'THE DAILY CORPORATE GOVERNANCE REPORT’ (for public company boards, the C-suite and GCs)

? ? ? ? ?Please see the items below with the related links (NOTE: access to link content may be metered, require a no-charge registration or require a paid digital subscription)?

? ? ? ? ? ? ? (i) CEO of the Institute of Internal Auditors (IIA) on the new 'Global Internal Audit Standards' and '5 things directors should consider when working with their internal audit teams'/KPMG on the audit committee and working with internal audit:?

? ? ? ? ? ? ? ? ? ?(a) As announced in this?IIA news release,?on Jan.9/24 the IIA released its new "Global Internal Audit Standards" (a "condensed version" consisting of mandatory guidance only is here; see also here?for a "collection of tools and resources to help internal auditors incorporate the new Global Internal Audit Standard into their practice" that the IIA has provided), to become effective in 2025. The Standards are described in this note?on the IIA website as follows:

? ? ? ? ? ? ? ? ? ? ? "The Standards guide the worldwide professional practice of internal auditing, are principle-based, and serve as a basis for evaluating and elevating the quality of the internal audit function. At the heart of the Standards are 15 guiding principles that enable effective internal auditing.?Each principle is supported by standards that contain requirements, considerations for implementation, and examples of evidence of conformance. Together, these elements help internal auditors achieve the principles and fulfill the Purpose of Internal Auditing."

? ? ? ? ? ? ? ? ? ? ? ? Anthony J. Pugliese is president and CEO of the IIA,?and is the author of this NACD blog post earlier this month, "Five Things Directors Should Know When Working With the Internal Audit Function". Below are excerpts:

? ? ? ? ? ? ? ? ? ? ? ? "Earlier this year, The Institute of Internal Auditors (IIA) released the "2024 Global Internal Audit Standards", designed to improve internal audit functions across industries by providing a cohesive framework for understanding and executing internal audit principles and requirements.....An internal audit function that conforms to standards is crucial for effective corporate governance.?Emerging risks are expanding the responsibilities and workloads of boards, especially their audit committees. By enhancing the value of the internal audit function through strong collaboration and frequent communication, organizations can provide greater oversight of potential threats and consistently deliver value to stakeholders.

? ? ? ? ? ? ? ? ? ? ? ? "Below are five things directors should consider when working with their internal audit teams.

? ? ? ? ? ? ? ? ? ? ? ? ? "?1. What the New Standards Mean for Boards: The new standards place a strong emphasis on optimizing the relationship between the board, senior management, and the?leader responsible for overseeing the internal audit function, the?chief audit executive (CAE). In particular, the new standards require the CAE to discuss “essential conditions” to be established by the board and senior management, such as supporting the independent positioning and overseeing the performance of the internal audit function, elements crucial to ensuring the function’s effectiveness. As such, boards and their audit committees should work closely with their CAEs?to ensure a strong understanding of the essential conditions as well as the requirements that the CAE is expected to follow to conform with the standards. By clarifying essential conditions for internal audit effectiveness, the new standards encourage a successful working relationship between management, boards, and the internal audit function......

? ? ? ? ? ? ? ? ? ? ? ? ? ? ?4. The Board’s Role in Audit Plan Development: The process to develop the internal audit plan is fundamental to ensuring that the internal audit function is focused on the right risks. Audit committees should look critically at internal audit plans to ensure that the most crucial risks are being addressed.?This includes reviewing and approving the internal audit plan and budget on an annual basis at minimum. The purpose of this exercise is to ensure that the internal audit function is focused on the most pressing risk areas and has the resources it needs to execute on its responsibilities.?

? ? ? ? ? ? ? ? ? ? ? ? ? ? ?5. How to Work Effectively With CAEs: It is the board’s responsibility to work closely with the CAE to ensure that the internal audit function has the resources needed to properly evaluate new and emerging risks.?If this is not the case, boards must ensure that the CAE has the budget available to utilize outside resources, including specialized skill-sets and technology, to meet the expectations set by the audit committee. Audit committee meetings should incorporate executive sessions with the CAE to ensure uninhibited communication.?These meetings may include a discussion of the completeness, accuracy, and timeliness of representations made by management and the next steps for follow-up items resulting from the discussions. An effective working relationship requires an open line of communication between the chair of the audit committee and the CAE between meetings as well......"

? ? ? ? ? ? ? ? (b) KPMG recently posted on its website this memorandum, "The 2024 Audit Committee agenda and the questions investors should be asking", which, "drawing on insights from our Board Leadership Centre,?interactions with audit committees and business leaders...., highlights nine matters we believe audit committees should consider and have on their 2024 agendas", one of which is "Internal audit focus on key risks":

? ? ? ? ? ? ? ? ? ? ?"Internal audit focus on key risks: As audit committees wrestle with heavy agendas – and risk management is put to the test – internal audit should be a valuable resource for the audit committee and a crucial voice on risk and control matters. This means focusing not just on financial reporting and compliance risks, but also critical operational and technology risks and related controls, as well as ESG risks.

? ? ? ? ? ? ? ? ? ? ?"ESG-related risks are rapidly evolving and include human capital management – from diversity, equity, and inclusion (DEI) to talent, leadership, and corporate culture – as well as climate, cybersecurity, data governance and data privacy, and risks associated with ESG disclosures. Disclosure controls and procedures and internal controls should be a key area of internal audit focus. Audit Committees will be thinking about internal audit’s role in connection with ESG risks and enterprise risk management more generally – which is not to manage risk, but to provide added assurance regarding the adequacy of risk management processes.

? ? ? ? ? ? ? ? ? ? ? "They will assess whether the internal audit plan is risk-based and flexible enough to adjust to changing business and risk conditions. The audit committee should work with the head of internal audit and chief risk officer?to help identify the risks that pose the greatest threat to the company’s reputation, strategy, and operations, and to help ensure that internal audit is focused on these key risks and related controls. These may include industry-specific, mission-critical, and regulatory risks, economic and geopolitical risks, the impact of climate change on the business, cybersecurity and data privacy, risks posed by generative AI and digital technologies, talent management and retention, hybrid work and organisational culture, supply chain and third party risks, and the adequacy of business continuity and crisis management plans.

? ? ? ? ? ? ? ? ? ? ? ?"Ask about the committee’s role with regards to monitoring the effectiveness of internal audit, how does the committee ensure that the internal audit plan is aligned to the key risks of the business, if there has been any significant issues raised by internal audit and the committee’s response, how do they ensure the internal audit function have the right skills and resources to succeed."

? ? ? ? ? ? ? ?(ii) the perils of missing the street's earnings estimates: Below is from this WSJ article yesterday, "Wall Street Turns Up the Heat on Companies to Perform":

? ? ? ? ? ? ? ? ? ?"Wall Street is showing little patience for companies that don’t live up to expectations.?With the first-quarter earnings season nearly over, companies in the S&P 500 are on pace to deliver a 5.4% jump in profits from a year ago, the biggest increase in nearly two years, according to FactSet. But those that fall short of investor forecasts are being punished more heavily than usual. Shares of companies that missed estimates have slid an average of 2.8%, compared with the five-year average of a 2.3% decline. ?

? ? ? ? ? ? ? ? ? ? "Meanwhile, companies that outperform aren’t being given any special prizes. Those that beat analyst forecasts have seen their shares gain an average 0.9%, roughly in line with the five-year average of a 1% advance. That is according to FactSet data that looked at share prices in the two days before companies reported through the two days after. “[The market] won’t ask questions; it will just reduce valuations really quickly if you don’t perform,” said George Goncalves, head of U.S. macro strategy at MUFG Securities Americas.?

? ? ? ? ? ? ? ? ? ?"Companies are being given little room for error in part because stocks are looking pricey, especially in light of the lingering uncertainty about whether the Federal Reserve will cut interest rates this year.......The high bar for companies this earnings season reflects investors’ nerves over stocks that are richly valued.?The S&P 500 is trading at about 20 times expected earnings over the next 12 months, above its 10-year average of 18. The prospect of persistently high interest rates, meanwhile, has lessened the appeal of stocks relative to bonds, while raising the possibility of higher borrowing costs for companies......"

? ? ? ? ? ? ? (iii) ?capital allocation: share buybacks: In its Q2/24 earning press release?on May 2, Apple Inc. announced inter alia that its board had authorized a $110 billion stock buyback, the largest in U.S. history (see item (iii) from last Monday). More on share buybacks in this WSJ article last Thursday, "Buybacks Are Back: Corporate America Is on a Spending Spree":

? ? ? ? ? ? ? ? ? ? ?"....(C)ompanies are stepping up repurchases of their own shares.....S&P 500 companies that have reported first-quarter results as of Monday have disclosed buying back $181.2 billion of their shares during the period, according to data compiled by Birinyi Associates.?That is up 16% from the year-ago quarter. The pace of purchases has been brisker than usual for nine straight weeks, BofA Securities said Wednesday in a research note.

? ? ? ? ? ? ? ? ? ? ? "Big tech companies are leading the charge: Facebook’s parent, Meta Platforms?repurchased $14.5 billion of its shares in the first quarter, up about $5 billion from a year earlier. Apple, Netflix and Nvidia?are among the other companies that have stepped up buybacks, as well as Wells Fargo, the construction equipment maker Caterpillar?and the tobacco manufacturer Altria Group. The spending is expected to continue......In all, 443 companies have announced a buyback plan this year, up from 378 a year earlier, data from Birinyi shows. Investors are taking the increase in buybacks as a sign of rising confidence among executives......

? ? ? ? ? ? ? ? ? ? ? ?"The jump in buybacks so far this year comes after a sharp pullback in 2023, when repurchases by S&P 500 companies tumbled 14%. That was the second-largest annual decline since the global financial crisis in 2008.....Analysts at Goldman Sachs project that total S&P 500 repurchases will reach $925 billion this year and $1.075 trillion in 2025, which would mark annual growth rates of 13% and 16%, respectively.?

? ? ? ? ? ? ? ? ? ? ? "Buybacks are popular among investors because they lower the number of shares outstanding, boosting a company’s per-share earnings.....Share repurchases are a relatively flexible use of cash.?They can typically take place at a company’s discretion, without a fixed deadline. Other uses of cash, such as investing in a new factory or paying out a regular dividend, are much harder to stop if the economy sours. Investors usually owe taxes on dividend payments they receive.?

? ? ? ? ? ? ? ? ? ? ? "Large repurchases can make stocks more attractive, but some investors warn they aren’t a reason for buying on their own. Buybacks can signal a slowing business, as fast-growing companies often invest their cash back into expanding their operations. Buybacks “should be one element of an overarching strategy to boost shareholder return,” said Tim Thomas, director of research and wealth manager at Badgley Phelps. Large repurchases won’t lift stocks in companies that aren’t increasing revenue or finding other useful ways to invest their cash, he said......"

? ? ? ? ? ? ? (iv) (more on) stock splits and explaining Chipotle's huge and unusual recent 50-for-1 stock split: This March, Chipotle Mexican Grill, Inc.?announced in this press release?an unusually large 50-for-1 stock split (one of the biggest stock splits in NYSE history: see item (iv)(a) from March 20/24). Some commentary on stock splits and the massive Chipotle one followed in this April 5 FT article, "Stock splits: slicing the burrito" (see item (iv) from April11/24). More in this WSJ article last Monday, "Chipotle Wants Its Stock to Be More Affordable—for Employees", with?Chipotle CFO Jack Hartung giving the main reason for the company's stock split,?as well as?quoting Marc Hodak, a partner at compensation consultant Farient Advisors, on stock splits generally:

? ? ? ? ? ? ? ? ? ?"Chipotle Mexican Grill wants to make it easier to reward its managers and workers and for them to have ownership in the company.?So the burrito chain is asking shareholders to approve its first stock-split for the 30-year-old company. “We think it’ll be easier for our employees to be shareholders,” said Chipotle Chief Financial Officer?Jack Hartung, adding that workers are the primary motivation behind the planned 50-for-1 split. “And that means, yes, it’s easier for them to buy the stock if they want, but it’s also easier for us to give them the right amount of stock.”?

? ? ? ? ? ? ? ? ? ?"Chipotle’s stock has been on a tear for years. At $3,155.38 at Friday’s close, the shares are up around 40% this year and over 375% from five years ago. The stock is currently the fourth most expensive among S&P 500 companies, according to S&P Global Market Intelligence. Chipotle grants restricted stock units to top-performing managers, but as the stock price has pushed higher, that’s become harder to do, Hartung said. “If we wanted to get somebody $2,000 worth of value based on what kind of year they had, and the stock is at $3,000, we either have to give them $0 or $3,000,” he said. “To only reward our teams in increments of $3,000, that gap is too wide,” he said......

? ? ? ? ? ? ? ? ? ? "Stock splits are relatively rare among large public companies. This year through April, only three S&P 500 companies—Walmart, Cooper Companies and Old Dominion Freight Line—split their shares,?compared with just two in the same period last year, according to FactSet......Splitting the stock makes it more affordable for employees and individual investors, and it may also boost the price, as investors see it as a sign of management’s confidence in the business. Chipotle’s stock price popped 3.5% on news of the proposed split.

? ? ? ? ? ? ? ? ? ?"A stock-split may additionally enable a company to grant shares to more employees?to enhance a sense of ownership in the business, which companies have more commonly done through employee stock purchase plans and??employee stock ownership plans, said Marc Hodak, a partner at compensation consultant Farient Advisors....

? ? ? ? ? ? ? ? ? ? "In connection with the planned split, Chipotle will award a one-time equity grant to all its restaurant general managers as well as all employees with more than 20 years of service.?The grants would be made after the split and will be in the form of shares rather than stock options. The planned split would build on the benefits Chipotle already offers to keep workers, Hartung said. Longevity means restaurants run better and move customers through lines faster, though he’s not expecting any impact to be immediate. "It’s not like we split the stock and now throughput gets better,”?he said. “There’s a link there, but there’s a lot of things that go in between the stock split and getting better operations, including throughput.”

? ? ? ? ? ? ? ? ? ? Note that, similarly to Chipotle, on Jan.30/24 Walmart announced in this press release?a 3-for-1 stock split "aimed at helping associates take advantage of long-standing stock purchase benefits", in conjunction with a program Walmart?had just announced whereby store managers would be eligible to receive stock in the company as part of their compensation, as reported NY Times article, "Walmart?Offers Store Managers Company Stock to Make Them Feel Like ‘Owners’": see item ?(iii) from Feb.6/24.

? ? ? ? ? ? ? (v) press release of the day: NYSE-listed Marathon Petroleum Corp.?(MPC) announced today in this press release?the promotion of the President to the position of President and CEO, with the current CEO transitioning to Executive Chairman and the current Chairman transitioning to Lead Director,?as follows:

? ? ? ? ? ? ? ? ? "Marathon Petroleum Corp. today announced its leadership transition plan, with all positions effective?August 1, 2024. At that time, MPC President?Maryann T. Mannen?will succeed?Michael J. Hennigan?as Chief Executive Officer?and will join the Board of Directors; Hennigan will transition from CEO to Executive Chairman of the Board; and, continuing as the Board's strong independent voice, MPC Chairman?John Surmahas been elected to serve as Lead Director.

? ? ? ? ? ? ? ? ? "Hennigan has led MPC as CEO since?March 2020?and joined the Board of Directors in?April 2020. Mannen has served as President since January of this year, after previously serving as Executive Vice President and Chief Financial Officer since?January 2021. Surma became independent Chairman of the Board in?April 2020, having served as a member of the Board since 2011......"

? ? ? ? ? ? ? ? ? ?The current base salary and other compensation of the newly appointed CEO and Executive Chairman are disclosed in the related Current Report filed with the SEC, which notes that: "As the new roles of Mr. Hennigan as Executive Chairman and Ms. Mannen as Chief Executive Officer are not effective until August 1, 2024, any associated compensation adjustments have not been determined."

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