Chinese Companies Go Dark

"Going dark" typically means that a company delists its stock from an exchange. Today, three Chinese companies announced plans to go dark from the New York Stock Exchange. What is interesting is that the companies will still be listed on the Stock Exchange of Hong Kong. The reason for delisting from the NYSE is that American regulators have warned Chinese companies that they would be forced to leave U.S. exchanges unless they allowed regulators to see the records of the company auditors.  

SEC Sues Vale SA

In January 2019, the Brumadinho dam in Brazil collapsed, sending a mudflow that killed 270 people. The dam was built by Vale SA to hold tailings from a copper mine. Now, the SEC is suing Vale SA, stating that the company made false claims about the safety of the dam, obtained fraudulent stability certificates, and regularly misled investors through its ESG statements. The SEC does not require that companies file ESG statements, but the Climate and ESG Task Force of the SEC is tasked with identifying false or misleading claims. In other words, consistent with its other directives, the SEC is concerned about the truthfulness of statements and disclosures made by a company.

SEC Backs Nasdaq's Diversity Requirement

Back in December, the Nasdaq approved a diversity requirement for the boards of companies listed on that exchange. Every company must have at least one female board member and one from an underrepresented minority. If a company fails to do so, it must explain in writing why it does not. Now, the SEC has approved the new policy. The NYSE has an Advisory Board aimed at connecting diverse candidates with open board positions, although there is no specific diversity requirement.

Volkswagen Clawback

Volkswagen's Dieselgate scandal has been ongoing for the past five years. Recently, former CEO Martin Winterkorn has agreed to pay the company €11.2 million ($13.7 million) in a clawback. Although Winterkorn was not found to be responsible for the development of the defeat device, he was in a meeting when the defeat device was discussed. In his role as CEO, he breached his duties by not investigating the defeat device and its possible use. Additionally, former Audi CEO Rupert Stadler agreed to a clawback of  €4.1 million ($5 million) for failing to investigate whether engines developed by Audi were rigged to cheat emissions tests.

Apollo Shareholders Rule

One trend in corporate finance is that many companies have moved to unequal voting rights. For example, Comcast, Alphabet, Facebook, Lyft, Pinterest, and many others have some type of dual class share structure, with different voting rights for each share class. Investment management company Apollo Global Management is feeling different. Recently, former CEO Leon Black proposed that the company move to one share, one vote. As Mr. Black stated:

Moving to a “one share, one vote” structure to ensure that the voting rights of our shareholders align with their economic interests by eliminating the Class C voting stock, as well as examining a move to a single class of common stock.

Apparently, Mr. Black feels that shareholders should be counted by the number of shares owned.

Organizational Charts

Organizational charts can have very different structures when comparing companies and an individual with the same duties in one company could have a different title in another company. Elon Musk certainly does. In a recent SEC filing, Musk has added a new job title of "Technoking of Tesla." And in a nod to Game of Thrones, CFO Zack Kirkhorn is now the "Master of Coin." Tyrion would be proud!    

Activists Fail On Kohl's

Often, when an activist investor takes an interest in a company, the stock price will increase, especially if it is felt that management is performing poorly. Recently, a group of activist investors took a 9.5 percent stake in department store chain Kohl's. The group proposed a slate of nine new board members, which would give it control of the company. Kohl's argued that the new board members would disrupt momentum and rejected the nominations. In a nod to the market's belief that Kohl's is moving in the right direction, the stock price jumped almost 8 percent on the rejection.

COVID-19 Stock Trading

In a positive announcement in the fight against COVID-19, on Monday, Pfizer announced a vaccine that is more than 90 percent effective. That day, Pfizer's stock rose about 10 percent. But a strange thing happened: Albert Bourla, the CEO of Pfizer, sold $5.6 million of the company's stock. The stock sale was part of a 10b5-1 plan. A 10b5-1 plan allows company executives to prearrange stock sales with a broker to avoid the appearance of insider trading. In Bourla's case, the 10b5-1 plan was put in place on August 19. However, some have scrutinized Bourla's plan as on August 20th, the company had a press release announcing new Phase 1 testing date. 

Goldman Fined And Claws Back Compensation

Goldman Sachs agreed to pay a $2.3 billion fine and disgorge $600 million in profits related to the Malaysian 1MDB scandal. Goldman employees bribed foreign officials and aided fund officials in misappropriating money from the fund. One Goldman banker has already pled guilty to criminal charges and another has his case still pending. Goldman has also clawed back $174 million in bonuses and reduced salaries from individuals involved in the scandal and their supervisors.

Thiel In Control

Palantir Industries, the data-mining company owned by billionaire Peter Thiel, went public this week. But take note, if you buy stock in the company you will have virtually no say in the company's operations. Thanks to super-voting shares, Thiel and two other co-founders will retain voting control in perpetuity. Other Silicon Valley companies like Alphabet, Facebook, and Snap have similar voting structures. As Ohio State professor Michael Weisbach notes, "They  set it up so Peter Thiel can still sort of run it like a private company and still have the advantage of being public." The three co-founders will retain 49.99 percent of the voting power in the company regardless of the number of shares owned.    

Fintech

So what is Fintech? Fintech is a broad term, covering direct money transfers, crowdfunding, and direct to consumer lending. But an important part of fintech is embedding financial products in everyday consumer and business products. For example, Amazon offers free credit on every purchase, although it is often better to use an Amazon credit card for a 5 percent discount, assuming that you pay your credit card bill every month. Of course the Amazon credit card and the Apple credit card are actually fintech services as well. But Amazon went even further, partnering with Goldman Sachs to offer small business loans of up to $1 million to its merchants. Shopify has also rolled out loans to its customer base, loaning out over $750 million to date. A big advantage for existing companies in offering financial products to existing customers is a built-in client base, as well as knowledge of what financial services a customer may need.

Wirecard Turmoils

Creditors of German digital payment processor Wirecard, which advertised "Beyond Payments," may find that the company's debts are beyond payment. Wirecard also proved that accounting fraud is unfortunately worldwide when it filed for bankruptcy yesterday. The company said that €1.9 billion ($2.1 billion) in cash that was on its balance sheet probably never existed in the first place. Now, things have gotten bad for the company's auditors as the German shareholder association SdK announced that it had filed a criminal complaint against the company's auditor Ernst & Young (EY). SoftBank, a major investor, also announced that it planned to file against EY. In its defense, EY stated there were "clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world at different institutions, with a deliberate aim of deception" and that "even the most robust and extended audit procedures" were not enough to uncover the fraud.

Free Connect Offer From McGraw-Hill

For all those students and Professors impacted by the COVID-19 virus and moving to online instruction, McGraw-Hill is offering free access to Connect for the remainder of the spring semester. The access includes all questions and problems in Connect, as well as the ability to record and upload video lectures to the website. For Professors, you can even download a report that details which videos were watched by which students and the time spent watching videos. McGraw-Hill is offering support and webinars for those wishing to take advantage of this offer. You can find more information here.

Grade Time!

As many of you are aware, it is that time of year for grades. And while we hope you earned an A, it appears that many companies haven't. The inaugural American Corporate Governance Index was released and only 16 percent of companies received an A- or better. Ten percent of companies failed. The worst average grade was a C- for Principle 8, which requires a company to regularly evaluate its system of corporate governance and commit to addressing deficiencies. The next lowest grade was given for Principle 4, which requires companies to maintain strategies focuses in long-term performance and value. Looks like more studying is needed.

WeWork's Neumann Ousted

Last week, we mentioned that WeWork had pulled its IPO, and now, CEO Adam Neumann appears to be paying the price. WeWork's biggest investor, SoftBank, called for his ouster this past weekend, and today, Neumann announced he would be stepping down as CEO. Even though Neumann co-founded WeWork in 2010, investors apparently lost faith in him to lead the company going forward.

Women In Finance

So how do women perform in financial roles? Based upon research, often better than men. For example, the stock market reacts more favorably to acquisitions and SEOs when the company has a female CFO, female run equity hedge funds outperform those operated by men, and women tend to earn higher returns as individual investors. Now, new research indicates that companies with female CFOs are less likely to restate financial reports. In addition, companies with the lowest percentage of institutional ownership, the gap between female and male led companies widens.

Hertz Tries A Clawback

Auto rental company Hertz is demanding the return of $70 million in incentive compensation to former CEO Mark Frissora and other senior executives. In 2014, Hertz disclosed that it would have to restate three years of accounting statements. Hertz is accusing former management of pressuring employees to use fraudulent and misleading accounting procedures that lead to the restatements. Hertz is also demanding that the executives return the severance pay received when they left the company after the accounting scandal was unearthed.

Happy Birthday To The TCJA!

One year after the passage of the TCJA of 2017 and analysis of the effects of new tax code has begun. For example, capital investment by S&P 500 companies increased by 8.9 percent in 2018, the highest growth rate in seven years. And Deloitte estimates that the new tax code will increase real GDP by .7 percent per year over the next 10 years. While the boost may not be as high as proponents had hoped, it is important to remember that several provisions of the TCJA, such as the Global Intangible Low Taxed Income, the Base Erosion and Anti-Abuse Act, and the limitation business interest expense, actually increased taxes.

P&G Shareholders Reject Peltz

Activist investor Nelson Peltz has apparently lost his bid for a seat on the Proctor & Gamble board. Peltz had sought to gain one seat on the 11 person board. At a market cap of $232 billion, the proxy fight was the largest in history, with the sides spending more than $100 million on mailings, phone calls, and advertisements. Peltz is expected to contend the results as the final outcome was within one percent. A major explanation for the win by P&G is believed to be the large number of individual stockholders in P&G stock.

Zuckerberg Loses New Votes

Even though Mark Zuckerberg currently controls the majority of Facebook's voting shares, it appears that even that has limits. Facebook recently announced that it would not seek approval of Class C shares that would effectively allow Zuckerberg voting control forever. Market sentiment on dual class shares has shifted, as indicated by the announcements that no new companies with dual voting share classes would be admitted into the S&P 500 or any FTSE Russell indices. Additionally, the approval of Class C stock with super-voting power would probably have prompted a shareholder lawsuit in which Mark Zuckerberg would have been for a deposition or as a witness, something he would likely wish to avoid.