Key Governance Developments September - November 2018

Systemic governance failings seen as feeding short-termism

Politicians and regulators are voicing concern about perceived failings in corporate governance that are encouraging decision-making toward short-term gains rather than a long-term growth strategy, and that exclusively prioritise shareholder interests over those of other stakeholders, including customers, employees and society as a whole. Britain's opposition Labour Party says it aims to require all but the smallest companies, even privately-held ones, to give at least a third of their board seats to employee directors. In the US, the erratic behaviour of Tesla CEO Elon Musk has prompted regulator SEC to impose a series of governance reforms on the company, including barring Musk for three years from being chairman and requiring Tesla to appoint independent directors to the board.

Unilever abandons plan to move to single Dutch structure 

Unilever has abandoned its plan to end its dual Dutch and British structure in favour of a single base in the Netherlands. Its board reversed its position after growing shareholder opposition made it unlikely that the proposal would receive sufficient support from UK institutional  investors, who feared being obliged to sell the group's shares once it was no longer part of the FTSE100 stock index. The Dutch government has subsequently dropped its controversial proposal to scrap dividend withholding tax, which was intended to protect the foreign shareholders of Dutch companies from having to pay tax in the Netherlands.

Reuters 

See also: Bloomberg 

US regulator settles with Elon Musk and Tesla 

The US Securities and Exchange Commission has settled charges with Tesla CEO Elon Musk over his alleged false or misleading statements on Twitter claiming he had secured funding to take the company private. Musk must pay a penalty of $20m and give up his position as chairman of the board for at least three years. Tesla will also be required to appoint two new independent directors to the board and institute further governance changes designed to  put constraints on Musk's ability to impose corporate decisions without effective oversight.

CNBC 

Hong Kong exchange seeks to clamp down on multiple board mandates 

Hong Kong Exchanges and Clearing will implement new listing rules incorporating a provision requiring companies to seek shareholder approval if any director holds more than six board mandates at the same time.

Hong Kong Exchanges and Clearing is to implement a new set of listing rules on January 1 incorporating a 'comply and explain' provision requiring companies to seek shareholder approval if any director holds more than six board mandates at the same time. There are 65 directors in Hong Kong who sit on more than six boards, accounting for 499 out of 7,564 listed company board seats in the territory, according to corporate governance activist David Webb. On average, each director of a Hong Kong-listed company sits on two boards, putting the jurisdiction in fourth place globally for directorship density, according to Institutional Shareholder Services.

South China Morning Post 

UK regulator considers ban on combining consultancy and audit roles 

The UK's Financial Reporting Council is considering banning professional services groups from undertaking consulting work for companies that they audit, in order to prevent conflicts of interest. EU rules introduced in 2016 already limit the consultancy fees firms can charge clients to 70% of their average audit billing over the previous three years. The regulator is examining measures to restore confidence in audit standards following a series of high-profile accounting scandals at companies including Carillion, GE and Steinhoff.

Financial Times (subscription required) 

Paris trial witnesses say UBS struggled to shift culture away from bank secrecy 

French prosecutors are basing their case against UBS on charges of money laundering and illegal solicitation of clients largely on testimony of former employees, who have described how the Swiss bank was attempting to make a transition from a disappearing culture of banking secrecy to a more transparent environment. UBS built up its French infrastructure but breached restrictions on how far Swiss-based employees visiting France could go in soliciting clients at cultural or sporting events, the prosecution alleges.

Neue Zürcher Zeitung (subscription required, in German)

See also: Le Temps (subscription required, in French)

UK opposition sets out plans for compulsory employee directors 

A future Labour government in the UK would introduce legislation requiring businesses to reserve a third of board seats for employee representatives, who would be elected by the workforce and paid the same as other board members, according to party leader Jeremy Corbyn. The rules would apply to companies with a workforce of 250 or more, regardless of whether they are listed or not, with a minimum, regardless of board size, of two employee representatives who would have to be members of a trade union. Corbyn blames governance that prioritises shareholder interests for a corporate culture focused on short-term gains at the expense of longer-term growth.

Best source: City A.M. 

New governance arrangements approved for Caisse des Dépôts 

France’s National Assembly has voted in favour of new governance arrangements for Caisse des Dépôts.

France’s National Assembly has voted in favour of new governance arrangements for Caisse des Dépôts. The legislation will increase the number of supervisory board members from the current 13 to 16, of whom 10 will either be members of parliament or nominated by it. Finance minister Bruno le Maire says the changes consolidate the position of Caisse des Dépôts as a national public financing institution and strengthen its oversight by parliament.

Les Echos (in French) 

Pilatus directors sue regulator over bank’s suspension 

Pilatus Bank’s remaining directors have filed a lawsuit against the Malta Financial Services Authority, seeking damages for what they say was the negligent, abusive and illegal manner in which the regulator suspended the bank’s operations in response to allegations of sanctions-busting and money laundering. The board members are seeking to recover costs stemming from administrative measures imposed on the bank, and to regain control of the business. Separately, a group of Pilatus Bank depositors are preparing legal action against the Maltese regulator in a bid to recover about €80m of frozen assets.

Times of Malta 

Proxy adviser warns CEO could gain control of fund manager through share buyback 

Institutional Shareholder Services says investors should reject a proposal to give more powers to Mark Coombs, the CEO of $76.4bn emerging market fund manager Ashmore, which it says could enable him to gain effective control of the company without offering a takeover premium to other shareholders. ISS supports a share buyback programme proposed by Ashmore, but says that if the company repurchases shares and Coombs does not participate, his stake in would rise from its present 38.6%. The UK takeover code says large shareholders that increase their stake should bid for the remaining shares at a premium price, but Ashmore proposes to waive the requirement for Coombs.

Financial Times (subscription required) 

Bank of England chief economist calls for shareholder interests to carry less weight 

The chief economist of the Bank of England, Andy Haldane, has called for reform of corporate governance rules, arguing that current UK rules give too much weight to the interest of shareholders at the expense of other stakeholders, including customers, clients, creditors, employees and society as a whole. Haldane believes the current model requires corporate leaders to prioritise returns to shareholders through dividends and share buybacks, possibly at the expense of investment and training.

Financial Times (subscription required)