'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) 2024 Center for Audit Quality (CAQ) report on audit committee disclosures in the proxy circulars of the S&P 500 companies: Each year the Center for Audit Quality (CAQ), in partnership with Ideagen Audit Analytics, releases a report analyzing the voluntary audit committee disclosures in the proxy circulars of the S&P 1500 companies (comprised of the S&P 500 large-cap companies, the S&P MidCap 400, and the S&P SmallCap 600), and last Monday it released the 2024 edition of the report, the "Audit Committee Transparency Barometer Report 2024." Below are some of the key takeaways as they pertain to the S&P 500 companies, as disclosed in the related CAQ press release:
"Some key toplines of the report include:
-- The majority of S&P 500 companies (85%) disclosed the board of directors’ skills matrix.
-- 64% of S&P 500 boards disclosed the audit committee is responsible for cybersecurity oversight while 34% of S&P 500 boards disclosed the audit committee is responsible for oversight of ESG information.
-- 60% of S&P 500 boards disclosed they have a cybersecurity expert compared with 51% in 2023. ESG or sustainability expertise on the boards of S&P 500 companies also increased by five percentage points since 2023 to 59%.
-- A plateau in disclosure rates was observed across several measures, including considerations in appointing or (re) appointing the external auditor, considerations of the length of tenure, and considerations around how the audit committee evaluates audit fees in relation to audit quality."
Below is from the table on p.5 of the CAQ report showing the per centage of S&P 500 companies that disclose 15 different matters related the audit committee (such as the length of time the auditor has been engaged, the frequency of evaluating the external auditor, etc.). Note in particular the last five questions on audit committee responsibility for cybersecurity risk oversight and ESG oversight; board cybersecurity and ESG expertise; and whether the board has a skills matrix:
"Q1: Is there disclosure related to a discussion of Audit Committee considerations in appointing or (re)appointing the external auditor? 50%
Q2: Is there disclosure of the length of time the auditor has been engaged? 73%
Q2.1: Is there disclosure related to a discussion about how the Audit Committee considers length of auditor tenure? 13%
Q3: Is there a disclosure related to a discussion of audit fees and its connection to audit quality? 6%
Q4: s there disclosure related to a discussion of how non-audit services may impact independence? 85%
Q5: Is there a statement that the Audit Committee is responsible for fee negotiations? 18%
Q6: Is there an explanation provided for a change in fees paid to the external auditor? 24%
Q7: Is it stated that the evaluation of the external auditor is at least an annual event? 39%
Q8: Is it explicitly stated that the Audit Committee is involved in selection of the audit engagement partner? 53%
Q8.1: Is there disclosure related to a discussion of how the Audit Committee is involved in the selection of the audit engagement partner? 17%
Q9: Is it disclosed that the board of directors has a cybersecurity expert? 60%
Q10: Is it disclosed that the Audit Committee is responsible for cybersecurity risk oversight? 64%
Q11: Is it disclosed that the board of directors has an ESG or sustainability expert? 59%
Q12: Is it disclosed that the Audit Committee is responsible for ESG oversight? 34%
Q13: Is it disclosed that the board of directors has a skills matrix? 85%"
(ii) Walmart to stop using the term 'DEI' in official communications and roll back its DEI programs under pressure from anti-DEI activist: Walmart has become the latest prominent U.S. company to roll back its DEI programs under pressure from anti-DEI activist Robby Starbuck, as reported in this Bloomberg article yesterday, "Walmart, World’s Biggest Retailer, Will Curb Diversity Efforts":
"Walmart Inc. is reversing course on diversity, equity and inclusion initiatives, joining a growing list of businesses retreating on DEI programs targeted by conservative activists. The world’s biggest retailer will no longer consider race and gender to boost diversity when granting supplier contracts, and stop collecting demographic data when assessing financing eligibility.
"The most prominent company so far to pull back on diversity promises, Walmart on Monday confirmed it would stop using the term “DEI” in official communications. It will also curb racial equity training for staff, stop participating in notable rankings by LGBTQ advocacy group the Human Rights Campaign and review its support for Pride and other events.
"The changes were made public after anti-DEI activist Robby Starbuck posted a social media video saying that he had threatened Walmart with a campaign to lead a customer boycott just days before Black Friday, one of the biggest holiday shopping events of the year....
"Walmart’s decisions come from “a place of wanting to foster a sense of belonging, to open doors to opportunities for all our associates, customers and suppliers,” the spokesperson for the Bentonville, Arkansas-based company said. The retailer said it would stop using “DEI” and instead focus on “belonging” and work on a respectful and supportive environment. It also confirmed it will review funding of all Pride events and monitor online merchants for what Starbuck described as “sexual and/or transgender products marketed to children,” and remove items as necessary......"
Here is the statement Walmart gave to ABC News about the changes, as reported by ABC News in this article:
"Our purpose, to help people save money and live better, has been at our core since our founding 62 years ago and continues to guide us today. We can deliver on it because we are willing to change alongside our associates and customers who represent all of America. We've been on a journey and know we aren't perfect, but every decision comes from a place of wanting to foster a sense of belonging, to open doors to opportunities for all our associates, customers and suppliers and to be a Walmart for everyone."
For a list of the 10 prominent U.S. companies that have rolled back their DEI policies in 2024, see the table in this Reuters article today, "US companies tweak diversity policies as challenges mount."
(iii) financial reporting: Macy's delays release of its Q3/24 results, and releases preliminary results instead, due to an accounting issue/UPS settles with the SEC over its failure to take a goodwill write-down under GAAP :
(a) Macy's, Inc. announced yesterday in this preliminary Q3/24 earnings release that it was delaying the scheduled release of its full Q3/24 results due to an accounting issue, as reported in this Reuters article yesterday, "Macy's delays Q3 report on accounting issue":
"Macy's on Monday delayed the publication of its third-quarter results due to an accounting issue tied to delivery expenses and instead posted preliminary results......A single employee "intentionally" made wrong accounting entries to hide about $132 million to $154 million of delivery expenses from the fourth quarter of 2021 through third quarter of 2024, the department store chain said......"
Below is how the accounting issue is described in the Macy's preliminary earnings release:
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"Other Corporate Developments: The company also reported today that, during the preparation of its unaudited condensed consolidated financial statements for the fiscal quarter ended November 2, 2024, it identified an issue related to delivery expenses in one of its accrual accounts. The company consequently initiated an independent investigation. As a result of the independent investigation and forensic analysis, the company identified that a single employee with responsibility for small package delivery expense accounting intentionally made erroneous accounting accrual entries to hide approximately $132 to $154 million of cumulative delivery expenses from the fourth quarter of 2021 through fiscal quarter ended November 2, 2024. During this same time period, the company recognized approximately $4.36 billion of delivery expenses. There is no indication that the erroneous accounting accrual entries had any impact on the company’s cash management activities or vendor payments. The individual who engaged in this conduct is no longer employed by the company. The investigation has not identified involvement by any other employee.
"The company is delaying its earnings release and conference call relating to the third quarter of 2024 to allow for completion of the independent investigation. The company expects to report its full third quarter 2024 financial results and hold its earnings conference call, where it will provide its fourth quarter and full year outlooks, by December 11, 2024. Mr. Spring (Tony Spring, chairman and chief executive officer of Macy’s) added, “At Macy’s, Inc., we promote a culture of ethical conduct. While we work diligently to complete the investigation as soon as practicable and ensure this matter is handled appropriately, our colleagues across the company are focused on serving our customers and executing our strategy for a successful holiday season.”
An interesting explanation of how the UPS employee was able to make erroneous accounting accrual entries is in today’s Fortune CFO Daily Newsletter, "How did a Macy’s worker conceal up to $154 million in fake expenses? Experts weigh in." A brief excerpt below:
"How did the employee do it?: ....To get a better sense of what might be going on, I asked Adriana Carpenter, CFO of software company Emburse, for her assessment of the situation. Carpenter noted that it is significant that P&L entries in the accounting statements were impacted while the cash flows were not. "This leads me to hypothesize that the accountant changed the coding of these delivery transactions to charge the payments to a balance sheet account (versus a P&L account),” she explained. “As a result, while the payments were appropriately recorded as cash outflows (payments), the expense was never reported.”
The changing of the coding could have happened at the time the transaction occurred, Carpenter explained. Or it could have been initially recorded to the P&L, and a second journal entry was then posted to reverse the charge and move it to the balance sheet. She recommends that CFOs enable end-to-end expense management solutions that capture all non-payroll-related-spend....."
Note also this Business Insider article today, "Macy's $132 million mystery has auditing experts scratching their heads."
(b) As reported in this WSJ article on Friday, "UPS Ordered to Pay $45 Million for Overvaluing Freight Business", the SEC announced on Friday in this news release that it had fined UPS $45 million for improperly recording a goodwill impairment related to its freight business. Below is from the SEC news release describing the SEC's charge against UPS (see also the related SEC order):
"The Securities and Exchange Commission today announced settled charges against United Parcel Service Inc. for materially misrepresenting its earnings because it failed to follow generally accepted accounting principles (GAAP) in valuing one of its worst performing businesses.
"According to the SEC’s order, UPS determined in 2019 that UPS Freight, a business unit that transported less-than-truckload shipments, was likely to sell for no more than about $650 million. GAAP required UPS to use the price it would receive to sell Freight in calculating whether it needed to write-down the value of the goodwill it had assigned to the business unit on its balance sheet. UPS’s own analysis indicated that nearly $500 million of goodwill it had associated with Freight was impaired. Rather than use that analysis, however, UPS relied on an outside consultant’s valuation of Freight without giving the consultant information necessary to conduct a fair valuation of the business. Using assumptions approved by UPS, which were clearly not ones a prospective buyer of Freight would make, the consultant estimated Freight was worth about $2 billion – three times as much as UPS had determined. On that basis, UPS did not record a goodwill impairment in 2019. Had UPS properly valued Freight, its earnings and other reported items would have been materially lower.....
"Goodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own,” said Melissa Hodgman, Associate Director. “Therefore, it is essential for companies to prepare reliable fair value estimates and impair goodwill when required. UPS fell short of these obligations, repeatedly ignoring its own well-founded sale price estimates for Freight in favor of unreliable third-party valuations.”.......
"In addition to the civil penalty, UPS, without admitting or denying the SEC’s findings, agreed to cease and desist from further violations of these provisions, adopt training requirements for certain officers, directors, and employees, and retain an independent compliance consultant to review and make recommendations about the company’s fair value estimates and disclosure obligations......"
(iv) Canadian bank regulator OSFI issues guidance for boards and management on monitoring corporate culture: As reported in this Globe and Mail article last Thursday, "Bank regulator warns character flaws of board members and executives create risks", the Office of the Superintendent of Financial Institutions (OSFI), as part of its most recent quarterly report, issued last Thursday this guidance for boards and senior management, "Regulatory Notice on Culture Risk Management", which "sets expectations for managing culture risk in areas of governance and enterprise-wide culture management." Below is from the Globe and Mail article discussing the guidance, and inter alia quoting Tolga Yalkin, OSFI’s assistant superintendent of the regulatory response sector:
"Canada’s banking regulator is requiring financial institutions to monitor and address weaknesses in their corporate culture, as well as in the character of their boards of directors and senior executives, that could allow risks and financial crimes to continue unchecked.
"The Office of the Superintendent of Financial Institutions (OSFI), as part of its quarterly report Thursday, unveiled new rules that say senior executives are responsible for modelling and reinforcing culture through their actions and decisions, and hold themselves and others accountable for their behaviour. The regulator added that the board is also responsible for promoting a risk culture that encourages integrity and effective risk management.
"Effective corporate culture ensures that employees are able to deal with challenging issues such as compliance risks, without allowing them to “languish for extended periods of time,” said Tolga Yalkin, OSFI’s assistant superintendent of the regulatory response sector. “Cultural behaviours and norms within financial institutions are key to ensuring that some of those risks don’t come home to roost,” he said in response to a reporter’s question during a news conference Thursday......"
Below is from the Appendix section of the Regulatory Notice (which, note, defines "culture risk" as follows: "‘culture risk’ refers to the misalignment between a financial institution’s stated desired culture and its actual culture that may prevent it from achieving its objectives."):
"Board: The board is responsible for the institution’s culture and should promote a risk culture that stresses integrity and effective risk management. Does the board:
-- formally designate responsibility for overseeing the institution’s culture?
-- satisfy itself that the decisions and actions of senior management are aligned with the desired culture?
-- validate that the institution’s desired culture supports the institution’s mission, strategy, and risk management approach?
-- hold senior management accountable through performance management and compensation decisions for embedding the desired culture?
-- receive information to enable oversight of the institution’s culture and management of culture risk?
-- maintain line of sight into culture risk issues and corresponding remediation activities to ensure issues are addressed?
-- reinforce the institution's desired culture through their words, actions and decisions?"
(v) press releases/precedents of the day (CEO employment offer letter with a form of Executive Compensation Agreement and forms of Restricted Stock Unit Agreements attached):
(a) NYSE-listed, department store retail chain Kohl's Corporation announced yesterday in this press release the appointment of a new CEO from outside the company, as follows:
"Kohl’s Corporation today announced that Chief Executive Officer Tom Kingsbury plans to step down as CEO, effective January 15, 2025. He will stay on in an advisory role to the new CEO and retain his position on Kohl's Board of Directors (the "Board") through his retirement in May 2025, after which the size of the board will be reduced by one.
"The Board has appointed retail veteran Ashley Buchanan as CEO, effective January 15. Buchanan has been CEO of Michaels Companies since 2020 and, prior to that, has held a variety of senior executive roles at Walmart and Sam's Club during his 13 years at the company......"
In connection with his appointment, the new CEO entered into this Employment Offer Letter, which includes as exhibits a form of Executive Compensation Agreement and forms of Restricted Stock Unit Agreements, as summarized in the related Current Report filed with the SEC;
(b) HSBC announced yesterday in this press release "senior management changes", including the appointment of an interim Chief Risk and Compliance Officer and an interim Chief Sustainability Officer, as follows:
"HSBC announces the following updates to its senior leadership team. All appointments are effective 1 January 2025. Richard Blackburn is appointed Interim Group Chief Risk and Compliance Officer. Richard will become a member of the Group Operating Committee. Richard joined HSBC in 2016 and has held a number of senior risk leadership positions within the Group......HSBC has begun a process to appoint the permanent successor for this role, which will consider both internal and external candidates.
"Celine Herweijer, has taken the decision to step down as Group Chief Sustainability Officer to pursue new opportunities with effect from 31 December 2024.....HSBC announces that Julian Wentzel, currently Head of Global Banking, MENAT, is appointed Interim Group Chief Sustainability Officer. In this interim role, Julian will report to Pam Kaur, Group CFO. Julian joined HSBC in 2015.....We will begin a recruitment process for a permanent Group Chief Sustainability Officer and will provide a further update in due course......"
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