IR Monitor – 2nd November 2022

This week’s news

Activist board battles to get more personal thanks to new SEC rule

As reported in our monitor previously, the SEC recently enacted a rule change that enables investors and activists to nominate and seek removal of individual directors. The FT noted that “universal proxy” ballot cards now grant shareholders a means to select nominees from all parties, and that investors are now able to flexibly vote only for directors they support. Previously, contested elections would be called and shareholders would vote for a slate of company nominees. This change is heralded by many, some saying it “lowers the barrier to entry for activists of all sizes”, and others believing it may serve as the first step in toppling unpopular, incumbent board directors. Activists have suggested that the universal proxy changes enable a targeted approach in making boards focus on directors’ individual competence, to the benefit of the wider American shareholder landscape. As a commentator summarises it, there now needs to be a clear narrative to whoever is added to a board of Directors.

US in-person AGMs soar in 2022

IR Magazine observes that American companies have seen a 5% reduction in virtual annual meetings this year, going against the grain of increased online conferences. According to a report by Computershare, 37% of AGMs were held virtually in the period to June 30, 2022. The other 63% was held in person, up from 56% at the same point last year. The report also shows that the hybrid format was quickly disappearing from US-based companies, with a total absence of AGMs opting for this option this year. Continental Europe has also seen a slight decrease in the number of virtual AGMs, from 72% held online in 2021 to 52% this year. Meanwhile, Canada reported a significant increase in virtual AGMs, while companies in the United Kingdom gravitated towards hybrid AGMs.

Accounting errors to cost execs their bonuses, under SEC’s new rules

The SEC voted in favour of approving the ‘clawback rule’, which will require public companies to take back executives’ incentive pay if significant errors are discovered in financial statements. As reported in the Wall Street Journal, the legislation aims to improve corporate accountability and discourage fraud and accounting mischief, at a poignant time of shareholder discontent over pay malpractices. The rule requires companies to procedurally recover previously erroneous compensation, regardless of whether misconduct was involved. Companies are not required to pursue recovery if the monetary amount retrieved would not offset the cost of retrieval or would violate cross-border laws. Some argue the rule could weaken alignment of interests between shareholders and management, in that it could lead companies to restructure compensation arrangements away from performance to shield executives from clawbacks. However, with investors increasingly willing to hold companies and executives to account, academics suggested that companies with no pre-existing claw-back provision exhibited positive abnormal stock returns following the SEC announcement, suggesting that the market expects the adoption of such provisions in the future to be value accretive for shareholders.

Inflation triggering biggest wave of profit warnings in the UK since 2008

The Telegraph has written about new figures published recently which show that listed UK PLCs reported 86 profit warnings in the quarter ended September 2022, up by more than two-thirds year-on-year and reaching levels not seen since the global financial crisis in 2008. The figures show that more than 40% of FTSE-listed retailers have issued a profit warning in the past 12 months, and that 28 companies were in the “risk zone” as they have warned already three times in the last twelve months. Interestingly, the study argues that 20% of companies that issue three warnings over a twelve-month period either fall into administration or get acquired within a year. And whilst consumer confidence has plummeted to its lowest levels since records began in 2011, another study indicated that 20% of medium-sized companies believe the current crisis to be tougher than the COVID pandemic, Brexit or the 2008 financial crash.

Investigation into Nikola – an activist short seller gets his day in court 

The New York Times has written on Nathan Anderson, who exposed evidence of fraud by Trevor Milton, founder and former Chairman & CEO of Nikola. Anderson worked closely with former Nikola contractor Paul Lackey to expose the activity that served as the basis for the federal prosecutors’ case – that Mr. Milton had misled investors about the technical abilities of his electric vehicle start-up. Marc Mukasey, Mr. Milton’s lawyer, repeatedly cited Hindenburg Research, the boutique investment research firm that Mr. Anderson founded, during the four-week criminal trial and Mr Lackey’s testimony, stating that the two were not to be trusted, and that their sole motive to impugn Mr. Milton was to make a quick buck. Nonetheless, the SEC and the DoJ are investigating nearly 30 activist short sellers as part of a sweeping inquiry into potential market trading abuses.

And finally… Zuckerberg reminds us that dual class structures are a bad idea

Mark Zuckerberg is providing fresh motivation for investors everywhere, according to Reuters . His relentless commitment to keep investing in the metaverse, whilst Facebook keeps suffering, sent shares in Meta Platforms tumbling more than 20% on Thursday. As operating profit nearly halved in Q3 2022, the company said on Wednesday that it would keep investing more than $100 million a day, most of it on virtual reality initiatives. Meanwhile, the stock has now vaporised more than $600 billion in market value this year. A decade ago, when Facebook went public, Zuckerberg commanded 57% of the vote with just 28% of shares, subjugating other owners with super-voting shares carrying 10 votes a piece. Given the recent collapse in Meta’s stock price, Breakingviews argues that there’s never been a better time to question its dual class share structure than now.

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