Key Governance Developments - July 2021


Social issues become higher priority on investors’ agenda

While climate change and other environmental concerns have up to now led investors' focus on sustainability, the balance is beginning to shift as activist investors, backed by legislators and regulators, push for corporate executives to take greater responsibility for fairness, inclusion and diversity in areas falling within their companies' remit, especially in international supply chains. In addition, activist investors are becoming increasingly vocal in their backing for global measures to address corporate tax avoidance, adding to pressure that has led to agreement in principle on an OECD-backed initiative to impose a minimum corporate tax rate and to require global providers of digital services to pay tax in countries where they earn revenue.

Key Governance Developments

ESG activist investors back legislation targeting corporate tax shifting

ESG investors have given their support to members of the US Congress on legislation that would require public companies in the US to disclose whether and where they shift profit internationally, and how much they pay in tax, as part of a campaign to curb aggressive tax planning. More than 60 investors with $2.9trn in assets have announced their support for the draft Disclosure of Tax Havens and Offshoring Act, a component of a larger bill on ESG provisions approved by the House of Representatives. However, the measure is expected to face opposition in the Senate.

Best source: Bloomberg (subscription required)

Shareholders vote out JD Group remuneration committee chairman over CEO pay anger

Independent shareholders have voted against the reappointment of Andrew Leslie, chairman of the remuneration committee at retailer JD Sport. The vote came after CEO Peter Cowgill had been paid nearly £6m in bonuses since February, despite the company accepting more than £100m in UK government Covid-19 support. Acknowledging low levels of support among shareholders for its remuneration report for 2020, the JD Group board says a new remuneration policy to determine pay, bonuses and share awards has received more than 80% of shareholder votes, thanks in part to support from sportswear specialist Pentland Group, which owns more than half the company's shares.

Best source: The Guardian

Schroders CEO demands governance changes for listed companies

Peter Harrison, CEO of UK-based asset management group Schroders, has warned that foreign private equity investors will continue to snap up listed businesses in the UK unless national rules are changed to reduce the burden of governance requirements for public companies. His comments echo those of fund manager James Anderson of Baillie Gifford and follow a spate of recent takeover bids by private equity firms seeking to profit from low valuations and the impact of Brexit and the Covid-19 pandemic, including a bidding war for supermarket group Morrisons.

Best source: Financial Times (subscription required)

See also: City AM

See also: The Guardian

See also: Financial Times (subscription required)

Wise direct listing raises concern about appeal of dual share class structure

Concern has been raised about the dual share class structure of cross-border payment company Wise, formerly known as  Transferwise, which completed a direct listing on the London Stock Exchange and ended its first day’s trading with its market capitalisation more than doubled to £8.75bn. Analysts note that choice of a direct listing rather than an initial public offering leaves CEO and co-founder Kristo Käärmann with enhanced voting rights, but disqualifies the company from membership in the FTSE 100 index. They say the reduced say over corporate decisions may deter some institutional and retail investors.

Best source: City A.M.

See also: The Guardian

Italian and institutional investors seek compensation from Binance

A group of international and Italian investors, along with the Swiss Blockchain Consortium, are launching legal action against crypto-exchange operator Binance over losses suffered when the exchange was offline during peak trading hours. The investors claim the company broke its internal rules on derivatives trading and that the compensation it has offered is too low. Binance has been banned in some countries such as the UK, is under investigation in others, and has been cut from payment systems including the Single European Payments Area.

Best source: Coin Telegraph

Corporate groups push back against EU ESG governance proposals

Corporate lobby groups have discreetly lobbied against elements of proposed EU legislation that would impose ESG due diligence requirements on corporate governance frameworks. The European Commission says voluntary social responsibility measures are insufficient to protect the environment and human rights in global supply chains. Companies oppose aspects of the proposed Sustainable Corporate Governance Directive, saying its provisions would hold them responsible for ESG abuses even if they do not directly have control over them.

Best source: EU Observer

Critics warns of risk to directors from UK legislation on financial or audit failings

The UK government is due to close in July its consultation into powers held by the new Audit Regulation and Governance Authority that could mean directors of public companies as well as of large junior market-listed and private companies could be personally liable for financial or audit failings. Under the proposals, directors would have to sign annual statements explaining capital maintenance and dividend decisions, steps taken to detect fraud, and the adequacy of internal controls, and would be required to act with due skill, care and diligence, and honesty and integrity. Critics say directors could be disqualified for inaccuracies in financial statements over which they had no control, and that companies might be less willing to share legally privileged material with auditors if it could be accessed by the regulator.

Best source: City A.M.

Japanese corporate governance and shareholder focus improving significantly, say asset managers

Asset managers say corporate governance in Japan has improved significantly in recent years, with revisions to stewardship and other codes, as well as the drive launched in 2012 by former premier Shinzo Abe for structural reform, which is seen as an important influence in boosting corporate profitability and performance, as well as returns for investors. Tokyo-based T. Rowe Price portfolio manager Archibald Ciganer says governance standards and returns for investors are closing the gap with European and US equity markets, including more efficient allocation of capital by Japanese companies, payment of higher dividends and increasing share buybacks. However, persisting concerns include the representation of women at the management level, the size of corporate boards and the structure of board committees, including CEOs chairing nomination or compensation committees.

Best source: Pensions & Investments (subscription required)

EBA calls on banks to draw up 10-year plan to phase in ESG risks

The European Banking Authority has called on banks and investment firms to draw up 10-year plans to identify and account for environmental, social and governance risks, especially the impact of climate change. The regulator says institutions should phase these risks into their supervisory model and governance analysis, starting with climate and environmental factors. Banks should analyse their resilience under various scenarios, define their ESG goals, and weigh the need to introduce sustainable products, the EBA says.

Best source: Handelsblatt (subscription required, in German)

See also: European Banking Authority

Central Bank of Ireland fines and bars former building society executive

The Central Bank of Ireland has fined former Irish Nationwide Building Society executive Gary McCollum €200,000 and disqualified him for 15 years after completing five cases involving violations of commercial lending law before the now-defunct building society's collapse during the country's banking crisis. The central bank has reached settlements with two former executives and dropped a third case for health reasons. Former finance director John Stanley Purcell is still defending himself against allegations of regulatory breaches in the period between 2004 and 2008.

Best source: Irish Times