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Oct 20, 2023

The week in GRC: Court upholds Nasdaq’s board diversity rule and Florida Bar considers requiring client consent to use AI

This week’s governance, compliance and risk-management stories from around the web

Reuters (paywall) reported that Florida attorneys may soon have to get their clients’ consent before using artificial intelligence (AI) on their legal matters. The Florida Bar is drafting a new advisory opinion focused on the use of AI and has asked lawyers in the state to weigh in. Florida bar leaders have asked the Florida Board Review Committee on Professional Ethics to create rules around the use of generative AI, such as OpenAI’s ChatGPT, Google Bard or Microsoft’s Bing.

In addition to a requirement that lawyers obtain client consent before using AI, the committee will decide whether such AI is subject to the same lawyer supervision requirements as non-lawyer assistants, and whether lawyer fees should be lower when AI is used. It will also consider whether law firms should be allowed to advertise their generative AI as superior or unique, and whether lawyers may encourage clients to rely on due diligence reports generated by AI.

– According to CNBC, activist investment firm Starboard Value is pushing for change at News Corporation, in particular for its real estate business to be separated from the rest of the company. Starboard CEO Jeffrey Smith said the firm is building a position in News Corp and has been in discussions with the company. ‘Our belief is [it is] going to want to… separate the digital real estate assets to be able to highlight this beautiful business for what it’s worth,’ Smith said.

A News Corp spokesperson said the company has ‘always maintained an active and engaged dialogue with our investors and [is] committed to driving shareholder value. We remain focused on executing our strategic plan, which has helped us set records in profitability over the past three years. We are proud of our rapid digital transformation and bright prospects for long-term growth and value creation.’

– The Financial Times (paywall) reported that according to research, the proportion of first-time, female and minority ethnic candidates appointed as non-executive directors by the UK’s largest public companies dropped sharply last year. Boards prioritized candidates with experience running public companies as they contended with destabilizing events such as the Russia-Ukraine war and high inflation, according to Spencer Stuart. Thirty-one percent of newly appointed non-executives in the 12 months to April 30 were first-time directors, down from 44 percent a year earlier.

Ethnic minority candidates accounted for 15 percent of non-executive board appointments, the lowest proportion since 2020. That figure was 27 percent last year as companies moved to meet an official target to have at least one ethnic minority board member. The proportion of non-executive vacancies filled by women fell to 51 percent from 60 percent a year earlier, according to Spencer Stuart. Women now hold 40 percent of all board roles at the 150 largest listed companies, a slight increase from a year earlier.

– Activist investment firm Engaged Capital has taken a stake in VF Corporation, owner of the brands Vans and The North Face, and is pressing for changes to the board and cost cutting, according to CNBC. Engaged is pushing for several sweeping changes, namely upwards of $300 mn in cost reductions through ‘elimination of duplicative costs and corporate excess’.

It also wants the company to commit to holding off on acquisitions. But the firm is supportive of current CEO Bracken Darrell, who took the position in July. ‘Mr Darrell appears to have the transformation experience VF urgently requires,’ Engaged said.

VF Corp said it is aware of Engaged’s comments and investment. ‘VF has globally recognized and iconic brands and best-in-class talent. VF’s board and leadership team, including our recently appointed CEO Bracken Darrell, are taking immediate and decisive actions to strengthen the company’s position and return VF to strong, sustainable and profitable growth in the interests of all our shareholders,’ the company said.

– According to The Wall Street Journal (paywall), the Commodity Futures Trading Commission’s (CFTC) enforcement unit said it plans to push for heavier fines and will increasingly eschew settlements that allow firms to avoid admitting fault. The CFTC will clamp down in particular on repeat offenders, it said in a memo to enforcement staff. Recidivist firms can expect to see monitors put in place to oversee compliance as part of their settlements, it added. The use of what are known as no-admit, no-deny settlements will also be curbed, the CFTC added. The moves are intended to deter misconduct by making it more costly for firms that violate the law.

‘At the end of the day, the penalties need to exceed the costs of compliance,’ said CFTC enforcement head Ian McGinley. ‘We want to send a message that firms should be investing in compliance.’ McGinley said in the most recent fiscal year the agency filed 96 enforcement actions and secured orders requiring targets to pay a combined $4.3 bn.

– A $9.5 tn investor group that includes Allianz, Legal & General and CalPERS reported a slight decline in greenhouse gas (GHG) emissions enabled by its members’ lending and investment activities, the first time it has disclosed a figure, Bloomberg (paywall) reported. The Net-Zero Asset Owner Alliance (NZAOA) said total absolute financed GHG emissions for its 86 members fell 3.5 percent to 213.4 mn tons of carbon dioxide equivalent in 2022 from 221.2 mn tons a year earlier. Although the decrease is small – 7.8 mn tons is equivalent to taking 1.7 mn cars off the road for a year – the result ‘makes us believe our approach works,’ said NZAOA chair Günther Thallinger. ‘Real-world emissions reduction isn’t only possible – it’s happening.’

The decline was mainly the result of pension funds and insurance companies persuading companies to develop transition plans and lower their carbon footprints, Thallinger said. Another factor was asset owners prioritizing their allocations to the least carbon-intensive companies that operate in heavy-polluting industries. Divestment of companies had the smallest impact, and the most progress was recorded by firms that joined NZAOA in the early years of the alliance.

– According to Reuters, activist investor Carl Icahn sued the board of genetic testing company Illumina and accused it of breaching its fiduciary duties. The publicly available version of the complaint did not contain further details, but Icahn told an investor conference that the lawsuit pertained to Illumina completing its acquisition of cancer detection test maker Grail. Illumina said it is reviewing the complaint.

Icahn said on Wednesday that he has never found it necessary to sue a company's board of directors until now.

– According to the FT, an attempt by a cross-party group of 44 right-wing and liberal lawmakers to block the adoption of new EU sustainability reporting standards failed after it was rejected by more than half of the European Parliament. More than 50,000 companies – including multinational firms – will need to assess the impact of their operations on the environment in the EU, with the first wave starting in January. The resistance to backtracking on transparency and reporting on environmental issues comes amid pushback against ESG investing, particularly in the US but also in Europe.

The EU sustainability reporting standards are part of wider legal proposals designed to press companies to be more transparent when it comes to their climate impact. They set out the criteria companies should report on, such as pollution, water use and impact on local communities. The EU has set itself apart from jurisdictions such as the US by demanding that companies report on the impact of climate change and sustainability issues on their business and the impact their operations have on the environment, a concept known as double-materiality.

Reuters reported that a US appeals court upheld Nasdaq’s board diversity rule, which requires companies listed on the exchange to have women and minority directors on their boards or explain why they do not. The 5th US Circuit Court of Appeals rejected lawsuits filed by the National Center for Public Policy Research and the Alliance for Fair Board Recruitment, a group formed by conservative legal activist Edward Blum, that sought to block the rule.

The SEC acted within its authority in approving the rule and was allowed to consider the opinions of investors that said board diversity information was important to their investment decisions, the court said. ‘This evidence is sufficient to support the SEC’s determination that regardless of whether investors think board diversity is good or bad for companies, disclosure of information about board diversity would inform how investors behave in the market,’ the panel wrote.

A Nasdaq spokesperson said the exchange is pleased the court upheld the SEC’s approval of the rule that would ‘enhance board diversity disclosures through a market-led solution. We look forward to working with our companies in continuing to implement this listing standard for corporate governance.’

Blum called the ruling disappointing and said his group plans to appeal.

– The Organization for Economic Cooperation and Development’s (OECD) Working Group on Bribery in International Business Transactions said Brazil has made progress in battling foreign bribery schemes over the last nine years but still needs to make progress in successfully charging individuals, the WSJ reported. The watchdog in a report commended the Brazilian government for progress implementing new legislation against corporate bribery and taking enforcement actions against large-scale foreign bribery schemes since its last evaluation in 2014.

The Brazilian authorities have been particularly successful in using leniency agreements to resolve foreign bribery cases against companies without going to trial, according to the OECD. This legal mechanism gives a company a reduction in fines and gives it other benefits if it co-operates with government investigations and helps identify others involved in alleged misconduct.


Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...