SRD II and the ramifications for disclosure obligations

With the proxy season fast approaching SRD II is top of mind. Learn about the implications SRD II will have on disclosure of executive pay and corporate goverannce.

With the next proxy season fast approaching the Shareholder Rights Directive (SRD) is top of mind. Extensive disclosure obligations are part of the second iteration and reliable information is key to ensuring requirements are met.

 

This article is part of the featured news report by governance.co.uk on SRD II. Click here to download the full article.

With the EU directive requiring transposition into domestic law in all Member States by September 2020, companies have a limited window to comply with the new requirements and ensure they have aligned their company’s structure in a way that encourages shareholder engagement long term.

The directive’s main aims involve long-term thinking and practices, transparency and increased engagement. However don’t think that this doesn’t also have implications for institutional investors, asset managers and proxy advisors. 

The new regime involves institutional investors and asset managers having to disclose their engagement  policies, and intermediaries to make sure they facilitate the transmition of information to shareholders in a transparent manner. This includes publicly disclosing what they charge for these services.

In short, the SRD II is aimed at reducing short-termism and excessive risk taking by EU companies, plus increasing transparency all-round.

The problem of pay

With executive pay being heavily scrutinized over the past few years, it comes as no surprise that SRD II calls for change to pay disclosures. Creating a better link between pay and performance of company directors, and bringing an end to short-term targets as a measure of success. With this aim brings requirements of providing greater detail and information to support pay policies, including what metrics are being used to measure executive performance. Decisions will have to be rationalized and justified in detail, and without data and facts showing exactly why these decisions were made, companies put themselves at risk of non-compliance.

For companies and investors to meet the requirements of SRD II and as they become effective in the 2020 proxy season (and for intermediaries to be fully compliant) there is no doubt that they need access to accurate and reliable data. CGLytics is already helping many companies, investors and intermediaries get up to speed with meeting obligations, including providing Glass Lewis with data for their Proxy Papers, and you can be fully prepared too.

If you would like to know more about the impact SRD II will have on your company or firm, click here to download the full article

Or reach out to us at CGLytics and receive a free explanation and assessment on how it’s likely to affect you. Click here

Aniel Mahabier SRD II quote

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How can innovations in information technologies support the role of the board of directors?

How far should we go in terms of sophisticated algorithms in order to complement the usual dashboards? What type of data processing tools boards need while avoiding a big data overload? How can a board leverage data and AI for effective oversight and to make better governance decisions?

6 November 2019  14.00 – 15.00 Brussels time     

Companies have to monitor their environment according to defined objectives and integrate the collected data into real strategic and operational information. Business intelligence is there to support not only the management but also board members in making better decisions. In a more demanding environment, board members have to understand the drivers of value creation and develop the right metrics to articulate value. Actionable and real-time insights are therefore becoming even more critical for board members. How far should we go in terms of sophisticated algorithms in order to complement the usual dashboards? What type of data processing tools boards need while avoiding a big data overload? How can a board leverage data and AI for effective oversight and to make better governance decisions?

Our speakers will provide their input to the debate:

  • Aniel Mahabier, CEO at CGLytics;
  • Deepak Krishnamurthy,  Executive Vice President and Chief Strategy and Transformation Officer at SAP;
  • Michael Hilb, Entrepreneur, Board Member and Professor;
  • Rytis Ambrazevičius, Baltic Institute of Corporate Governance, President;

 

The webinar will be moderated by Suzanne Liljegren, ecoDa Communication Adviser.

Download the invitation here

ecoDa and CGLytics webinar

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GlaxoSmithKline: Hampton’s departure gives a sense of unfinished business

CGLytics’ examines the board expertise and director interlocks of GSK both pre- and post-appointment of Mr. Jonathan Symonds, following Philip Hampton’s resignation as Chairman.

This article examines GlaxoSmithKline’s board expertise and director interlocks both prior and post the appointment of Mr. Jonathan Symonds; replacing Chairman Philip Hampton.

GlaxoSmithKline plc (GSK) announced in December 2018 the merger of its non-prescription drug and parapharmacy activities with those of the American giant Pfizer. The two labs are creating a GBP 10 billion joint venture, which will become the industry leader with GSK holding a majority of the shares – 68% and Pfizer a 32% holding. Within three years however, GSK plans to separate from this new entity and introduce it on the London Stock Exchange, placing Emma Walmsley as the CEO. There will therefore be a demerger project for GSK, aiming at separating their consumer health division (merged with Pfizer’s business) from their pharmaceutical and vaccines one. A lot of investors have been asking for this demerger over the past few years, however GSK is still in the middle of a transformation that is not quite complete.

The company intended, since 2015, to recover its Free Cash Flow (FCF) after the expenses arising from the costs of restructuration and integration of the Novartis deal. The company’s FCF is recovering quite well, with a GBP 5.7 billion in 2018 (+63% compared to 2017).

In January of this year, the Chairman of GSK, Philip Hampton, announced his decision to step down from his position after three and a half years and declared:

“Following the announcement of our deal with Pfizer and the intended separation of the new consumer business, I believe this is the right moment to step down and allow a new Chair to oversee this process through to its conclusion over the next few years.”

 

GSK announced their decision for a successor of Mr. Hampton, and it appears that Mr. Jonathan Symonds will be taking that role. Both individuals have different backgrounds and expertise. Mr. Symonds brings with him a strong pharmaceutical background together with corporate governance and corporate development experience. He was CFO of Novartis AG from 2009 to 2013 and prior to that CFO of AstraZeneca plc. He has been Deputy Group Chairman at HSBC Holdings plc since August 2018 and its Independent Non-Executive Director since April 2014. During his past experience, he has proven to be an expert of corporate changes. The most important transactions of Novartis (acquisition of Alcon) and AstraZeneca (acquisition of MedImmune) took place under his tenure. The experience Mr. Symonds brings with him added to his international finance knowledge make him a great fit for the upcoming challenges GSK will face.

The board expertise diagrams, produced directly from data and analytics in CGLytics’ platform, show GlaxoSmithKline’s board expertise matrix before and after Symonds’ appointment. The information used for producing CGLytics’ expertise and skills matrices in the SaaS offering is standardized and applied consistency to more than 5,500 companies globally for easy comparison, analysis and benchmarking of boards composition.

GSK board expertise prior to Symonds 4

Looking at the current board composition of GlaxoSmithKline, the Board’s strongest expertise are International, Governance, Leadership and Executive. The Board however currently has no director with Technology expertise. Five directors, including Sir Philip Hampton, have Financial expertise, having served as Finance Director of BG Group Limited. The Chairman nonetheless lacks Industry expertise which is in line with what market watchers have said.

The chart below displays the company’s expertise with the coming of the new Chairman Mr. Symonds. Jonathan also brings with him Non-Executive, Financial, Executive, Governance expertise among others. However, he also brings with him Industry expertise having served as CFO of Novartis AG. With his addition, the board will still lack in the area of Technology expertise.

GSK board expertise with Symonds 4

Another interesting insight is that Hampton is not currently sitting on any other company’s board, unlike Symonds who is currently sitting on four different boards (including HSBC Holdings plc). One could easily argue about the effectiveness of that choice when it comes to availability and focus/time dedication for the heavy incoming agenda.

The UK Corporate Governance Code advises:

“Additional external appointments should not be undertaken without prior approval of the board, with the reasons for permitting significant appointments explained in the annual report. Full-time executive directors should not take on more than one non-executive directorship in a FTSE 100 company or other significant appointment.”

Glass Lewis, in their UK 2019 Proxy Paper Guidelines, recommends:

“Voting against a director who serves as an executive officer of any public company while serving on a total of more than two public company boards, and any other director who serves on a total of more than five public company boards.”

On the other hand, investment management company BlackRock Inc., top shareholder of GSK’s capital, shares in their 2019 Proxy Voting Policy document that they would:

“Expect companies to provide a clear explanation in situations where a board candidate is a director serving on more than three other public company boards; or a Chairman serving on more than two other public company boards (or only one if this is an additional chairmanship).”

Finally, the recommendations of GSK’s second largest shareholder – asset management group Vanguard – state that:

“A fund will vote against any director who is a Named Executive Officer (NEO) and sits on more than one outside public board.”

Additionally,

“A fund will also vote against any director who serves on five or more public company boards.”

Mr. Symonds is sitting on one other public company’s board (from which he will be stepping down from at the beginning of 2020) and does not hold any executive position, which means that he satisfies the previous recommendations. But at the same time, Symonds remains on the board of three private companies: Proteus Digital Health Inc. (Chairman), Genomics England Limited (Chairman) and Rubius Therapeutics Inc. (Non-Executive Director). Despite the fact that he’s satisfying all guidelines, we can question if his agenda will allow him to dedicate the optimal amount of time for all the changes GSK is about to face.

As a conclusion, we can obviously always find a rational explanation to Hampton’s resignation and highlight the benefits of Symonds’ arrival. But at the end of the day, we must remember everything Hampton has done since joining the company: he has replaced the CEO, has reorganized the Board of Directors and led one of the biggest corporate restructuring projects seen these past years.

What makes this resignation a big event, is that GSK is currently in a timeframe where it needs as much stability as possible on a management level. The massive projects that are being led rely on the company to be extra cautious with its many moving parts. Considering the time needed for the restructuring and demerger to be concluded, we can think Hampton should have ideally stayed until the very end and then recruited a board for each entity.

All the reasons lead to thinking of the possibility of activities being overshadowed to keep investors from worrying. However, GSK has been clear about the fact that Hampton decided to leave once the Pfizer deal was announced. There may never be light over the other possible reasons that pushed Hampton to resign.

For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you make better decisions, click here.

About the Author

Amine Chehab: European Research Analyst

Amine completed his Master’s degree in International Financial Analysis at INSEEC Bordeaux, France. As part of his studies, he also attended the University of California, Riverside as an exchange student. Previously, he gained experience in the field of finance as a Finance Business Analyst and Financial consultant. Most recently he worked as a Credit Manager Assistant.

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Equity Incentive Schemes: Examining the rationale behind shareholder rejection

Two historical examples of organizations that have had their stock option plans rejected by shareholders include Red Lion Hotels and HomeAway. How could they have reduced the likelihood of rejected plans? Read to find out

The approval for equity-based incentive plans, or amendments to current plans, is a critical part of many organizations strategies to acquire and retain premium talent. Opposition or even rejection by shareholders can derail these efforts.

In this article we look at two historical examples of organizations that have had their equity incentive plans rejected and explore the reasons behind and impact of shareholder opposition.

When Red Lion Hotels was punished for lack of clear strategy

In 2019, Red Lion Hotels Corporation’s (NYSE: RLH) shareholders delivered a blow to the company by voting overwhelmingly (70% opposed) against the proposed amendment to the 2015 stock incentive plan.

Shareholders were troubled by, what they perceived, as the board’s continued inability to fulfil its obligations and the absence of a clear strategy (Vindico Capital LLC – letter to the board). Flat performance of the stock over time and significant underperformance against the market and industry peers were particular points of concern for shareholders.

When HomeAway was sent packing

In 2015, HomeAway (NASDAQ: AWAY) had their amended equity incentive plan rejected. Investors felt equity awards continued to be granted despite diminishing returns for investors over time. While the Market Capitalization of HomeAway had remained relatively steady over two years, the rest of the index saw significant gains. Total Shareholder Return was perceived as minimal in this context and the equity awards were seen to be rewarding poor performance. Ultimately HomeAway was acquired shortly afterwards and incorporated into one of the largest travel industry players, Expedia.

Trends in the opposition

When shareholders are considering the impact of diluting their holdings, they require that any potential value lost by the equity incentive plan is offset by the value the business gains by meeting the qualifying KPIs. Whether this is Market Capitalization, Total Shareholder Return, EBITDA or free cashflow, there has to be a compelling strategic rationale for the award of equity. Further, the remuneration committee must ensure that the organization behaves is a prudent manner, even after the plan is agreed to.

Test your equity compensation plans with Glass Lewis’ Equity Compensation Model

Reduce the likelihood of shareholder rejection on your stock option plans and proposals with Glass Lewis’ new  Equity Compensation Model (ECM) application. Now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

Click here to experience Glass Lewis’ new application.

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Interlocking Directorates: Looking for signs of collusion, conflict of interest and overboarding

Conflicts of interest, collusion and the overboarding of directors have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware. How can this be avoided right from the start?

Conflicts of interest, collusion and the overboarding of directors on publicly listed companies have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware, this unwanted attention raises questions, creates risk to a company’s reputation, gains attention from activist investors, and can ultimately affect the value of company shares. However, there is a way that all of this can be avoided right from the start.

Interlocking directorates are nothing new. It occurs when two firms share a common director, and the tie or connections that he/she creates is also referred to as a board interlock.

Although lawful and not illegal, it does raise questions about the independence of decisions made in the boardroom and can be seen by the U.S. Federal Trade Commission (FTC) as an anti-competitive practice prompting an investigation.

As stated by the FTC it is their responsibility to, “take(s) action to stop and prevent unfair business practices that are likely to reduce competition and lead to higher prices, reduced quality or levels of service, or less innovation”.

WHEN INTERLOCKS BECOME A CONCERN

An example of where interlocks became a concern for the FTC was during 2009. During this year Apple’s director Arthur Levinson abruptly resigned his seat on Google board following pressure from regulators. Following the announcement FTC’s chairman praised Google and Levinson “for their willingness to resolve our concerns without the need for litigation”.

That same year also saw Google’s Eric Schmidt resign from Apple’s board, three years after accepting a seat.

Eric Schmidt
Eric Schmidt resigns from Apple’s board in 2009

It’s important to mention that prior to these resignations, the FTC had been looking into whether interlocking directorates between Google and Apple raised competitive issues. These competitive issues may have violated U.S. antitrust laws.

The only safe way for companies to avoid situations of interlocking directorates that prompt investigation is by having oversight of every board members’ seats on other companies. By gaining this oversight companies can instantly see any risks or red flags, which are likely already on the radar of investors with governance issues coming under greater scrutiny of late.

This is also hugely important when a company makes new appointments to their board, or an existing director takes on additional responsibilities. Without oversight, companies might be opening themselves up to governance risk and wider liability.

 

CGLytics online solution provides instant information about a company’s board composition, director skills and expertise, as well as interlocking directorates for corporations, investors and advisors.

 

Interlocking directorates are common. It is not new. Most directors will have other board positions across one or more industry, however with highly confidential information that they are privy to, it is vital to identify potential conflicts of interest.

That being said, interlocking directorates can be indicators of the following:

– Collusion: Two or more members of the board holding appointments on another board and using this connection to influence the decision-making away from the best interests of either company.

– Conflict of interest: Directors with specific industry experience will often sit on boards that could be in competition. This can lead to questions from investors on if these board members are performing their duties in the best interests of the company.

– Overboarding: Directors must have the adequate time to devote to their duties of providing oversight for a company. US Proxy Advisory standards state that a director is considered to be overboarded when he/she is a non-executive director and sits on more than five boards, or he/she is an executive director and sits on more than three boards.

– Chairmen of the board are expected to spend double the amount of time as a NED and are considered overboarded with one chair and three other NED roles.

By identifying whether a board member is also on the board of a potential competitor (sometimes inevitably in niche markets where experience is necessary), or if two or more members of the board sit on the same board of another company, is vital for the nomination and governance committees to be aware and ensure that they have the correct policies and procedures in place, as regulators, investors and activists are constantly monitoring.

THINK LIKE AN ACTIVIST

Activist investor campaigns are continuing to show a year-on-year increase with more focus being placed on the composition of the board and the board members existing commitments. Leading investors are voting against the re-appointment of directors who are perceived to be overboarded. In addition, never before has there been as much scrutiny on the skills that a director brings to the board.

Activist investors are using CGLytics’ data and analytics for assessing the board effectiveness of listed companies worldwide.

 

With deep insights into how boards are composed in the CGLytics platform, and a skills matrix applied consistently across all companies in its universe, activist investors easily benchmark a board and assess if its compliant with regulatory and stewardship codes, hence see if there is any reputational risk.

Companies can access these very same insights in the CGLytics platform.

Corporate issuers, their boards and stakeholders can see exactly how they are perceived by activist investors. CGLytics is helping to promote good governance through transparency to the market. View director interlocks, see how board composition compares to competitors and raise concerns of any red flags. Identify any potential skills gaps and be proactive in succession planning, with access to a database of 125,000+ executive profiles draw from 5,500+ publicly listed companies across 40 indexes and 24 countries.

Curious to see how companies are viewed through the eyes of an activist investors? Click here

 

RESOURCES

https://www.ftc.gov/enforcement/anticompetitive-practices

https://www.reuters.com/article/us-google/arthur-levinson-quits-google-board-appeasing-ftc-idUSTRE59B2R120091012

https://techcrunch.com/2009/08/03/google-ceo-eric-schmidt-resigns-from-apple-board-surprised/

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Barrick Gold Corp, Acacia Mining and Turbulence in Tanzania

Issues involving the mining industry and corporate governance practices are nothing new. And Barrick Gold’s recently deal with Acacia Mining is no exception. After multiple negotiations and tradeoffs in the past, Acacia Mining has agreed to Barrick, the majority shareholder, buying out the remaining minority shareholders.

Barrick Gold Corporation, based in Canada, is one of the largest gold mining companies in the world. It currently holds 262,246,950 shares of Acacia Mining (64% stake in share capital). To gain the remaining 36%, Barrick has proposed a 24.2% premium on the closing price of Acacia shares on July 18. The deal comes in at USD 430 million and will take the company private.

The Acacia CEO, after finally reaching an agreement, stated: “Given all the circumstances, this is possibly the best outcome.”

Perhaps more importantly, is that the deal aims to resolve many of the longstanding public issues between the Tanzanian government and Acacia that have plagued the mining company’s operations.

Two years ago, the Tanzanian government banned the export of mineral concentrates. This movement was due in part because the government believed they had not received a fair share of profits from mining in the country. Two of Acacia’s units came under fire, being handed a USD 190 billion tax bill from the government. This tax bill has since been reduced to USD 300 million.

Additionally, Tanzania recently demanded that Acacia cease use of a waste-storage facility at a core gold mine. These disruptions have crippled operations and caused Acacia’s shares to fall 50% since 2017.

After facing external pressures and at the insistence of minority shareholders, Barrick CEO, Mark Bristow, proposed a higher offer than what was initially proposed to Acacia in May. This was recently accepted.

Shareholder awareness proved a worthy factor here; Acacia shares rallied 20% on the deal and a positive response was received from the Tanzanian government. This is a fine example of shareholders prioritizing the survival of a company.

Delving into Acacia Mining’s board composition, by utilizing CGLytics’ board effectiveness tools in the online platform, provides insights into why the company may not have managed issues as effectively as possible.

Acacia Mining plc’s Board Expertise

Source: CGLytics Data and Analytics

The board expertise and skills matrix from CGLytics show that experience in the area of governance severely lacks, however industry and sector, and financial expertise is heavily present. This may provide an explanation to the problematic relations they experienced with the Tanzanian governance. It generates a question of if more governance experience was present on the board, would the situation have been different? While the survival of the company and acceptance of the “best-we-can-get” deal could be attributed to the strong presence of industry and financial expertise.

The recent movements have rekindled, if only just, a better relationship with the government. Because of Barrick’s increased involvement, the Tanzanian government agreed to receive USD 300 million for the tax debt as a gesture of goodwill. The company was also given the option to pay in installments, with an upfront cost of USD 100 million to be paid out in addition.

Furthermore, Barrick was able to negotiate an agreement in which payment to the Tanzanian government is dependent on the export ban being lifted from Acacia and its subsidiaries in the country. In a “give and take” action, the Tanzanian government also claimed a 16% stake in Acacia in the form of Class B shares.

The complex strategy devised is a clear manifestation of the board leveraging its expertise and abilities to secure a better position. Had there been more Governance oversight, perhaps the company would not have encountered such trifles. The devastating government backlash will certainly continue to have an effect for years to come. Nonetheless the Board can rest easy knowing that it has found the best outcome to a longstanding battle, one that could’ve left Acacia and Barrick incapable of recovering.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service. To find out more click here.

About the Author

Rollin Buffington

US Research Analyst

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Bed Bath & Beyond: Cleaning House

New Jersey-based company Bed Bath & Beyond has recently become the target of an activist campaign. CGLytics examines the drivers, the response and the outcomes of this campaign.

New Jersey-based company Bed Bath & Beyond operates 1,533 retail stores as of March 2, 2019. The company has recently become the target of an activist campaign initiative led by a trio of activist investors: Legion Partners Asset Management LLC, Macellum Advisors GP LLC and Ancora Advisors LLC. Jointly, this group of investors owns about 5.2% of the company.

After initially filing for a potential proxy fight, in late April 2019, the activist campaign at Bed Bath & Beyond kicked off with a lengthy presentation from the above entities to the company’s investor base. This presentation criticized almost every facet of the company’s management; from executive pay to individual store design.  The presentation focused particularly on their CEO Steven Temares’ compensation package, which totaled USD 14,605,042 in 2018, while the remaining Named Executive Officers collectively made USD 30,271,726. Temares, who had served in the role since 2003, resigned shortly thereafter.

In response to this campaign, the company’s board has recently seen a significant reshuffle. In May 2019 alone, nine new directors joined the board, five being appointed on May 1, 2019 : Harriet Edelman, Harsha Ramalingam, Andrea Weiss, Mary A. Winston and Ann Yerger. In addition to these new members, another four were appointed to the board effective May 29, 2019, pursuant to an agreement with the activist group: John E. Fleming, Sue E. Gove, Jeffrey A. Kirwan and Joshua E. Schechter. The addition of these new members results in an almost complete board turnover during the past two years, with 12 of the 13 members having joined within that timeframe. Moreover, former directors and co-founders, Warren Eisenberg and Leonard Feinstein were displaced from their positions as co-Chairmen of the board, and granted the status of co-Chairmen Emeriti, with no entitlement to attend board meetings and no voting powers at such meetings.

While the activist campaign calling for an increase in value creation is not new in the field of corporate governance, conflicting ideas about how to best create that value has been a core issue between boards, executive teams, and investors across the business world for years. So why, in this particular case, was the activist campaign successful?

We do note that the company reported its first decrease in sales in conjunction with its first net loss for the FY 2019. However, the company has been lagging behind the median of its own disclosed peer group in several key financial performance indicators such as net income, enterprise value, three-year TSR, and economic profit since at least 2016. Moreover, the CEO’s compensation has outpaced that of the median of the company’s peer group, as displayed in the graph below:

Bed Bath and Beyond’s Disclosed Compensation Peer Group (2018)
Dillard’s, Inc. AutoZone, Inc.
Burlington Stores, Inc. Williams-Sonoma, Inc.
Dick’s Sporting Goods, Inc. Nordstrom, Inc.
Big Lots, Inc. Macy’s, Inc.
Advance Auto Parts, Inc. L Brands, Inc.
Tractor Supply Company Kohl’s Corporation
Ross Stores, Inc. The Gap, Inc.
O’Reilly Automotive, Inc. Foot Locker, Inc.
Dollar Tree Dollar General Corporation
Office Depot, Inc.
Source: CGLytics Data and Analytics

Moreover, we find that the activists’ criticisms of the CEO’s remuneration may have gained traction when comparing the company CEO’s Total Realized Pay versus its own disclosed peer group for FY 2018. Bed, Bath and Beyond’s Total Realised Pay appears to be out of alignment with the company’s performance.

 

CGLytics’ data and analytics are trusted and used worldwide by Glass Lewis, the leading independent proxy advisor, as a basis for their research on companies

bedbath&beyond2
Source: CGLytics Data and Analytics

The CGLytics research team has also taken a deeper look to evaluate the current board. Utilizing CGLytics’ governance and data analytics platform we find that after all changes recently undergone to the board, Bed Bath & Beyond scores extremely well in nearly every category, except for the Director Interlocks and Nationality Dispersion metrics. The board does have several director interlocks, and diversity of nationality also appears low, as 92% of the board is local to the US.

All other effectiveness attributes score high, with most of them having a score of 100, driving the overall health score of the company at 85 points (Excellent), 10 points above the sector average.

These metrics show that the board contains an age gender diverse group of directors with experience and expertise in all areas measured by the CGLytics platform.

bedbath&beyond3
bedbath&beyond4
Source: CGLytics Data

The effectiveness attributes in the chart above are based on the company in question’s governance practices compared to the corporate governance code of the market in which it is primarily based (in this instance, the NYSE Governance Guidelines). The thresholds above are set by empirical research performed by CGLytics. Each attribute receives a score from 0 to 100, with a score of 100 reflecting the best governance practices

In summary, as Bed Bath & Beyond’s stock price has fallen approximately 80% over a five-year span due to potential mismanagement, ineffective business strategy, and a lack of innovation, the recent changes within the structure of the management and advisory team provide a potential clean slate for the company. Interim Chief Executive Officer, Mary Winston will be at the helm looking to captain the ship as the company searches for stability after an intense period of significant upheaval.

Corporate boards and executive teams increasingly require a broader range of analytical tools to identify potential areas of reputational risk, even for controlled companies, which could make them the target for activist campaigns. For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service.

Sources

CGYLTICS DATA AND ANALYTICS

Proxy 2018       Proxy 2017       Fox Business       Business Insider       Wall Street journal      Motley Fool

Header Image: Bed Bath and Beyond store by Anthony92931  licensed under the Creative Commons license.

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Facebook: Increasing Shareholder Pressure Exerted on Zuckerberg’s Role as Chairman

In this article, CGLytics examines the increasing pressure on Facebook to split the roles of Chair and CEO from founder Mark Zuckerberg and the implications on the company’s future.

Mark Zuckerberg has been Chief Executive Officer of Facebook, Inc. since he founded the company in 2004 and has held the combined position of CEO/Chair since the Company’s IPO in 2012. Shareholders have increasingly voiced their concerns regarding the combination of both roles. Those opposing the combined CEO/Chair position state that it gives Zuckerberg too much control over the company, where minority shareholders already have very little influence. Founder Mark Zuckerberg controls over 51% of the vote although he owns only 13% of the economic value of the firm. Additionally, headlines surround the billionaire founder, as Zuckerberg again failed to address a committee of international lawmakers who are amid an investigation into Facebook’s disinformation, antitrust, and privacy scandals.

Shareholders Try to Force Zuckerberg’s Hand…Again

In light of the above, several investors have banded together and filed multiple shareholder proposals for consideration at the company’s 2019 AGM, which took place on May 30th, 2019, aimed to alleviate their concerns over Zuckerberg’s influence and lack of oversight of the company. Of interest were proposal five and six filed.

Proposal Five: Proposed primarily by NorthStar Asset Management, in conjunction with other groups of shareholders, requesting that each share be given an equal vote. Currently, Class B shares (controlled by Zuckerberg and a small group of others) have 10 times the voting power of Class A shares. They continued in their supporting statement noting “since July 2018, Facebook value dropped as much as 40% due to Management and Board decisions that have not protected shareholder value. By allowing unequal voting power, our company takes public shareholder money but does not provide us an equal voice in our company’s governance…”

Proposal Six: Recommended that the Chair of the Board of Directors operates as an Independent Member of the Board. The supporting statement offers that there exists no form of checks and balances in order to limit Mr. Zuckerberg’s power. The statement continues, “we believe this weakens Facebook’s governance and oversight of management. Selecting an independent Chair would free the CEO to focus on managing the Company and enable the Chairperson to focus on oversight and strategic guidance.” It’s of importance to note that nearly 60% of the S&P 1500 has separated the roles of Chief Executive Officer and Chairperson as of April 2018. This proposal received the public support of both the Council of Institutional Investors (CII), as well as Trillium Asset Management.

Unsurprisingly, the Board of Directors has concluded with a recommendation to vote against all stockholder proposals mentioned above. However, the requests made through these proposals heavily resemble several that have been proposed in past years.

CGLytics has taken a deeper look into Facebook’s board composition and effectiveness when compared to all other companies in the US market. Utilizing CGLytics’ governance data and analytics in the specialized platform it was discovered that the key area where the company is underperforming, compared to the sector average, lies primarily in the combination of the role of CEO and Chairman.

Facebook Effectiveness Attributes
Source: CGLytics’ board effectiveness data and analysis

The zero score for the CEO/Chair criterion is in sync with the concerns of the shareholders who are seeking the dissolution of the combined position. This is also supported from the NYSE Stewardship guidelines, where the separation of the CEO/Chair position is required. However, taking all other factors into consideration, Facebook’s board composition and effectiveness is rated ‘Very Good’ and higher than the sector average. Even though the CEO/Chair combination has a score of 0, the majority of the other effectiveness attributes rank above the sector average.

The effectiveness attributes in the chart above are based on the company in question’s governance practices compared to the corporate governance code of the market in which it is primarily based (in this instance, the NYSE stewardship guidelines). The thresholds above are set by empirical research performed by CGLytics. Each attribute receives a score from 0 to 100, with a score of 100 reflecting the best governance practices.

The health score of Facebook and of the market is calculated as the average scoring of all of the effectiveness attributes, respectively. Facebook has an average score of 76, with three effectiveness attributes (Nationality Dispersion, Board Independence and CEO/Chair combined) falling under 60, two effectiveness attribute (Gender Equality, Director Interlocks) at 60 points, and the rest of the effectiveness attributes at 100 points.

Source: CGLytics’

Given the repeated failure of such proposals at the company’s most recent AGM, the future of Facebook seems to remain in the hands of Mark Zuckerberg. It comes as no surprise that these proposals would have similar results as those at previous AGMs, given Zuckerberg’s voting power at the firm. However, the increasing regularity of these types of proposals have been making headlines around the company’s governance structure and posing serious questions to the general public regarding Zuckerberg’s current and future role at the company.

Corporate boards and executive teams increasingly require a broader range of analytical tools to identify potential areas of reputational risk, even for controlled companies, which could make them the object of activist campaigns. For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service.

Sources

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Debenhams: The Fall of a High Street Chain

Following the entry into administration of Debenhams, CGLytics takes a look at some of the key governance analytics, and how they could have been indicators that change was needed

Debenhams is a well-known British multinational retailer which operates primarily through its numerous department stores in the United Kingdom and Ireland with franchise stores in other countries. The company was founded in the eighteenth century as a single store in London. On April 9, 2019, Debenhams went into a pre-pack administration deal in which the company was handed over to hedge fund lenders. As a result, equity holders like SportsDirect, the company’s biggest shareholder, saw their value wiped out.

Timeline of a Potential Takeover

In January 2014, Mike Ashley surprised the market by acquiring a 4.63% stake in the then struggling retailer. Despite the value of his equity dropping by 8% in January 2015, Ashley increased his stake in the company to 21% in August 2017. Two months later in October Debenhams announced that their profit dropped 44%. This decrease was largely due to the costs incurred from the implementation of a new turnaround strategy. In January 2018, the woes of the company continued when they issued a shock profit warning after weak Christmas sales and a failure to entice shoppers with cut-price goods. The market responded, and the company’s share price decreased by as much as 20%, wiping almost GBP 70m off its market value. In March 2018, Mike Ashley increased his stake to 29.7%. The move sparked takeover conjecture as a stake of more than 30% requires the launch a formal takeover bid.

Debenhams announced another profit warning in June 2018 (the third in a row for the year 2018) and then announced plans to shut down up to 50 of its of its under-performing stores over the next three to five years, putting around 4,000 jobs at risk.

With this turn of events, then-CEO Sergio Bucher and Chairman Ian Cheshire would be forced to step down from their respective offices following an activist campaign led by Michael Ashley. At the company’s AGM on December 10, 2018, the CEO had only 44.15% of support for his re-election, while the re-election of the Chairman received a similarly low level of support at 43%. The Board however asked Sergio to stay on as CEO but not as a director, serving as a blow to shareholders expectations.  In response Ashley launched a formal takeover bid which was designed to install himself as Debenham’s CEO. Most interestingly, his efforts were warded off by bondholders who handed the firm a GBP 40m lifeline. The overdraft facility from its banks and bondholders proved useful to pay its onerous quarterly rent bill and give it some much needed breathing space.

Financials sourced from CGLytics performance data

The company and its directors went into advanced talks with its lenders over a GBP 150m bailout, as a move to fend off Ashley’s offers. SportsDirect offered Debenhams an alternate GBP 150m deal if the fashion house would issue five percent of new shares to the company and appoint Mr. Ashley as director and CEO.

The company however rejected the deal, putting itself into administration on April 9, 2019.

Possible reasons for entry into administration

Lack of a clear strategy: Debenhams had about 165 stores in the United Kingdom, a seemingly large number at a time when its sales were falling and costs were rising. The company had previously outlined plans to close 10 loss-making stores within five years as its finances continued to deteriorate. Increasing consumer preference for online shopping also dealt a huge blow to the company’s overall strategy.

Aging Product Line: The retailer is best known for the Designers at Debenhams collections created over the past two decades by designers including Jasper Conran and Julien Macdonald. Some brands, including Betty Jackson, have been discontinued because they had become dated; however, replacement fashion ranges have so far lacked pulling power as shoppers take a cautious approach to spending as the uncertainty created by Brexit continued. Other factors that led to the Company’s demise include being outsmarted by more agile competitors, failure to embrace change, and their tarnished brand image. This naturally raises the questions of how and why the company’s business strategy was allowed to deteriorate to such a detrimental degree.

Conflicts of Interest on Board: Utilizing CGlytics interlocks tool, it can be noted that before the shareholder rebellion at the 2018 AGM that witnessed significant opposition against the CEO and Chairman, there were two independent directors who sat on the boards of companies in competition with Debenhams. These individuals included Ian Cheshire and David Adams. Cheshire serves as the current chairman of Maisons Du Monde while David Adams also remains the current Senior Independent Director of Halfords Group Plc.

Source: CGLytics Data and Analytics

Using the skills matrix functionality available on the CGLytics platform, we see that in December 2018, the majority of company directors lacked Technology expertise. Only one member of the Board out of nine members held technology expertise. This reaffirms the previous notion that the company has failed to catch up with market trends, especially when tracking changes in consumer preference has become so heavily reliant on technology. Moreover, board members with key positions such as the Chairman, CEO, and the Senior Independent Director all lacked financial expertise, potentially suggesting that the company’s top leadership were unable to provide sufficient oversight of the company’s accounting procedures and financial health.

Source: CGLytics Data and Analytics

Lessons Learnt

The fall of Debenhams has shed light on how having the right skills set on the board can influence the strategy and ultimate direction and of a company. Corporate boards increasingly require a broader range of analytical tools to identify the skills gap of their members, potential overboarding and competing directorships. For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

Sources:

CGLYTICS DATA AND ANALYTICS  FT  MSN

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McKesson Versus the State of West Virginia

Drug distribution companies are experiencing significant reputational and financial risks as a result of the Opioid Crisis in the US. In this article we take a look at how a lack of regulatory and risk experience may have impacted the McKesson Corporation.

Opioid overdoses accounted for more than 42,000 deaths in 2016 (more than any previous year on record), prompting the United States Department of Health to declare a public health emergency. An estimated 40% of the reported overdose deaths involved prescription opioids.[i] While there are multiple socio-economic factors at play in such a wide-spread public health crisis, the role of pharmaceutical manufacturers and distributors has repeatedly come into question.

The Opioid Crisis has created significant reputational and financial risks for drug distribution companies; with McKesson Corporation currently in the eye of the storm. The company recently reached a USD 14.5 million settlement with the state of West Virginia, with an additional USD 4.5 million per year to be paid over the next five years. The funds will be used in support of state initiatives to combat the opioid epidemic, including rehabilitation, job training, mental health and other important public health efforts. In addition, a USD 150 million civil penalty was imposed on the company for alleged violations of the Controlled Substances Act regarding the distribution of opioids. The company was also ordered to suspend sales of controlled substances from four distribution centers. However, this is not new litigatory territory for McKesson, as the U.S. Department of Justice imposed a USD 13.25 million civil penalty in 2008 for similar violations.

The most recent settlement however did lead to a call for governance changes at the company, as the International Brotherhood of Teamsters General Fund proposed a shareholder resolution at the company’s 2017 annual general meeting requesting an Independent Board Chair.[ii] As the proposal received approximately 40% of shareholder support, in response the board set up an independent Special Review Committee in 2018. The Board disclosed that the Committee in its findings revealed a strong company culture that encouraged ethical and compliant conduct, as led by management and reinforced by the Board.[iii]

Potential Red Flags

However, given the substantial reputational risk and significant fines imposed on the company, the question is raised if there were any red flags that could have warned both management and the board, as well as investors, to the potential for such regulatory breaches. Specifically, was the board appropriately equipped to sufficiently perform its risk and compliance oversight function, particularly with regards to regulatory and legal matters within the pharmaceutical industry?

Source: CGLytics Data and Analytics

Utilizing CGLytics’ board skills matrix assessment analytical tool, we see that McKesson’s Board is currently composed of nine members in total, with six individuals having sector experience. However, the relevant sector/industry experience for these six individuals has been primarily garnered through operations and executive roles in the healthcare sector. Most interestingly, we find only one board member, Bradley Lerman, with actual experience in regulatory and risk compliance within the pharmaceutical industry, in which McKesson does play a significant role. Mr. Lerman’s previously held positions include Senior Vice President, Corporate Secretary of Medtronic Plc until 2014 and Senior Vice Price, Associate General Counsel and Chief Litigation Counsel of Pfizer Inc until 2012. The lack of a broader base of directors with significant experience in regulatory matters should have served as a bullhorn to investors, the board as a whole, and the company’s executive team regarding the potential for legal issues to arise.

Aftermath and Lessons Learned

During its most recent quarterly earnings call, McKesson reported that it expects to spend USD 150 million defending itself in state and national opioids lawsuits into FY 2021, up from more than USD 100 million this year. This however is just an estimate, as the total amount may go up into the billions as several states have already stated that they currently intend to file similar suits against the company. The recent settlement that the company has been engaged in only highlights the need to actively and vigorously evaluate board composition and skill set in the face of significant risks that the company faces, or otherwise pay the reputational and financial price.

Would you like to learn more about how, you too, can have instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills? Click here to find out about CGLytics’ boardroom intelligence capabilities and obtain the same insights used by institutional investors and advisors.

[i] https://www.hhs.gov/opioids/about-the-epidemic/index.html

[ii] 2017 Proxy Statement

[iii] 2018 Proxy Statement

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