The week in GRC: Boards said to weaken oversight via excessive independence and Treasury plans post-crisis rulebook overhaul

– The Financial Times reported that Jeff Immelt has stepped down as CEO of General Electric (GE) after 16 years. The company unveiled a management shake-up that will see Immelt replaced as chief executive by John Flannery, the head of GE’s healthcare division, from August 1 and as chair from the start of next year. The company said the move was the result of a succession process that had been under way since 2011. Jack Brennan, lead independent director, said in a statement: ‘The board is confident that in the years to come, GE investors and employees will benefit from Jeff’s hard work.’

– Global bank regulators have been working for a decade on capital rules intended to help prevent another financial crisis, and are now close to a final deal, but France is the main obstacle standing in their way, according to Bloomberg. The US has insisted on tough curbs under Basel III, while Europe, led by Germany and France, has pushed a softer line. But although the US and Germany have recently shown a willingness to compromise, France has dug in its heels, according to people with knowledge of the matter.

– The Wall Street Journal said Qualcomm’s bid to acquire NXP Semiconductors faces an in-depth EU probe regarding concerns the deal might lead to higher prices, less choice and reduced innovation in the semiconductor industry. The European Commission (EC) said it was concerned the newly merged company would hold strong market positions with both cellular chipsets and chips for near-field communications, giving the company the incentive to exclude rival suppliers from the market or even modify NXP’s intellectual property-licensing practices.

In a statement, Qualcomm said: ‘[B]oth companies expected a thorough review process and are working closely with relevant regulators, including the EC, to obtain the necessary approvals.’ Qualcomm also said it was confident it could address the EU’s concerns, adding it still expects the transaction to close by the end of the year.

–  The Guardian reported that Carlsberg unveiled plans to reduce its brewery carbon emissions to zero, pointing to President Donald Trump’s withdrawal of the US from the Paris climate agreement as a motivating factor. The Danish brewer, whose beers also include Holsten Pils and San Miguel, said it would eliminate brewery emissions and halve its water usage by 2030 as part of a new sustainability drive. Carlsberg’s resolve to go green had been hardened by Trump announcing plans for the US to withdraw from the Paris climate agreement, its CEO Cees ’t Hart said.

– The Washington Post looked at the US Department of the Treasury’s report calling for the scrapping or softening of some of the rules for banks and other financial firms put in place after the financial crisis. The Treasury recommended more than 100 changes to financial rules and recommends streamlining supervision of the financial services industry and giving political leaders more influence over the process, taking away some power from independent regulators.

Specifically, the report said the White House should have the ability to fire the head of the Consumer Financial Protection Bureau and called for giving Congress the ability to slash that agency’s budget. Many of the other recommendations are meant to help eliminate rules that affect small and regional banks. The report stopped short of calling for the repeal of the Dodd-Frank Act, but targeted changes that could be made in the absence of a repeal of that law. These include exempting many banks from certain stress tests and exempting most banks from the Volcker Rule.

– Peter Hambro secured the backing of ISS and Glass Lewis for his re-election to the board of Petropavlovsk as executive director a month after announcing he would step down as executive chair at the company’s annual meeting on June 22, according to the FT. That move followed calls from Russia’s Renova Group, the company’s largest shareholder, asset manager M&G and Sothic Capital for Hambro to step down from the company entirely. Each cited concerns over corporate governance at Petropavlovsk. ISS said the accusations have ‘not been substantiated in any detail in a public statement.’

M&G said: ‘Our sole interest is in raising the standards of corporate governance and we think by doing this we’ll improve the value of our holdings on behalf of our customers.’ Renova and Sothic did not comment.

– The WSJ noted that when activist investors call for changes at a company or on its board, their campaigns often start with the CEO in the crosshairs, but reported that pressure is also mounting on CFOs as they are more often tasked with cutting waste, increasing efficiency and boosting margins. Demand for activist-seasoned CFOs is rising. ‘A lot of our more recent requests are that a candidate has had experience with an activist,’ said Peter Crist, chair of executive recruiter Crist|Kolder Associates.

– Senator Elizabeth Warren, D-Massachusetts, said Senate Democrats are willing to pursue targeted changes for regulations affecting community banks and credit unions as Congress moves to review post-crisis financial regulations, according to the WSJ. But she said she would stand against changing laws to roll back consumer protections or to help big banks.

‘There are places where we should do targeted changes in laws and regulations to make sure community banks don’t have to endure regulations… for problems like disrupting the entire US economy when they really don’t pose that kind of threat,’ Warren said.

– The Guardian reported that venture capitalist David Bonderman resigned from Uber’s board of directors after apologizing for making a sexist remark during an all-staff meeting about reforming the company’s culture. In a statement, Bonderman called his comment ‘careless, inappropriate and inexcusable’ and said he understood ‘the destructive effect it had.’

‘I do not want my comments to create distraction as Uber works to build a culture of which we can be proud,’ he added. ‘I need to hold myself to the same standards we’re asking Uber to adopt. Therefore, I have decided to resign from Uber’s board of directors, effective tomorrow morning.’ The board had voted unanimously to approve the recommendations contained in a report on reforming the company, which was prepared by the law firm of former US attorney Eric Holder.

– The WSJ looked at a new study which found that, in an ironic twist, many US corporate boards weakened their oversight of management by trying too hard to be independent. Nearly three quarters of S&P 1500 companies have boards where the CEO serves as the lone inside member, up from 41 percent in 2000. But companies governed this way are more likely to commit financial misconduct, generate lower profits and overpay their CEOs, the research suggests. ‘Having at least one other insider is valuable to preventing some of these negative consequences,’ said Christine Shropshire, co-author of the research.

An extremely independent board ‘is too much of a good thing’ because lone-insider CEOs restrict board access to critical information and to leaders’ possible successors, said Shropshire, an associate professor of management at Arizona State University’s business school. Some governance experts favor boards with the company leader as their sole insider to minimize management’s boardroom clout.

– UK Prime Minister Theresa May appointed Brexit supporter Stephen Barclay as minister to oversee the country’s financial services industry, which faces upheaval as the UK prepares to leave the EU, Reuters said. Barclay is likely to be responsible for financial services policy and the government’s relationship with firms such as banks, insurers and asset managers. Before he was elected to parliament in 2010, he worked in financial regulation and then financial crime prevention at Barclays retail bank, according to his website.

– IBM formally launched a Watson product for financial regulation, rolling out artificial intelligence (AI) tools to help financial institutions comply with rules and detect possible financial crimes, according to the WSJ. Watson’s move comes as financial firms continue to shift to AI and so-called ‘machine learning’ to manage data that must be analyzed for regulatory compliance and crime prevention.

– The New York Times reported that, according to a new class action and other lawsuits, officials in Wells Fargo’s mortgage business made unauthorized changes to home loans held by customers in bankruptcy. The alleged changes put borrowers in bankruptcy at risk of defaulting on the commitments they made to the courts, and could make them vulnerable to foreclosure in the future, the plaintiffs argue.

A spokesperson for Wells Fargo said the bank strongly denied the claims made in the lawsuits and particularly disputed how the complaints characterized the bank’s actions. Wells Fargo contends that the borrowers and the bankruptcy courts were notified. ‘Modifications help customers stay in their homes when they encounter financial challenges,’ the spokesperson said, ‘and we have used them to help more than 1 million families since the beginning of 2009.’

– An esoteric requirement that bankers and some US officials have long said discourages firms from participating in the derivatives market – and makes the financial system less safe – is on the regulatory chopping block, the WSJ said. The Federal Reserve, amid pressure from banks and some US officials, has already begun laying the groundwork to ease the rule, according to people familiar with the matter. The Fed, which helped craft the rule, has yet to reach a decision on how exactly to refashion it, but is taking a new look at the measure, though no decision is imminent, these people said.

The rule calls for banks to hold additional capital against collateral, known as margin, that they collect from clients on certain swaps transactions. Banks and some government officials say the rule makes it uneconomical for banks to participate in such transactions.

– GE executives are ‘living in fear of hedge fund activists’, Bloomberg reported. Under former chief executive Jeffrey Immelt, the company spent more than $45 billion on share buybacks during the last two years. This was, in part, a reaction to Nelson Peltz’s activist fund Trian Fund Management taking a position in GE in 2015.

John Flannery, GE’s new chief executive, inherits a $31 billion pension shortfall, the biggest among S&P 500 companies and 50 percent greater than any other corporation in the US. ‘GE has the tension between financial-ization and innovation,’ said William Lazonick, a professor of economics at the University of Massachusetts Lowell, speaking to Bloomberg. ‘People at the top are living in fear of hedge fund activists and worry about their share price rather than what is going on with the company.’

Jennifer Erickson, GE spokesperson, said: ‘Given the significant decline in interest rates and volatile financial markets that resulted in lower asset returns from 2008 to 2009, the company has been actively managing the pension liability.’

– The WSJreported that a recent Supreme Court ruling will blunt the SEC’s ability to penalize private equity managers for fees they overcharged investors. Under the ruling, the SEC has just five years to order firms to give back profits that may have been wrongly taken. According to WSJ sources, private equity funds usually last 10-12 years. There was no time limit on SEC action prior to this Supreme Court ruling.