Mon 2 Oct 2017
News - Key Governance Developements July - September 2017
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Introduction

Auditors on the front line over governance oversight
Auditors are increasingly being called to account over their monitoring of governance issues at client companies, and being punished for failures that put the interests of investors at risk. Meanwhile, a backlash may be building against the trend among technology firms to deprive investors of voting rights, with some index providers taking tentative steps to set minimum standards for shareholder rights at constituent companies.

Key Governance Developements July - September 2017

Critics say new UK governance reforms fail to go far enough
Planned new UK corporate governance rules would require 900 publicly-listed companies to publish how much more their chief executives are paid than the average employee, under proposals intended to take effect starting next June. However, investors are concerned that restrictions on executive pay have been watered down after the ruling Conservative Party promised in their election that executive pay should be approved by an annual vote of shareholders. Instead, public companies that encounter significant shareholder opposition to executive pay packages will be identified on a public register overseen by the Investment Association. Listed companies will also face a choice of allowing employees to nominate a director, creating an employee advisory council, or assigning a non-executive director to represent the workforce.
BBC News
http://www.bbc.com/news/business-41073365
Insider
http://www.insider.co.uk/news/mixed-response-uk-governments-corporate-11071745

German regulator investigates VW and Daimler over disclosure issues
German financial regulator BaFin is examining whether Volkswagen and Daimler have violated disclosure rules. Both car manufacturers have reportedly used whistleblower provisions to limit the potential fines they could face if found guilty of operating a cartel. BMW, Mercedes, Porsche, Audi and Volkswagen are alleged to have conspired to fix the size of tanks for Adblue, the additive used to reduce nitrogen oxide emissions from diesel engines.
Reuters
https://www.reuters.com/article/us-germany-emissions-cartel/german-regulator-probes-vw-daimler-for-disclosure-violations-idUSKBN1AN1EL

US audit regulator bans Hong Kong firm over client disclosure
The US Public Company Accounting Oversight Board has banned Crowe Howarth Hong Kong from auditing companies listed on US stock exchanges for three years after the firm refused to produce audit working papers related to a China-based client. The enforcement action is the second by the agency against a Hong Kong firm for refusing to co-operate with its investigations.
Economia
http://economia.icaew.com/en/news/july-2017/pcaob-revokes-crowe-horwath-hks-audit-registration

UK pension regulator seeks to clarify governance guidelines for funds
The UK’s Pensions Regulator has launched a communications campaign to make clearer its expectations of pension fund governance and how it will respond to breaches of its standards, saying it is not imposing new or more stringent terms but clarifying its existing requirements.
The regulator says it has found significant failings in pension fund governance, especially among small and medium-sized pension schemes. Industry members say the campaign will principally benefit professional trustee and advisory firms.
IPE
https://www.ipe.com/countries/uk/uk-pensions-regulator-to-take-tougher-approach-to-governance/www.ipe.com/countries/uk/uk-pensions-regulator-to-take-tougher-approach-to-governance/10020704.fullarticle

Snap criticised over lack of investor voting power after poor results
Tech firm Snap, which operates the Snapchat social media platform, has been criticised as a “corporate governance nightmare” after a tripling of quarterly losses to $443m sent its share price plummeting at the beginning of August, months after it raised $3.4bn in an IPO. Investors received shares with no voting power, while co-founders Evan Spiegel and Bobby Murphy will control the company even if they step down, and Spiegel’s voting power may not be diluted until nine months after his death. Fund managers have pushed for companies with little or no voting rights to be excluded from equity indices.
Financial Times
https://www.ft.com/content/05f74668-7e6f-11e7-9108-edda0bcbc928

S&P and Russell to cut multi-share class stocks from indices
S&P Dow Jones and FTSE Russell are to begin removing stocks with limited voting rights from their equity indices. S&P Dow Jones has barred companies with multiple share classes from some indices, while FTSE Russell has set a minimum of 5% of stock held by unconnected investors that must have voting rights in order to qualify. The index firms’ stand has been prompted by Snap’s equity structure, but the low minimum means Google and Facebook are not affected by the changes adopted by FTSE Russell.
MarketWatch
http://www.marketwatch.com/story/russells-line-in-the-sand-against-snap-could-give-investors-more-control-2017-07-28

UK supermarket group to offer £85m compensation over false profit statement
UK-based supermarket chain Tesco has launched an £85m compensation scheme for investors who claim they were misled by a profit statement that the group subsequently admitted was inaccurate. The scheme will compensate investors who were net purchasers of Tesco shares or certain bonds between August 29 and September 19, 2014. The group admitted that it had overstated its expected profit for the half-year by accelerating the booking of income and delaying the accrual of costs.
Citywire
http://citywire.co.uk/wealth-manager/news/tesco-opens-85m-compensation-scheme-for-misled-investors/a1043654

PwC pays $1m to settle charges over flawed Merrill Lynch audit verification
PwC is to pay $1m to settle a civil complaint that it conducted flawed audits of Merrill Lynch’s compliance with US federal brokerage customer protection rules in 2014, according to the Public Company Accounting Oversight Board. The Bank of America subsidiary has already paid $415m to settle Securities and Exchange Commission charges that it put brokerage clients’ assets at risk in breach of customer protection regulations. PwC reportedly failed to verify that Merrill was keeping customer securities in segregated accounts ring-fenced from its own assets.
Reuters
https://www.reuters.com/article/usa-audit-pricewaterhouse/u-s-audit-watchdog-fines-pwc-for-flawed-audit-of-merrill-lynch-brokerage-idUSL1N1KO1GV

Lobby group looks to restore governance reputation of Chinese listings in London
The China City Group, a new lobbying organisation, is seeking to encourage more Chinese firms to list in London and boost investment in them by fund managers by improving governance standards. There were some 110 Chinese listings in London between 1997 and 2016, raising £1.7bn, but 75 of the companies have since been delisted and market capitalisations have fallen by nearly half, leaving investors wary of their ability to monitor and influence the behaviour of Chinese groups.
City A.M.
http://www.cityam.com/269616/city-figures-launch-initiative-encourage-more-chinese-firms

Dutch directors call for trust-based governance philosophy
The Dutch Association of Directors has called on Gerrit Zalm, the likely leader of the country’s next government, to embrace a new approach to corporate governance based on trust rather than on mistrust, which it says would give managers greater willingness to take on responsibilities. The association says that under current rules, minimising risk is more important that seizing opportunities, and argues that however many rules there may be, misconduct can never be ruled out.
Board Agenda
http://boardagenda.com/2017/09/20/dutch-directors-association-trust-based-governance/