Timothy Sloan Wells Fargo CEO
since 2016, but a 31 year employee abruptly resigned Thursday as CEO. Rumors were that the employees complained of a toxic work environment while at the same time regulators complained of lack of reform at the bank. Yesterday, Mr. Sloan stated, "I could not keep myself in a position where I was becoming a distraction,"
Boeing Software in Question
According to the Wall Street Journal, the team studying the recent 737 Max 8 crash in Ethiopia has reportedly reached a preliminary conclusion that that the automated anti-stall software activated shortly before the plane crashed.
"The emerging consensus among investigators, one of these people said, was relayed during a high-level briefing at the Federal Aviation Administration on Thursday."
It is "the strongest indication yet that the same automated system, called MCAS, misfired in both the Ethiopian Airlines flight earlier this month and a Lion Air flight in Indonesia, which crashed less than five months earlier."
"The preliminary finding from the 'black box' recorders of Ethiopian Airlines Flight 302 is subject to revisions, according to the people briefed on the matter."
Relevant Board Discussion Points
It is too early to come to any conclusions regarding the tragedies related to the two Boeing 737 Max 8 crashes. However, there are numerous observations that each of us can make and perhaps utilize in our own future governance decisions. For example, similar incidents taking place with similar products in a short timeframe is a major factor. The loss of life, which has generated a huge wave of public sentiment. There were multiple parties involved, customers, carriers (airlines), manufacturers and regulatory bodies. Good or bad decisions were slow in being made and leadership was somewhat lacking. The end result is government intervention and now political (US) grand standing. Currently, certain critical issues remain unresolved such as, the complexity of the technology, related training issues and the margins of safety implemented. The axiom applying to most of the parties involved will be the basic legal question, "What Did You Know? When Did You Know It? What Did You Do about It?"
Ed Note:
From a senior management and board perspective, all of these are factors are worthy of reflection relative to our own business activities. You could manufacture lawnmowers, develop revolutionary bio/pharma products or sell new investment products and you could easily be confronted with one or more of these scenarios.
Hold on, Proxy Advisory Firms
The SEC is expected to soon propose rules and regulations on how proxy - advisory companies function. This is the result of a concentrated effort by more than 300 public companies that called on the SEC to take "strong regulatory action". They were accompanied by lobbying and advocacy groups such as the US Chamber of Commerce and the National Association of Manufacturers, along with the NYSE and NASDAQ. The targets were primarily the proxy advisory firms ISS and Glass Lewis. The positions of these firms has been that they provide valuable information for investor decisions. In contrast, the listed companies cite a conflict of interest when the proxy advisory firms advise companies on corporate governance and make recommendations to shareholders at the same time.
Ed Note:
Frankly, this is a surprising turn of events. Two thoughts come to mind. It is always risky when any self-anointed regulator such as ISS/Glass Lewis begins to believe their own omnipotence. Combine that with the "Chinese Wall." defense and you are in a tenuous position. This is a porous concept often used to deflect an organization's potential conflict of interest. Often, this can sow the seeds of destruction. Hopefully reasonable middle ground will be achieved supporting good corporate governance.
Audit Changes 2019
If you're on the audit committee of a major publicly held company, this may be old news. However, it is worthy of some additional focus. This action is driven by PCAOB, which oversees public accounting firms. Starting this June, large public firms, whose fiscal year ends on June 30, will see their auditors required to expand their reports regarding those items that the auditors feel are the most challenging components of a company's financial statements. The reports will also cover the manner in those auditor concerns are being dealt with by the company. The items in the report could include goodwill, impairment of critical assets, revenue recognition, tax liability or acquisition integration. These items/procedures could fall under the abbreviation CAMs, "critical audit matters." The goal of PCAOB is to better inform investors on critical events that are taking place within a company in a more robust and descriptive manner. Hopefully, this will help in avoiding future restatements.
Ed Note:
The changes were adopted by PCAOB in 2017. They were adopted by large companies this year with smaller firms facing a deadline of 2021. Similar requirements are already in existence in Europe.
You Should Know
According to the Motion Picture Association of America audiences spent more on online entertainment than they did purchasing tickets at the movie theaters. $42.6 billion last year up from $32.9 billion in 2017. This is already the situation in the US, but this is a first-time global event.
Jumbo mortgages which are defined as those too big to be sold to Fannie Mae and Freddie Mac dropped by 12% last year in dollar volume. This outpaced the 7% decline in more traditional mortgages. Jumbos are defined in most parts of the country as loans above $484,000 and in more expensive locations $726,000.
Brexit continues to be a disaster with no reasonable solution in sight. The only lesson of value is plan ahead and don't depend on elected officials.