| |
The Directors Letter
Corporate Governance News Since 2006
|
|
|
Written by Executives, Read by Executives
|
|
|
|
|
|
|
November 3, 2018
In This Issue
The Global Digital Tax.
Valuing Transparency and Integrity?
Security and The Internet of Things.
SONY Competitive Hardware?
In our next video, Melissa Means of Pearl Meyer walks us through the important subject of Pay Equality and Pay Parity.
|
MetLife Points Sustainability Officer
Corporate Secretary recent reported, that Tim Ring, who previously had been the company's corporate secretary, has been promoted to the new role of Chief Sustainability Officer. In terms of structure, he reports to an executive vice president and head of corporate affairs. The position will oversee corporate responsibility initiatives, a new sustainability function (undefined in the article), and the reputation management team. The latter produces MetLife's annual corporate responsibility report and oversees the company's policy focused thought leadership efforts.
Ed Note:
Not exactly a detailed job description but certainly recognition of the importance of the subject of sustainability. Interesting components are: corporate responsibility initiatives, the annual corporate responsibility report, and thought leadership efforts. If you are considering the sustainability function in some structure, this is food for thought and board discussion.
Disclosure and Transparency
Two companies in terms of product and market sector could not be further apart. They are: Facebook and Campbell Soup. However, they both have communication problems with stakeholders and regulators.
Campbell Soup
is being sued by Third Point LLC, a significant investor, alleging that the company distributed misleading and incomplete information to shareholders about specific board members. The goal of Third Point is to replace the entire 12-person board by winning wide support in a heated proxy fight over control of the company.
Ed Note:
Might additional conversations between both parties (Third Point and the Dorrance Family) have avoided a disruptive and public delay of a critical vote? Stories such as this, do little to enhance long-term value.
Facebook
continues to be the target of regulators for their significant delay in reporting the Cambridge Analytica data debacle. In this instance, it is a fine assessed by the UK's privacy watchdog. The dollar amount is small, but the media coverage is not. Facebook was alleged to have known that Cambridge Analytica received data on tens of millions of Facebook users from a third-party app that plugged into their network. The cornerstone of the charges is that Facebook knew of the breach in 2015 and Cambridge Analytica wasn't suspended from Facebook until early in 2018. In the social media world anything approaching 3 years is an eternity.
Ed Note:
The importance of timely reporting of any breach or release of personal data is not a new concept. Prior instances have resulted in fines, executive dismissals, and loss of market share. Why was this history lesson lost on Facebook? Every board of a company that maintains significant personal databases should already have discussed, "What would our response be, if there was a data breach of personal data?"
Related
Several public retirement funds including New York City, Rhode Island, Illinois and Pennsylvania have joined a shareholder proposal filed by Trillium Asset Management last June. The proposal called for removing Mark Zuckerberg from his position as chairman at Facebook. The proposal is unlikely to succeed because of Mr. Zuckerberg's super voting shares essentially give him a 59.9% voting impact. Still the message is clear. Institutional shareholders are holding the leadership of social media companies responsible for good governance, especially as relates to the security of personal data.
Smart Devices and the Security
For a moment, let's discuss the "Internet of Things." Siri unlocks your front door for the deliveryman. You utilize, your cell phone to turn up the heat in your home while driving from work. At the office, your computer connects to the camera in your backyard to see if the pool cleaning man has arrived. In most cases, these devices connect to you utilizing the Internet. In most cases, these devices have little if any security protection against being hacked. However, the scenarios described above are not the major problem or risk. It is the fact that they provide an easy entrance to your PC and other devices, which most likely contain personal and valuable data.
Ed Note:
From a security standpoint, these devices are just not sophisticated nor are they protected with antivirus software. Usually, they don't require logins and passwords. This risk can apply to the devices utilized in your personal life but also in the business environment. Think of the concept that "The chain is no stronger than its weakest link." From a senior executive standpoint, it might be appropriate to ask IT security to discuss your company's risk from the "Internet of Things." If your company is involved in the manufacturing/marketing of these devices, the products' security capabilities should be the subject of a product assessment by management.
You Should Know
Chinese ride- hailing company Didi,
who beat out Uber in China several years ago, recently had some of its stock traded in private transactions. The sale was at a valuation priced between $50 billion and $52 billion. In late 2017, SoftBank made a $4 billion investment in Didi at a valuation of $56 billion. Worth reflecting upon.
Finance Prof. Jay Ritter of the University of Florida compiled data for the first three quarters of 2018. It showed that 4/5 of all the US listed IPOs were of companies that lost money in the 12 prior months. Memories of the Late 1990s?
Activism with public pension funds takes a turn to the conservative
as CalPERS new president Jason Perez defeats incumbent Priya Mathur. The winning campaign theme was: People can invest their own money wherever they like, but public pension funds have a fiduciary duty to maximize returns for their members. An interesting pushback in today's discussion of corporate social responsibility.
The stock price of the darlings of Silicon Valley have taken a hit.
Since early September, shares of the FAANG are down, Facebook 17%, Apple 7.1%, Amazon 25%, Netflix 22%, and Alphabet/Google 14.6%. Source: WSJ. Sobering, at least in the short run.
In contrast, the shares of software/services company Red Hat saw it shares rise 45%. This was after IBM announced that it would buy the firm for $33 billion. Just as noteworthy is the fact that this will be the biggest acquisition IBM has ever made. Its shares fell 4.1%. Acquisitions and integrations are tough. Our sincere best wishes to IBM CEO Ginni Rometty.
Calculating and Utilizing
The CEO Pay Ratio
Melissa Means a partner with Pearl Meyer & Partners, executive compensation, gives us timely feedback from the boardroom on the CEO Pay Ratio.
|
 
|
|
Reporting Loan Losses
While you may not be a senior executive or board member at a bank, you still should know that significant changes in how banks report troubled loans is set to go into effect in 2020. FASB issued the rule in 2016. It will require banks to record (at the reporting date) all future losses when they realize they might occur. The current requirement is recording losses when they do occur. Advocates feel the new information would give investors a better understanding of a bank's financial condition. The opposition feels that the required increase in loan loss reserves would negatively impact earnings and reduce funds available for lending.
From the FASB website:
The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.
"Why Did the FASB Embark on a Project to Improve Financial Reporting of Credit Losses on Financial Instruments?"
Current GAAP requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. This model has been criticized for restricting an organization's ability to record credit losses that are expected, but do not yet meet the "probable" threshold.
Sony, Return of the Hardware
Remember the Sony Walkman in 1979. It began the revolution in portable electronic devices. In the early 2000's, Sony let Apple take the lead with its iPod. Sony continued to be a leading seller of headphones, but these were the $10 models not the upscale premium products from Bose and later fashionable Beats (acquired by Apple in 2014). This year, under new management, Sony's audio unit saw a sales increase for the first time in 20 years. Part of the reason for the increase in sales and profitability was a return to hardware but in this case high end noise canceling wireless headphones selling for $350. With the arrival of Spotify Technology and other music screening services, the sound is now high resolution justifying the higher priced headphones.
Ed Note:
No buyer is more fickle than the consumer and this applies even more so when it comes to electronics. At Sony new leadership and a recognition that profitability was in high-end products, not commodity devices, began the turnaround. This was combined with a commitment to aggressively compete. At the same time, the marketing assignment was to research the broader electronics industry to identify additional products for which consumers are willing to pay extra. Not a bad philosophy to consider when implementing a turnaround.
Rapid Response
After the tragic Pittsburgh synagogue shooting, it was determined that the alleged killer had utilized the social media platform Gab.com for his hate messages. The response from the business partners of Gab.com was swift. Their web hosting firm Joyent Inc. dropped them immediately as did GoDaddy Inc, the domain registrar that allows them to have an address on the web. PayPal Holdings Inc. and Stripe, both payment processors cut them off shortly thereafter.
Ed Note:
Two actions are worthy of note. The first was that the above partner firms took immediate action. They were not investigating the incident or issuing lengthy policy statements. The second point is that they were not targeting the alleged killer, but rather the communication vehicle Gab.com that he had utilized. We like their style and are glad they made the front page of the WSJ. In 2018, too often talk is cheap.
|
Theranos, a Lesson to Remember
Our educational seminar subsidiary, Board Leaders, recently held a breakfast seminar discussing the Theranos Case. In attendance were directors and senior executives with a panel composed of a corporate litigator, venture capital investor, and a former federal prosecutor. The most significant conclusion and recommendation to any director was, "Ask the tough questions and demand the right answers. The alternative is to resign from the board."
GE What Happened? The dividend is down to a penny a share from 12 cents. The stock recently fell 8.8% to $10.18 a share. This is the lowest price since the financial crisis. Investigations are being conducted by both the SEC and the Justice Department regarding the accounting charge related to the acquisition in GE's power unit. Another investigation is underway related to the first quarter shortfall in insurance reserves. Cash is becoming more of a problem.
Ed Note:
Most business media outlets have written this sad story. GE was the biggest and the best. Did the board accept everything the CEO said without challenges? Did the executive incentive compensation plan put too much emphasis on short-term earnings? The leadership at many levels ignored reality and abdicated their responsibility. Worth reflecting on and a long-term lesson to be learned by all of us.
Overseas Tech Tax, a Big Deal
The proposed tax would be on digital services such as search engines, social media platforms, and online marketplaces. It is being discussed within the EU and very seriously in the UK. Asia-Pacific countries as well as Latin America are exploring it. The tax target today is large digital companies such as Alphabet, Facebook, and Amazon. It is unclear whether it will be based on topline revenue or bottom-line profit. Basing it on profit is an elusive concept for the taxing country because of how and where global companies declare revenue, expenses and eventually taxable income.
Ed Note:
There are significant considerations for any size company involved in the digital delivery of products, most likely services. All of the impacted countries see this as a new source of revenue. The ethical considerations for the tax are straightforward. Your company is doing business in our country and making money from our citizens. Therefore, your company should pay for that privilege.
It is unrealistic to think that this type of tax will not roll out over time on a global basis. The UK can make decisions independently and will most likely be an early on implementer. The EU has a member voting requirement that will delay design and passage of any tax, but not forever. Other countries will probably watch and see how the events in Europe progress. In the short run China has enough on its plate with trade and tariffs. But-----
The original target will be the big global digital companies, but they will not remain the only tax target for long. If you are directly involved in providing digital services globally, you will eventually be a target of the tax regardless of your size. Whether the tax is based on revenue or profitability certainly will have a potential impact on what operations are located in what countries. This in turn will impact how revenue and expenses are accounted for. For senior management and the board, this is a series of events that should be monitored closely at all levels. In the near future, it should become a significant and ongoing part of your global marketing/revenue/tax discussions. This is serious business with strategic ramifications to your company's operations and business plans.
|
|
| |
|
|
| The Directors Letter by Daly & Company Inc. 184 High Street, Boston, MA 02110
Dan Daly, Publisher For more information, visit:
|
|
|
