This week’s governance, compliance and risk-management stories from around the web
– Bloomberg reported that Dan Loeb had amassed a $3.5 billion stake in Nestlé, targeting Europe’s largest company in the biggest bet of his career as an activist investor. Third Point, Loeb’s hedge fund, encouraged Nestlé to sell its stake in L’Oreal, increase leverage for share buybacks and adopt a formal profitability target, among other suggestions. ‘As always, we keep an open dialogue with all of our shareholders and we remain committed to executing our strategy and creating long-term shareholder value,’ Nestlé said. A L’Oreal spokesperson declined to comment.
– Plans to reform Canada’s asset management investment in an effort to remove conflicts of interest have encountered fierce resistance from firms that say the proposed changes will hurt investors, according to the Financial Times. The Canadian Securities Administrators has proposed a ban on asset managers paying commissions to advisers for selling mutual funds, arguing that this widespread practice increases costs for investors and curbs returns. But the Investment Industry Association of Canada and the Investment Funds Institute of Canada have rejected the proposed ban on commission payments, arguing that it would restrict the availability of advice to many households and damage Canadians’ ability to plan and save for their retirement.
– Bloomberg reported that Google was hit with a record €2.4 billion ($2.7 billion) fine from EU regulators that said the company skewed search engine results to thwart smaller shopping search services. Google has 90 days to ‘stop its illegal conduct’ and give equal treatment to rival price comparison services, according to a binding order from the European Commission. It’s up to Google to choose how it does this and inform the EU of its plans within 60 days. Failure to comply would risk fines of up to 5 percent of its daily revenue.
Google’s lawyer Kent Walker said the company respectfully disagrees with the EU’s conclusions and will consider a court appeal, according to a blog post. ‘When you shop online, you want to find the products you’re looking for quickly and easily,’ Walker said. ‘And advertisers want to promote those same products. That’s why Google shows shopping ads, connecting our users with thousands of advertisers, large and small, in ways that are useful for both.’
– According to Reuters, dozens of companies such as Google, Microsoft and CBS urged a federal appeals court to rule that a law banning sex discrimination in the workplace offers protection to gay employees. The brief submitted by 50 companies to the 2nd US Circuit Court of Appeals marks the first time such a large group of businesses has backed arguments about employment discrimination that LGBT groups and the administration of former US president Barack Obama have made for years.
The companies said bias against gay employees is widespread, with more than 40 percent of gay workers reporting harassment and other forms of discrimination in various studies. The lack of a federal law clearly prohibiting discrimination on the basis of sexual orientation has hindered recruitment in states that have not adopted their own law, the companies said.
– The Trump administration is struggling to find a nominee for the Federal Reserve board with community banking experience, delaying plans to fill two other Fed vacancies, including a key regulatory post, The Wall Street Journal said. The problem is that they can’t find somebody willing to take the job.
Ethics rules require Fed governors and their immediate family members to divest themselves of holdings in any financial firms to avoid potential conflicts of interest. But many of the country’s small banks are privately held and run by third-generation or fourth-generation executives. At least three community banker candidates who had been recommended for the job either bowed out or declined to be considered over concerns about selling their stakes in their banks, according to people familiar with the matter.
– Staples agreed to sell itself to private equity firm Sycamore Partners for $6.9 billion, The New York Timesreported. Shares in the company had fallen from about $18 per share two and a half years ago to just $7 earlier this year. Sycamore’s offer of $10.25 per share represents a 20 percent premium over the company’s stock price in early April, before initial reports of a deal to sell the company lifted shares. Staples’ board believes this process ‘has led to a transaction that is in the best interests of our stockholders, as well as Staples and its employees,’ Robert Sulentic, the company’s chairman, said in a statement.
– Blue Apron’s IPO was watered down by Amazon’s recent acquisition of Whole Foods, Reuters reported. Blue Apron listed on the NYSE on June 29. The company slashed its valuation expectations by a third earlier this week and early trading led to a market cap of around $2 billion. Amazon’s $13.7 billion deal to acquire Whole Foods has left some potential investors worried about Blue Apron, Reuters noted. The company has been criticized by the Council of Institutional Investors for its plan to list with a non-voting class of shares (CorporateSecretary.com, 6/26).
– A panel of top financial institutions and companies launched guidelines to push for more disclosure about the impact of climate change, highlighting rising concern about the potential investment risks posed by global warming, the WSJreported.
The task force, commissioned by a group of global regulators known as the Financial Stability Board and led by former mayor of New York City Michael Bloomberg, said companies should disclose in financial filings how they are planning for risks and opportunities related to climate change. It also called for companies to develop specific metrics and targets to measure performance in that area. This follows recent defeats in proxy contests for ExxonMobil, Occidental and PPL Corporation on climate-change risk disclosures (CorporateSecretary.com, 6/23).
– While 66 percent of board directors rate their board as highly effective at accurately assessing CEO performance, the percentage drops to 36 percent when they’re asked about the board’s ability to assess the performance of board members, according to new research reported on by KPMG. According to the research, carried out by the Rock Center for Corporate Governance at Stanford University and The Miles Group, only 23 percent of respondents rate their boards as very effective at giving direct feedback to fellow directors. More than half (54 percent) say if they had the sole power to do so, they would have one or more of their fellow board members removed.
– Nestlé’s investors responded well to the company’s announced plans for a $21 billion share buyback, Bloomberg reported. The announcement was a reaction to activist firm Third Point going public with its $3.5 billion stake in Nestlé, whose share price increased by 1.7 percent on Wednesday.
‘Nestlé’s value-creation model might be seen as a response to recent activist overtures, though the company insists its comprehensive review took place in early 2017, Charlie Mills, an analyst at Credit Suisse, wrote in a note. ‘It certainly points to a faster pace of change at the group [in the future], with growth the overriding agenda.’
– A cyber-attack that first targeted companies in Ukraine is spreading across the world, with several large companies falling victim to the attack, according to Reuters. The companies that have so far fallen victim include AP Moller-Maersk, Mondēlez International, Saint Gobain and BNP Paribas Real Estate.
The attack locked machines and demanded that companies pay a $300 bitcoin ransom or risk losing all of their data. Reuters reported that more than 30 companies have paid the ransom so far.
– The planned merger between Walgreens Boots Alliance (WBA) and Rite Aid was called off this week over fears that the deal would be opposed by antitrust authorities. Even under a government administration that has pledged lighter regulation of business, regulators remained concerned about mergers creating dominant players in some sectors, The New York Timesreported.
Rite Aid will now sell 2,186 stores – roughly half of its total – and three distribution centers to WBA for $5.18 billion. Rite Aid shares tumbled as much as 30 percent following the news, its steepest fall in more than a decade. ‘While we’re disappointed we cannot complete the proposed merger with WBA, we believe this asset sale is an important strategic transformation for Rite Aid,’ said John Standley, Rite Aid’s chairman and chief executive, on a conference call with analysts.
– Berkshire Hathaway has announced it will buy 700 million Bank of America shares, placing Warren Buffett’s firm as the bank’s largest shareholder, the WSJ reported. Berkshire Hathaway bought $5 billion of preferred shares in Bank of America in 2011. The deal created provisions for Berkshire Hathaway to buy 700 million common shares in Bank of America at $7.14 per share, well below the current price of $24.32.
‘After an exchange, Mr Buffett’s firm would own about 7 percent of the bank’s common shares, giving it a significant role in corporate governance issues from compensation to the election of new directors,’ the WSJ said.
– The Federal Reserve passed all 34 financial institutions it checks annually as sound – the first time this has happened since testing began in 2011. The results indicate that the banks tested have finally replenished their capital levels following the financial crisis. The New York Times reported that this is good news for banks, banking executives and investors, but could lead us into risky territory.
‘Critics fear the easing of regulatory pressure and a more laissez-faire-oriented White House could set the stage for a return to the bad old days of enormous leverage and freewheeling deals until the music inevitably stops,’ wrote Nelson Schwartz in an op-ed for The New York Times.
– For investors looking for stocks that outperform their peers, simply looking at ESG issues isn’t a panacea, The New York Times reported. Companies that perform best on ESG issues do perform better, on average, than others but, according to research from Bank of America Merrill Lynch’s research group, ‘this performance was not consistent, and was very similar to the performance of large versus small companies.’
– Sprint Corp used confidential information from its alliance with RadioShack Corp to open competing mobile phone stores, dooming the comeback by the electronics retailer and destroying jobs, according to a lawsuit filed on Wednesday by RadioShack creditors. RadioShack emerged from bankruptcy in 2015 with a deal to co-brand about 1,400 stores with Sprint, which was meant to help the telecoms provider better compete with larger rivals AT&T Corp and Verizon Communications. By early 2017, however, RadioShack, owned by General Wireless, had returned to bankruptcy and is liquidating.
The lawsuit filed in Delaware Superior Court by RadioShack’s official committee of unsecured creditors said Overland Park, Kansas-based Sprint breached its contract with RadioShack, and is seeking $500 million in damages. Sprint allegedly ignored its obligations to provide inventory and staff to RadioShack stores because of its own financial troubles. Company spokesperson David Tovar said the company was disappointed by the creditors’ committee action and Sprint expected to defend the matter vigorously.
The lawsuit alleged that in 2016, Sprint used confidential information obtained from RadioShack to open 200 competing stores near RadioShack’s best locations, sinking any comeback for the electronics chain. ‘Sprint’s action destroyed nearly 6,000 RadioShack jobs,’ the lawsuit noted.
