Key Governance Developments in 2019

Environmental issues carry greater weight as boards face pressure on climate change

The past year has seen pressure grow on companies and their boards, particularly in Europe but increasingly worldwide, to pay attention to climate change and other environment-related issues. For now, regulators are mostly urging compliance with voluntary transparency standards, but the trend is toward mandatory requirements. Meanwhile, institutional investors are demanding more radical changes to corporate policy, for example demanding that investment managers divest stakes in companies active in the coal industry. Directors are now called upon to consider not just the reputation of their companies, especially for brands vulnerable to changes in public opinion, but legal liability risks, for example from class action lawsuits from victims of climate change. Boards are also being pressed on corporate remuneration by investors demanding that increases in executive salaries, bonuses and pension fund contributions be more closely aligned with companies' financial performance and shareholder returns. The regulatory turmoil at Nissan in the wake of Carlos Ghosn's downfall has been an object lesson to directors about the risks of failing to hold over-mighty corporate chiefs to account. And despite the lead from Washington, it was a year in which the US Business Roundtable, a group of US CEOs chaired by Jamie Dimon of JP Morgan Chase, argued that profit and shareholders’ interests should not be the primary goal of companies. The public interest is back in favour.

 

Shell to link executive pay to carbon emission reduction

Oil and gas group Royal Dutch Shell is to introduce three-year or five-year carbon emissions reduction targets annually from 2020, to which it will link its executive pay. Shell had previously intended to set only non-binding long-term emissions targets, but it has now agreed to stricter commitments under pressure from its shareholders. Shell’s targets will include so-called Scope 3 emissions from the burning of fossil fuels sold to millions of customers around the world, rather than just emission reductions in its own operations.

Best source: Reuters

 

One-third of world’s largest banks fail to sign climate disclosure initiative

Twenty-eight of the world's 75 largest banks have not yet signed up for the Task Force on Climate-related Financial Disclosures initiative, which seeks to encourage companies to disclose their exposures to climate risk. Most of the laggards are Chinese, but the list of non-signatories also includes Italy's UniCredit, France's Groupe BPCE, Germany's Commerzbank and Wells Fargo in the US.

Best source: Financial Times (subscription required)

 

Hong Kong falling behind competitors on ESG standards: Asia governance body

The Asian Corporate Governance Association says the changes proposed in a recent consultation paper by the Stock Exchange of Hong Kong on the Review of the ESG Reporting Guide and Related Listing Rules do not go far enough and will leave the jurisdiction well behind the standards of other regional markets, as well as globally. The association argues that more guidance is required in areas such as board statements, climate change impact and international ESG reporting standards.

Best source: Top1000Funds

 

Fund industry group warns UK listed firms over executive remuneration

The Investment Association, the industry group that represents 250 UK fund management companies, has written to the heads of remuneration committees at companies in the FTSE 350 index to warn against excessive and opaque executive pay packages. The organisation says listed companies should simplify compensation structures, justify executive pay, and strengthen provisions to claw back bonuses after executives leave their jobs.

Best source: Financial Times (subscription required)

 

US public companies demand regulation of proxy advisers

A group of 319 listed US companies co-ordinated by the Nasdaq stock exchange has written to the Securities and Exchange Commission calling for the regulation of proxy advisers. The companies say they are concerned about potential conflicts of interest and a lack of transparency in the methods used by advisers to determine their voting recommendations in areas such as the election of board members, executive remuneration and other corporate governance issues. Glass Lewis and Institutional Shareholder Services dominate the US proxy adviser market. Nasdaq says frustration with proxy advisers is deterring some companies from listing on the stock market, reflected in a downturn in the number of IPOs.

Best source: Financial Times (subscription required)

See also: Financial Times (subscription required)


UK investment body issues shareholder guidance on excessive executive pensions

The UK's Investment Association has issued new guidelines for institutional shareholders on voting for or against executive pension packages at companies they invest in. The Investment Association, which represents 250 asset managers and other institutional investors, says public companies with existing directors' pension contributions worth more than 25% of their salary will prompt the highest level of warning. The changes will apply from the 2020 annual general meeting season.

Best source: Financial Times (subscription required)

 

US CEO group says maximising shareholder value not primary goal

The Business Roundtable, a group of leading US CEOs chaired by Jamie Dimon of JP Morgan Chase, says profit and shareholders’ interests should not be the primary goal of companies. The statement marks a shift away from the prioritising of shareholder value in corporate responsibilities, which often favours a focus on short-term results, and is also seen as encouraging decision-making that boosts the value of stock options held by senior management. Listed companies face growing pressure from institutional shareholders to temper executive pay and to focus on the broader business environment, including staff pay and conditions, climate change and equality.

Best source: Washington Post (subscription required)

 

Japan rewrites merger rules to protect minority shareholders

Japan's Ministry for Economy, Trade and Industry has published the first of three sets of changes to the country's mergers and acquisitions guidelines. The rules give more protection to minority shareholders, and are designed to curb conflicts of interest ahead of an expected increase in management buy-outs and instances of companies absorbing their listed subsidiaries. The Tokyo Stock Exchange is joining the government in efforts to reduce the number of listed subsidiaries controlled by parent groups Hitachi and Toshiba, and may eject small or badly-run subsidiaries from the exchange's First Section board.

Best source: Financial Times (subscription required)

 

UK company directors face imprisonment for abuse of employee pension funds

The UK's Department for Work and Pensions has published legislative proposals under which company directors could be sentenced to imprisonment or unlimited fines if they fail to provide correct information or to notify of certain events in the operation of employee pension funds. The ministry is seeking to give Britain's Pensions Regulator greater powers to investigate corporate transactions to ensure that defined-benefit pension funds are protected.

Best source: UL Department for Work and Pensions

 

French regulator to focus on shareholder dialogue in governance issues

French regulator Autorité des Marchés Financiers says its campaign for improved governance will focus on a dialogue with shareholders. The emergence of activist shareholders in other countries has not been observed in France, and the regulator would like to foster greater engagement, according to Astrid Milsan, the AMF's deputy secretary-general for governance. The regulator is considering a new threshold of 3% for disclosure of a stake, and requiring shareholders with a 5% shareholding to declare their intentions.

Best source: Agefi (subscription required, in French)

Shareholders increasingly ready to vote against European company AGM resolutions

Investors in European companies are increasingly willing to vote against resolutions at annual general meetings. Consultancy Georgeson has calculated that the proportion of resolutions at large German companies that resulted in significant dissent increased by 108.6% in 2019. Significant dissent was up by 21.1% in Spain over the same period, while the overall increase in Europe’s largest markets stood at 6.7%.

Best source: Financial Times (subscription required)

International regulators examine big fund groups’ grip on corporate voting rights 

The US Federal Trade Commission, the Department of Justice, the European Commission and competition commissioner Margrethe Vestager are examining the role of BlackRock, Vanguard and State Street Global Advisors in corporate voting rights. The three fund managers will soon hold four of every 10 votes cast at large US companies, partly as a result of the rapid growth of their exchange-traded fund ranges. There is concern that big shareholders will not drive companies to compete against other firms in the same market or sector in which they are also investors.

Best source: Financial Times (subscription required)

UK regulator steps up investigation of directors’ failings on culture and governance

The UK's Financial Conduct Authority is investigating 58 directors of financial companies, more than double the number two years ago, with nearly half of them under scrutiny for non-financial failings in culture and governance. The regulator is seeking to put pressure on executives and directors at financial institutions to take action in the wake of allegations of sexual harassment, homophobia and bullying. Accountability rules will be rolled out toward the end of this year, and groups could face fines for failing to meet diversity targets.

Best source: Financial Times (subscription required)

 

Dubai regulator to examine governance issues after Abraaj collapse

Bryan Stirewalt, CEO of the Dubai Financial Services Authority, says the regulator may change its oversight procedures and approach to corporate governance following the collapse of private equity firm Abraaj Capital. Stirewalt says the DFSA will review its risk-based approach to supervision to ensure that it adequately captures some of the features of the Abraaj case, notably the fact that the regulator did not supervise key group entities including Abraaj Holdings and Abraaj Investment Management, or its private equity funds, because they were domiciled in the Cayman Islands.

Best source: Arab News

 

Activist investors target corporate governance at family-controlled Korean groups

Elliott Management, the world's largest activist fund investor, has called on Hyundai to appoint outside directors to its board to improve accountability at South Korea's second largest family-run conglomerate as it prepares for vice-chairman Chung Eui-sun to succeed his father. Analysts describe the initiative as the first serious challenge by Korean shareholders to a system in which founding families maintain a strong grip over listed companies through complex cross-shareholdings with affiliates. Hyundai Motor's annual general meeting is due to be followed by that of Korean Air Lines and its parent Hanjin KAL, at which local activist firm Korea Corporate Governance Investment is expected to challenge the group's controlling family.

Best source: Nikkei Asia Review