The week in GRC: Tesla shareholders back Musk pay plan and Elliott seeks changes at Southwest Airlines

– CNBC reported that activist investor Elliott Investment Management has built a $1.9 bn stake in Southwest Airlines and intends to push for leadership changes at the company. Elliott is seeking to replace Southwest CEO Bob Jordan and chair Gary Kelly with outside candidates, the activist said in a letter and presentation. Elliott believes Southwest has fallen from a best-in-class airline to one of the biggest laggards, according to the presentation. The investor wants Southwest to announce a CEO and chair transition with ‘immediate’ effect, Elliott said.

Southwest said in a statement that its board ‘is confident in our CEO and management’s ability to execute against the company’s strategic plan to drive long-term value for all shareholders, safely and reliably serve our customers and deliver on our commitments to all of our stakeholders.’ The company said it is keeping an ‘open dialogue with our shareholders’ and values ‘their perspectives related to enhancing shareholder value.’

– Reuters later reported that Jordan said he will not resign as the company faces pressure from Elliott, with the firm already considering amendments to its open-seating policy and other potential changes. ‘We want to understand what [Elliott’s] ideas are, [it] may have great ideas,’ Jordan said.

‘At the end of the day, we are going to treat Elliott like any other investor. We’ll sit down and listen to [it].... Southwest is a great company. We have a great plan and will execute. You’ve got to be very informed before you start proposing changes that affect the business model of Southwest Airlines. Elliott is not directing the company.’

– Norges Bank Investment Management (NBIM) said it would vote against ratifying Tesla CEO Elon Musk’s $56 bn pay package, according to CNBC. Musk’s pay, the largest for a CEO in corporate America, was approved in 2018 but voided by a judge earlier this year. NBIM said it appreciated ‘the significant value generated under Mr Musk’s leadership since the grant date in 2018’ but ‘we remain concerned about the total size of the award, the structure given performance triggers, dilution and lack of mitigation of key person risk. We will continue to seek constructive dialogue with Tesla on this and other topics.’

– According to the Financial Times (paywall), the UK’s Financial Conduct Authority (FCA) is poised to approve the biggest overhaul of the country’s listing regime in 40 years as early as this month. The FCA’s board is due to meet on June 27 when it will decide whether to approve the final version of the rules, according to people familiar with the matter. Once confirmed publicly, the changes would take effect following a two-week implementation period. The FCA is not expected to make any announcement until after the July 4 UK general election.

The changes are part of a wider effort to attract companies to float in the UK by easing regulatory requirements. FCA chief executive Nikhil Rathi warned last week that the changes would create ‘potential for failure’ as well as ‘great opportunity’ for companies seeking to list. Rathi said the plans, aimed at making it easier for companies to join the London Stock Exchange, could leave the market – and investors – exposed to a greater risk of ‘more things going wrong’.

– The SEC appointed Erica Williams to a second term as chair of the Public Company Accounting Oversight Board (PCAOB), beginning on October 25, 2024 and running until October 24, 2029. ‘I thank Erica for her leadership and am pleased she will continue to serve as [chair] of the PCAOB,’ said SEC chair Gary Gensler in a statement. ‘I also thank the PCAOB staff and the board for their diligent work to ensure that public company financial disclosures can be trusted by investors.’

Before joining the PCAOB in January 2022, Williams was a litigation partner with Kirkland & Ellis. She previously spent more than a decade in various roles at the SEC, including as deputy chief of staff to three former SEC chairs.

– CNBC reported that WeWork emerged from bankruptcy and named Cushman & Wakefield executive John Santora as its new CEO. WeWork also announced a new board, including Anant Yardi, CEO of property management software company Yardi Systems. WeWork filed for Chapter 11 bankruptcy protection in November, with total debts of $18.65 bn against assets of $15.06 bn. The Covid-19 pandemic – which led to a surge in vacancies – coupled with an economic slump and steep downturn in tech valuations contributed to the company’s troubles.

Santora becomes WeWork’s fourth permanent CEO in five years after the company’s failed IPO in 2019.

– According to The Wall Street Journal (paywall), shareholders at dozens of big companies are voting on proposals opposing environmental and social initiatives this year. Shareholders have voted on 70 measures opposing traditional ESG initiatives at S&P 500 companies through the end of May this year, up from 30 two years ago and just seven in 2020, according to data from ISS-Corporate. Shareholders have filed more resolutions overall in recent years but anti-ESG proposal growth outpaced that of other categories tracked by ISS.

‘We who would prefer corporate behavior without partisan influence have really started to get into the game after years of quiescence,’ said Scott Shepard, general counsel at the National Center for Public Policy Research, a conservative think tank that has proposed dozens of shareholder measures questioning corporate initiatives on climate, diversity and other subjects.

Advocates for more progressive ESG shareholder proposals call the newcomers politically motivated and cite research suggesting that more established ESG measures improve long-term financial outcomes at companies.

– Reuters (paywall) reported that US manufacturing and chemical industry groups have filed a lawsuit seeking to block a federal rule announced this year setting the first drinking-water standard to protect people against toxic ‘forever chemicals’. The rule is intended to reduce exposure to the group of 15,000 chemicals known as per and polyfluoroalkyl substances (PFAS) for roughly 100 mn people. It would avoid deaths that have been linked to PFAS, according to the US Environmental Protection Agency (EPA).

In a brief petition against the EPA filed in the US Court of Appeals for the DC Circuit, the National Association of Manufacturers and the American Chemistry Council said the rule is ‘arbitrary, capricious and an abuse of discretion.’ The groups allege the rule exceeds the EPA’s authority.

A spokesperson for the EPA declined to comment.

– The WSJ said that according to a report, it will take longer than planned for the companies responsible for a third of US plastics packaging to reach their environmental goals. In 2020, dozens of major companies joined the US Plastics Pact, signaling a commitment to minimizing plastic waste. Their goals included phasing out plastic straws, cutlery and intentionally added PFAS; recycling or composting half of their plastic packaging; and making sure 100 percent of plastic packaging would be reusable, recyclable or compostable – all by 2025.

With that deadline close at hand, the US Plastics Pact has published an updated set of objectives, which look a lot like the 2020 goals but many of the target dates have been pushed back to 2030. Signatories include brands such as General Mills, Nestlé and Coca-Cola Co. Retailers including Walmart and Target and packaging and materials suppliers have also signed.

Spokespeople for Coca-Cola and Nestlé reiterated the companies’ commitment to recycling. General Mills, Target and Walmart didn’t respond to requests for comment.

– According to Reuters, an institutional shareholder accused Musk of making billions of dollars by selling Tesla stock using insider information and asked the court to direct the Tesla CEO to return ‘unlawful profits’. Musk sold company stock between late 2021 and the end of 2022, cashing in before news that would cause the stock to fall became public, according to the lawsuit filed by the Employees’ Retirement System of Rhode Island. Musk sold the shares at artificially inflated prices by concealing his plan to use the proceeds to buy social media platform Twitter, which he later renamed X, according to the lawsuit. He also sold Tesla stock when he knew deliveries of Tesla cars had fallen far below public projections, the lawsuit alleged.

Musk and Tesla did not respond to Reuters’ messages seeking a comment.

– According to the WSJ, two female Apple employees filed a proposed class-action lawsuit alleging the company pays women lower salaries than men for similar work. The suit targets Apple’s hiring practices used to set compensation, as well as the company’s performance-review policies. The plaintiffs allege that Apple is violating the California equal pay, employment and unfair business practice laws.

An Apple spokesperson said the company has achieved and maintained gender pay equity since 2017. Apple works with an independent third-party expert to examine team members’ total compensation and makes adjustments where necessary, the spokesperson said.

– The American Petroleum Institute (API), the nation’s largest oil trade group, filed a federal lawsuit seeking to block the Biden administration’s efforts to reduce planet-warming emissions from cars and light trucks and encourage electric vehicle (EV) manufacturing, Reuters reported. The EPA issued new tailpipe emission rules in March that will force automakers to produce and sell more EVs to meet the new standards. Under the rule, the administration projects up to 56 percent of all cars sold between 2030 and 2032 will be electric.

The API claims the EPA has exceeded its congressional authority with a regulation that will eliminate most new gas cars and traditional hybrids from the US market in less than a decade. ‘Today, we are taking action to protect American consumers, US manufacturing workers and our nation’s hard-won energy security from this intrusive government mandate,’ said API senior vice president and general counsel Ryan Meyers.

The EPA declined to comment, citing a policy against talking publicly about pending litigation.

– The PCAOB expanded liability for individual auditors involved in their firm’s violations and proposed tighter rules around one of the ways auditors gather evidence to detect financial misstatements, the WSJ reported. The PCAOB voted unanimously to change the liability threshold for contributors to accounting firms’ violations of auditing standards, lowering it to negligence from recklessness.

– The FASB wants to set requirements on how companies account for environmental credits such as renewable energy certificates and carbon offsets, as more state governments set up mandatory programs in the US, according to the WSJ. The board voted unanimously to propose that US public and private companies apply one model to various credits that companies obtain for their compliance programs or voluntary use. At present there are no specific environmental accounting rules companies must follow when recording these transactions.

– CNBC reported that Brad Smith, Microsoft’s vice chair and president, said ahead of a congressional hearing on the company’s security practices that the firm will evaluate its employees’ cyber-security contributions in reviews that will factor into their compensation. In an addendum to his written testimony to the House Committee on Homeland Security, Smith wrote that security will be a new core priority, alongside other areas, for its employees’ twice-annual reviews with managers in the 2025 fiscal year, which begins on July 1.

For senior executives who regularly meet with CEO Satya Nadella, one third of the ‘individual performance’ part of their bonuses in the 2025 fiscal year will be tied to a review of their cyber-security work from the board’s compensation committee, Smith wrote. He added that a third party not identified in the addendum will provide Nadella and the board committee with an independent assessment to assist with the review.

– CNBC reported that Tesla shareholders voted to ratify Musk’s 2018 pay plan, five months after a judge in Delaware ordered the company to rescind the package, having found it had been improperly granted by the board. The vote at Tesla’s AGM doesn’t override the court’s ruling but provides a public relations victory for Musk and could help his effort to sway a court to give him his performance options in the future.

In an SEC filing dated late Thursday, Tesla said 77 percent of those who voted were in favor of granting Musk the compensation package. The AGM featured votes on a dozen proxy proposals, including an effort by Musk to move Tesla’s site of incorporation out of Delaware and into Texas. Shareholders voted in favor of the move.