability-conscious investors. Analysts point to the downgrade of Volkswagen by S&P after revelations of diesel emission test manipulation in the US in September 2015, partly reflecting evidence of the group's inadequate environmental and social risk management framework.
Raiffeisen names new chairman in bid to emerge from Vincenz scandal
Swiss co-operative bank Raiffeisen has nominated lawyer and turnaround specialist Guy Lachappelle as chairman and proposed four other new directors in an attempt to recover from the scandal involving former CEO Pierin Vincenz. Financial regulator Finma has told the bank to improve its corporate governance and review whether it should convert to limited company status. Lachappelle, who has been CEO of Basler Kantonalbank since 2013, will be responsible for implementing a series of governance reforms already underway at Raiffeisen. His predecessor, Johannes Rüegg-Stürm, resigned in March after Zurich prosecutors launched a criminal investigation into fraud allegations against Vincenz involving conflicts of interest.
Better corporate governance in Europe could boost investment returns: asset manager
Impediments to shareholder rights and corporate transparency in Europe are being challenged by activist investors promising to deliver higher returns, according to Benjamin Segal, an equity portfolio manager at New York asset management firm Neuberger Berman. He says the EU's revised Shareholder Rights Directive has encouraged both long-term engagement by shareholders and increased corporate transparency, opening the way for shareholder-friendly corporate actions including operational improvements to capital allocation, the replacement of board members and managers, or the sale of the company, either under pressure from activists or to head off being targeted.
Unilever shareholders angered by relocation plans
After almost a century in UK, Unilever plans to establish its headquarter in Rotterdam
UK investors have expressed anger at Unilever’s plans to drop its dual UK-Dutch headquarters and stock market listings in order to establish the group fully in the Netherlands. If the change is approved, the company would drop out of the FTSE 100 index, obliging some British institutional investors and benchmark-based and index tracker funds to sell the stock. The company has announced it will take measures to avoid the application in future of strict Dutch rules on hostile takeovers. Shareholders are due to vote on the change in legal structure next month.
Widespread business support in US for abolition of quarterly reporting obligation
The Trump administration's proposal to end quarterly reporting obligations for listed companies in favour of a half-yearly system has been applauded by US business leaders, including Berkshire Hathaway's Warren Buffett and JPMorgan Chase's Jamie Dimon, who argue that quarterly earnings guidance can result in an unhealthy focus on short-term profit at the expense of long-term strategy, growth and sustainability, as well as being a factor behind a decline in the number of American public companies over the past two decades. Quarterly reporting obligations were introduced in the wake of the 1929 stock market crash, and reverting to a twice-yearly system would bring the US back into line with Europe, which abolished quarterly earnings reporting rules after the financial crisis to reduce the bureaucratic burden on businesses.
Schroders faces nepotism claims over heir’s possible nomination to board
London-based asset management company Schroders may face accusations of nepotism if the daughter of director Bruno Schroder is appointed to the board as his successor for when he retires. The Schroders and another branch of the family own 47.9% of the company, but Leonie Schroder Fane has no experience in the financial services industry. Bruno Schroder, the great-great grandson of Henry Schroder, who founded the business in 1804, has been a board member since 1963, and is currently a member of its nominations committee. The group attracted widespread criticism two years ago when it nominated long-standing CEO Michael Dobson as chairman.
Singapore Exchange adapts rules to boost board independence and diversity
Singapore Exchange said it will make amendments to its listing rules
Singapore Exchange is to amend its listing rules following the Monetary Authority of Singapore's acceptance of changes to the country's Code of Corporate Governance following a public consultation. The measures aim to strengthen director independence by tightening tests for the independence of board members and setting a maximum tenure of nine years, as well as requiring at least one-third of directors to be non-executive, or a majority if the chairman is not independent, and imposing a duty on companies to disclose their board diversity policy and report on its implementation.
Luxembourg regulator sets out new rules on fund manager governance
Luxembourg's financial regulator has set out new rules on the governance, substance and organisational structure of UCITS and alternative fund managers. The CSSF's circular 18/698, which is applicable immediately, states that members of the management of an AIFM may not exceed 1,920 working hours a year, nor exercise more than 20 board mandates with regulated entities and operational companies, although the regulator may consider exemptions if firms can demonstrate justification.
Irish insurance group fined over reporting and controls failings
The Central Bank of Ireland has fined insurer PartnerRe Ireland Insurance and sister company Partner Reinsurance Europe €1.5m for failing to comply with insurance regulations in breach of the Solvency II regime, involving weaknesses in the companies' corporate governance relating to internal reporting and internal controls relating to capital requirements. The regulator says governance failings had resulted in miscalculation of the capital requirement for 2016, the submission of incorrect information to the central bank, and, in the case of PartnerRe Ireland, a breach of its solvency capital requirement.
German governance expert criticises Continental management letter
German corporate governance expert Manuel René Theisen has criticised Continental's board for sending a scathing note to the company's middle management employees. The board urged managers to act urgently to improve disappointing recent financial performance, but Theisen interprets the note as an admission by the directors that they have failed to resolve the group's problems and says they are not offering an example to the workforce.