'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)?McKinsey with suggestions for board oversight of geopolitical risk/former SEC chair on disclosing China risks/the rise in?mentions?of?geopolitical risk on earnings calls:?

? ? ? ? ? ? ? ? ? ?(a) Below is from this Aug. 8?McKinsey?memorandum, "Geopolitical resilience: The new board imperative":

? ? ? ? ? ? ? ??? ? ? ??".......(G)eopolitical risks are among the top three issues that CEOs believe they must act on in 2023.?For management, the imperative of navigating geopolitical risks is obvious, but for a board, the road map is unclear.?What is a board’s role, relative to management,?in building and stewarding a resilient and thriving enterprise under geopolitical storm clouds??In this article, we focus on this question and suggest approaches and frameworks for directors’ consideration. In doing so, we draw on our discussions with the boards of leading global companies?and our experience as geopolitical risk practitioners and board members.......

? ? ? ? ? ? ? ?? ? ? ??"Boards must, first and foremost, upgrade their capabilities to conduct more nuanced discussions and decisions around managing geopolitical risk.?Doing so starts with the?who.?Does your board have the core competency and clear governance to engage on geopolitical risk??Ensuring so requires reassessing board composition criteria, committee setup, and overall board scope.?Steps to consider include the following:

? ? ? ? ? ? ? ? ? ? ? ? ? "A diverse board with the relevant skills and experience to provide forward-looking strategic direction and actively engage in problem solving.?Board composition strategies and selection criteria, often defined by nomination committees, could include explicit requirements around ensuring a subset of members have experience in geopolitics (whether from media, regulatory affairs, or government) and exposure to key markets of elevated geopolitical sensitivity. These directors could also play a role in conducting business diplomacy and engaging key stakeholders across markets in a manner that adds to and advances management’s core strategic objectives from a level of risk oversight that only directors can convey.

? ? ? ? ? ? ? ? ? ? ? ? ? "A set of board committees with domain awareness and expertise.?The board could shape the remit of key committees to support the board overall in dealing with geopolitical risk across different dimensions. For example, risk committees could ensure that issues of public policy and regulatory affairs are a core agenda item, or they could consider establishing a stand-alone committee with members of relevant expertise to focus on related questions. Similarly, compensation committees could tie a portion of CEO and leadership compensation to having managed down the organization’s geopolitical risk through defined criteria, thus enabling them to earn a geopolitical resilience premium. Providing the right incentive structure to upgrade capabilities can thus help ensure the right people are at multiple levels of the organization.?

? ? ? ? ? ? ? ? ? ? ? ? ? "A clear delineation of roles and responsibilities between the board and management team.?Boards and management teams ought to have a clear delineation of responsibilities in terms of leading on managing geopolitical risk. Typically, the board would fundamentally focus on providing a clear direction and strategy, stress-testing scenarios, and providing guidance, instead of, for example, defining specific controls needed.....

? ? ? ? ? ? ? ??? ? ? ? ?"In addition,?boards should consider hearing directly from external sources of insight,?by either standing up an advisory council of individuals with related expertise or bringing in two to three external speakers over the year. Whether council or speakers, ensuring a diversity of perspectives is critical. Exposure to a multipolarity of perspectives is necessary for navigating a multipolar world and establishes credibility with colleagues across a global firm.?

? ? ? ? ? ? ? ? ? ? ? ? ?"In terms of the?when, simply put,?geopolitical risks do not heed a quarterly calendar. Rather, boards must up their clock speed and their ability to make decisions to at least monthly reviews of key developments?with ad hoc meetings in between as needed......"

? ? ? ? ? ? ? ? ? ? (b)?Below is from this Sept. 12?WSJ?article, "Big Businesses Should Disclose China Risks, Ex-SEC Chairman Says":

? ? ? ? ? ? ? ? ? ? ????"The largest U.S. public companies should be forced to disclose their exposure to China and weigh how an “abrupt decoupling” might play out, former Securities and Exchange Commission Chairman?Jay Clayton?told lawmakers?Tuesday.?Large companies with significant China footprints should be required to lay out for investors the extent of their exposure to China and the expected effects on operations and business of a substantial disruption to U.S.-China relations, Clayton said in testimony before the U.S. House of Representatives?Select Committee on the Chinese Communist Party.

? ? ? ? ? ? ? ? ? ? ? ??? "The goal here is to allow investors and policy makers to understand and evaluate how large companies view, and are preparing for, China‐related risks, an inherently uncertain and ever‐changing exercise,”?Clayton, who headed the SEC during the Trump administration.....said in a written submission that accompanied his live testimony......Risk advisers increasingly have flagged geopolitical tumult, including growing tensions between the U.S.?and China, as a?major concern?for businesses......"?

? ? ? ? ? ? ? ? ? ? (c) The preoccupation of CEOs and boards at the S&P 500 companies with geopolitical risk is evidenced by the increased frequency of mentions of it on earnings calls these days. Below is from the opening paragraph of this Sept. 17?Bloomberg?article, "The Global Economy Enters an Era of Upheaval":

? ? ? ? ? ? ? ? ? ? ? ? ? "One word has been popping up increasingly on earnings calls and in corporate filings of some of the world’s biggest companies.?From Wall Street giants like?BlackRock Inc.?to consumer titans like?Coca-Cola Co. and Tesla Inc.?and industrial mainstays like?3M Co., S&P?500 chief executives and their lieutenants have used the word “geopolitics” almost 12,000 times in 2023,?or almost three times as much as they did just two years ago......"

? ? ? ? ? ? ? ? ?(ii)?SEC chief accountant on the importance of risk assessment by management:?On Aug. 25,?SEC Chief Accountant Paul Munter issued this statement, "The Importance of a Comprehensive Risk Assessment by Auditors and Management", and below are some excerpts:

? ? ? ? ? ? ? ? ??? ? ???"Management’s and auditors’ risk assessment processes are critical to the decisions regarding financial reporting and the effectiveness of internal control over financial reporting (ICFR). Accordingly, we are troubled by instances in which management and auditors appear too narrowly focused on information and risks that directly impact financial reporting, while disregarding broader, entity-level issues that may also impact financial reporting and internal controls.....

? ? ? ? ? ? ? ? ???? "This statement discusses management’s obligation?to (1) take a holistic approach when assessing information about the business and avoid the potential bias toward evaluating problems as isolated incidents, in order to timely identify risks, including entity-level risks; (2) design processes and controls that are responsive to identified risks; and (3) effectively identify information that issuers are required to communicate to investors.

? ? ? ? ? ? ? ? ? ?? ? ???"Risk Assessment-Management Considerations:?Changing economic conditions may have a significant and sudden impact on an issuer’s business, which could change risks or create new ones. Therefore, to be effective, risk assessment processes must comprehensively and continually consider issuers’ objectives, strategies, and related business risks; evaluate contradictory information; and deploy appropriate management resources to respond to those risks.?For example, management’s risk assessment process may consider observations from regulators, analyst reports, and short-seller reports. Management is also required to provide auditors complete information related to certain communications from regulatory agencies.

? ? ? ? ? ? ? ? ? ? ?"Management needs to be alert to new or changing business risks to identify changes that could significantly impact its system of internal control,?and design and implement responses that support issuers’ ability to appropriately disclose information in its periodic filings.?Business risks, such as a company’s loss of financing, customer concentrations, or declining conditions affecting the company’s industry, could affect issuers’ ability to settle their obligations when due, and affect the risks of material misstatements in financial statements not being identified on a timely basis.?Likewise, risks related to changes in technology could impact the effectiveness of controls around processing of transactions......"

? ? ? ? ? ? ? (iii)?latest data on virtual and hybrid?(online)?AGMs: Last Tuesday,?Broadridge Financial Solutions?released its??ProxyPulse Report?reviewing the 2023 proxy season. Here is what it says?about virtual AGMs:

? ? ? ? ? ? ? ? ? ???"The number of virtual-only meetings in 2023 was close?to the all-time high at the height of the pandemic and few companies will return to an in-person only meeting format.?Companies and shareholders are realizing the benefits of online meetings as the technology continues to advance."

? ? ? ? ? ??(iv)?capital allocations:?the decline in share buybacks/Citigroup co-head of European M&A on M&A v. returning cash to shareholders:?

? ? ? ? ? ? ? ? ? ? (a) Following the torrid pace of share buybacks in 2022 and the first few months of this year (see item (iv) from May 25/23), there has been a noticeable slowdown recently, as reported in this Sept. 17?FT?article, "Companies ease off on share buybacks as rising interest rates push up costs":

? ? ? ? ? ? ? ? ? ? ? ? ?"Share buybacks on the US stock market have dropped to the slowest pace since the early stages of the Covid-19 pandemic as rising interest rates undermine the incentive for companies to purchase their own shares.?Companies in Wall Street’s benchmark S&P 500 index spent $175bn buying back shares in the three months to June, according to preliminary data from S&P. That marked a 20 per cent decline from the same quarter last year and a 19 per cent decline from the first three months of 2023.?

? ? ? ? ? ? ? ? ? ? ? ? ? ? ?"Analysts say the slowdown is likely to mark the beginning of a longer-term trend that could put downward pressure on stock markets.?“Structural reasons as well as the interest rate environment are both contributors,”?said Jill Carey Hall, equity and quant strategist at?Bank of America. “We would expect buybacks to not be as big for the foreseeable future.”.........

? ? ? ? ? ? ? ? ? ? ? ? ? ? ?"Companies are now facing a combination of new investment demands and higher borrowing costs, making buybacks less of a priority.?“When rates were zero it made sense for companies to issue long-dated, low-rate debt and use it to buy back shares. Now not so much,”?Carey Hall said.?At the same time, businesses are facing increased pressure to invest in areas such as reshoring supply chains, automation and artificial intelligence and reaching net zero targets, she added........

? ? ? ? ? ? ? ? ? ? ? ? ? ? ??"US stock buybacks have also been subject to a new 1 per cent?tax since the start of this year.?Silverblatt??(Howard Silverblatt, senior index analyst at S&P)?said that, at its current level, the tax had not had much impact......“Some companies might be impacted sooner, but I think about a 2.5 per cent tax is where you would see a significant impact?.?.?.?[and] shifts in spending from buybacks partially into dividends,” said Silverblatt......."

? ? ? ? ? ? ? ? ? ? ? ? ? (b) Below is from this?WSJ?article, "M&A Can Pay Off, but It’s Far From a Sure Thing", inter alia quoting?Barry?Weir,?Citigroup’s co-head of European M&A, on when to allocate funds to acquisitions v. returning cash to shareholders:

? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?"Does M&A work? The latest research says it’s a tossup......(R)ecent research from academics and consultants puts the success rate closer to even. Companies that do frequent smaller deals, as well as making bigger bets, tend to outperform, advisers say. That is because they hone their ability to identify targets, integrate those businesses and reap the intended financial benefits.?

? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?"Companies should always weigh up deal making against alternative uses of funds,?said Barry Weir,?Citigroup’s co-head of European mergers and acquisitions.?“If the risk-adjusted return from M&A is higher than the benefits from returning cash to shareholders or some other lower-risk alternative, then it makes sense,”?Weir said. “If it doesn’t meet this hurdle then you shouldn’t be doing M&A.”

? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? "Since the global financial crisis,?stock in companies doing deals worth $100 million or more on average has beaten peers 53% of the time, said Naaguesh Appadu, a senior research fellow at the Bayes Business School of City, University of London who tracks this metric closely.?Deal making can help companies boost sales and profit faster than would otherwise be possible.?Buyers can gain customers by moving into new locations, or by adding new products and services, and can cut costs by eliminating overlapping operations.?The risk is that the promised financial benefits don’t cover the often hefty premium paid for a target.?

? ? ? ? ? ? ? ? ? ? ? ? ? ??? "Companies can encounter unanticipated delays, regulatory pushback or extra costs; new products can fail to meet expectations; and key employees can walk out. Big deals also risk distracting top executives from their day jobs. Integrating the target’s operations is often easier said than done and can take longer than anticipated......

? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?"Stock investors often have strong initial reactions to an announced deal, and that first response is often a good longer-term signal, said Mark Sirower, an M&A adviser at?Deloitte Consulting.?The more a stock rises, the more the market believes the buyer can justify the premium paid, by achieving planned boosts to sales and profit, Sirower said.?

? ? ? ? ? ? ? ? ? ? ? ? ? ? ? "His data shows 57% of stocks that started off with a positive performance around the deal announcement stayed ahead a year out, while almost two-thirds of the stocks that initially fell remained lower 12 months later.?To measure initial performance, Sirower compares where a stock stands five trading days after a deal is unveiled with where it stood five days beforehand.?Overall, Sirower said his data showed odds of a sizable deal succeeding were?“slightly less than a coin flip.” His research shows that between 1995 and 2018, buyers’ stock lagged behind peers 56% of the time in the year after a deal announcement........"

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