Key Governance Developments

January 2022


The 98 companies listed in the US last year with dual share classes represented a record level of 32% of all IPOs, including high-profile offerings Sweetgreen and Rent the Runway, prompting increasing concern among investors about a corrosive impact on corporate governance. Asset managers are among the biggest opponents of dual share structures, which they say leave too much power in the hands of founders, early investors and management, allowing them to fight off takeover bids and pressure from activist shareholders. Jay Ritter, an IPO expert at the University of Florida, says the trend has spread from technology companies to other businesses, even though dual listing can mean exclusion from leading equity indices. Meanwhile, audit firms say the average level of corporate governance among US companies declined last year. In part, the drop is attributed to the impact of the Covid-19 pandemic, which has disrupted shareholder communications and meetings as well as ethical training for employees, but companies have also been slow to respond to shareholders' concerns about sustainability.

Key Governance Developments

Investors losing fight to curb dual-class share listings in US

A record number of companies were listed in the US last year with dual share classes, despite opposition from investors concerned about corporate governance issues. Almost one-third of all US listings had two share classes, including Sweetgreen and Rent the Runway. Asset managers oppose dual share structures on the grounds that they leave too much power in the hands of founders and management, at the expense of other shareholders.

Best source: Financial Times (subscription required)

Concern about payout to Activision CEO if Microsoft acquisition succeeds

The CEO of US video-game company Activision, Bobby Kotick, should resign over sexual harassment allegations at the company as well as the potential $293m he could receive if Microsoft acquires the business, according to Dieter Waizenegger, executive director of activist investor SOC Investment Group. Kotick is expected to leave his job if Microsoft’s $68.7bn offer is successful.

Best source: Business Insider

Audit firms say US corporate governance is in decline: survey

The quality of US corporate governance has fallen over the past year, receiving an average B- score in the American Corporate Governance Index survey of audit firm CEOs. The Institute of Internal Auditors' report finds that companies earning A ratings for governance fell from 19% in 2020 to 14% last year, while the average company score fell from 82 out of 100 to 81. The researchers note that shareholder communications and meetings, as well as employee ethical training, have been disrupted by the Covid-19 pandemic, but say companies have been slow to respond to concern about environmental, social impact and governance issues among a growing range of shareholders.

Best source: Accounting Today (subscription required)

Decade-old corporate spying case raises questions for US regulators about Iberdrola’s governance

An $8bn bid by Spanish sustainable energy generator Iberdrola to acquire New Mexico-based utility PNM Resources has been blocked by US regulators, in part because of concern that decade-old corporate espionage allegations against the company and top executives are indicative of pervasive governance failings. Chairman and CEO José Ignacio Sánchez Galán and other executives were placed under criminal investigation last June over claims that Iberdrola paid former police chief José Manuel Villarejo, head of intelligence services company Cenyt, €1.13m for undercover operations between 2004 and 2017. Alleged incidents included spying on Real Madrid football club president Florentino Pérez when the latter's ACS construction company was seeking seats on Iberdrola's board in 2009. Critics have also noted that Galán has been running the group since 2001, first as CEO and from 2006 also as executive chairman.

Best source: Bloomberg (subscription required)

UK e-commerce company accuses hedge funds and stockbrokers of collusion to push share price lower

E-commerce company THG has passed information to the UK's Financial Conduct Authority on allegations of irregular stock market trading as well as short-selling data to support its accusations of collusion between hedge funds and stockbrokers to lower its share price. The company’s stock market valuation fell by around £2bn within hours of the firm’s investor day on October 12, after a member of the sales staff at stockbroker Numis circulated a memo to clients claiming that THG had irregularities in its accounting, on top of concern about its corporate governance, the value of its technology licensing business and weak cash flow. THG says the slump in value of its shares was due to sell orders co-ordinated to trigger further sales by automated trading algorithms. The company's share price has fallen from £13bn in January 2021 to £2.8bn this month.

Best source: City A.M.

See also: The Guardian

Telecom Italia appoints new CEO after private equity bid

Telecom Italia has appointed general manager Pietro Labriola as CEO as its shareholders consider whether to accept a €10.8bn bid from private equity company KKR. The company has faced intense competition in the Italian communications market and needs to upgrade its network to meet demand for digital services. Investors have long criticised the sector incumbent's debt levels, which have hampered its ability to invest; former CEO Luigi Gubitosi was ousted in November following a string of profit warnings. Labriola could decide to separate Telecom Italia’s fixed network assets and services businesses.

Best source: Reuters (registration required)

Activist investor accuses Rio Tinto of further corporate governance failings

Natural resources company Rio Tinto is facing fresh accusations of corporate governance failings, including a conflict of interest involving board member Ngaire Woods, dean of Oxford University’s Blavatnik School of Government, which has received donations from the company. Activist hedge fund firm Pentwater Capital Management has also alleged that Rio Tinto is seeking to place the burden of a promised $3.2bn in debt forgiveness to the government of Mongolia on minority shareholders in Turquoise Hill Resources, a joint funder of the Oyu Tolgoi mine.

Best source: Seeking Apha

Third Point listed fund investors seek appointment of independent director

Investors in a London-listed fund run by hedge fund manager Third Point are calling for the appointment of an independent director to boost corporate governance and help to turn around under-performance. Activist investor Asset Value Investors and three other investors with an 18% total holding are seeking the appointment of Richard Boleat to the board of closed-ended fund Third Point Investors. Former JPMorgan banker Steve Bates quit as the fund's chairman last month, complaining that he had suffered personal threats at meetings the board had arranged with representatives of Asset Value Investors and another with Staude Capital.

Best source: Reuters

See also: Reuters (registration required)

UK housebuilder’s CEO quits to resolve dispute with activist investor

Iain McPherson, CEO of UK housebuilder Countryside Properties, has resigned with immediate effect to resolve a dispute with Los Angeles-based activist hedge fund firm Browning West, Countryside's third largest shareholder with a 10% stake. The company's share price has fallen by more than a quarter after it reported a 50% drop in profit, despite the UK's booming property market. McPherson's departure follows that of last May by chairman David Howell, who had been criticised by Browning West for inadequate leadership skills. The US firm, whose partner Peter Lee has been appointed to the Countryside board, has undertaken not to propose resolutions at general meetings, circulate statements to shareholders or seek to remove directors from the board.

Best source: Evening Standard