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Feb 09, 2024

The week in GRC: Business groups urge companies to back diversity initiatives and Senate bill seeks to stop SEC’s proposed AI rule

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

The Wall Street Journal (paywall) reported that US companies’ diversity initiatives are here to stay but are being adapted in response to lawsuits and outside scrutiny. Companies are trying to develop programs that promote inclusion without running afoul of the law and potentially bringing costly consequences, according to lawyers and corporate advisers. That means some are abandoning practices such as numerical targets that can be seen as ‘quotas’ or the use of unconscious bias training that casts blame.

Legal pressure has been mounting following last year’s US Supreme Court decision to strike down affirmative action in college admissions. Johnny Taylor, an employment lawyer who heads the Society for Human Resource Management, said some business leaders he has spoken to have begun wholesale reviews of their organizations’ diversity, equity and inclusion (DE&I) policies. Any policy shifts tend to be undertaken quietly because companies don’t want to give plaintiffs’ lawyers a potential angle to sue by implicitly conceding a past policy might have been illegal, he said.

CNBC reported that two Republican senators introduced a bill to kill a proposed SEC rule on the use of AI in finance before it can be finalized. The draft rule unveiled last July would require financial services firms to identify and eliminate conflicts of interest that emerge from their use of AI tools, and to ensure they are prioritizing their clients’ interests over their own bottom line. The Protecting Innovation in Investment Act was introduced by Ted Cruz, R-Texas, and Bill Hagerty, R-Tennessee. It would bar the SEC from moving forward in finalizing the rule.

SEC chair Gary Gensler has warned of the danger of letting AI tools make incorrect assumptions about investors and exercise a bias toward a firm’s own products. More than 20 Republican lawmakers in the House and Senate sent Gensler a letter last fall, calling on the SEC to withdraw the rule. They argued that compliance would be so expensive it would essentially prevent firms from adopting any new technology, not just AI. ‘American consumers will ultimately bear the cost of yet another SEC attempt to overregulate financial markets,’ said Hagerty in a statement.

– According to Reuters (paywall), a three-judge panel of the 11th US Circuit Court of Appeals refused to dismiss a Georgia doctor’s lawsuit claiming that Bayer’s Roundup weedkiller caused cancer, as the company tries to fend off thousands of similar cases carrying potentially billions of dollars in liability. The panel rejected Bayer’s argument that federal regulators’ approval of Roundup shielded the company from being sued under state law for failing to warn consumers of the product’s risks. Several other appeals courts had previously reached the same conclusion in similar lawsuits.

Bayer said in a statement that it disagreed with the ruling and that it ‘continues to stand fully behind its Roundup products’, which it maintains are safe. Some investors have been pushing the company to change its strategy on the litigation by seeking settlements or breaking up its business. The company has so far backed its strategy of continuing to fight Roundup cases in court, saying it believes it can win key victories on appeal.

– A bipartisan group of US senators is calling for the Financial Crimes Enforcement Network (FinCEN) to explain its delay in fully implementing a whistleblower award program for reporting possible money-laundering and sanctions violations, the WSJ reported. Senators Chuck Grassley, R-Iowa, Elizabeth Warren, D-Massachusetts and Raphael Warnock, D-Georgia said in a letter to FinCEN that they were concerned about its lack of progress in implementing the program, three years after the bill mandating it was enacted. The program has struggled to get going because its legislation provided an up to 30 percent cut of monetary penalties for a whistleblower but listed no minimum. The omnibus spending bill for 2023 changed that and added sanctions evasion to violations that can be reported to the FinCEN program.

A spokesperson for FinCEN declined to comment on the letter but said in an email that ‘FinCEN is fully committed to successful implementation of our expanded mandate… to include the whistleblower program.’

– According to Reuters, activist investor Blackwells Capital has urged The Walt Disney Company to elect its three board candidates, arguing they would help deliver growth, review real estate holdings and bring technology expertise. The Blackwells nominees could help Disney ‘explore all strategic possibilities with cold eyes’, including a potential separation of the company into three entities that could eventually become stand-alone public companies, the activist also said in a letter to shareholders. Blackwells said it supports Disney CEO Bob Iger and the changes he is making but that even Iger ‘requires oversight and accountability’.

At its April 3 AGM, Disney shareholders will, under new rules, have the option of choosing from the company’s 12 nominees, Blackwells’ nominees and two put forward by Nelson Peltz’s Trian Fund Management. Disney has urged shareholders to re-elect its directors and not vote for the Trian or Blackwells candidates.

A Disney representative was not immediately available to comment on Blackwells’ letter.

– According to the WSJ, minority, veteran and women-focused business advocacy groups are pressing companies to invest in diversity initiatives that are under legal attack and face opposition from Pershing Square CEO Bill Ackman and Tesla CEO Elon Musk. The coalition, which includes the US Black Chambers, National Urban League, National LGBT Chamber of Commerce and National Veteran-Owned Business Association, said investments in diversity initiatives were essential to business success and the US economy.

‘We believe it is imperative that CEOs and other company leaders are able to make strategic decisions for their companies without threats of frivolous lawsuits and political pressure, and we will be here with support, every step of the way,’ the coalition said in a letter published Wednesday.

Conservative activists’ success in challenging affirmative action in college admissions have given momentum to efforts to stop DE&I efforts at companies, arguing they are tantamount to race and sex discrimination. Ackman and Musk have also taken up the fight against DE&I initiatives.

Spokespeople for X, which Musk owns, and Pershing Square did not immediately return requests for comment.

Reuters reported that Hipgnosis Songs Fund’s shareholders backed a board proposal to pay a fee of up to £20 mn ($25 mn) to suitors in order to make bidding for its music assets more appealing in the light of a call option held by its investment adviser. At an extraordinary general meeting, 99.9 percent of shareholders of the fund, which holds the rights to the work of artists ranging from Shakira to Neil Young, voted for the special resolution.

– Nicolai Tangen, CEO of Norway’s $1.5 tn sovereign wealth fund Norges Bank Investment Management (NBIM), told the Financial Times (paywall) he was concerned about ExxonMobil’s action against Follow This and Arjuna Capital, which submitted a proposal calling on the company to set more ambitious emissions targets. Tangen said: ‘It’s a worrisome development. We think it’s very aggressive and we are concerned about the implications for shareholders’ rights.’

Follow This and Arjuna withdrew their proposal last week, but ExxonMobil has said it will proceed with the case, arguing they could return with similar motions in future years. The company has argued the proposal is in breach of rules prohibiting repeat motions that fail to win a minimum number of votes and preventing investors from ‘micromanaging’ businesses.

Carine Smith Ihenacho, NBIM’s chief governance and compliance officer, said: ‘We are concerned with anything that takes away shareholder rights… This is a shareholder proposal that is quite similar to shareholder proposals we have supported earlier.’

‘We share the same concerns about shareholder rights being preserved, which is why we want clarity on a process that has become ripe for abuse,’ ExxonMobil said.

Reuters reported that a Dutch pension fund has divested its holdings in Europe’s top oil and gas companies, saying they are not moving fast enough to cut emissions. PFZW, which managed roughly €238 bn ($256 bn) at the end of 2023, said it had sold its holdings in 310 oil and gas companies after a two-year engagement program. The companies include Shell, BP and TotalEnergies, which have set out plans to become net-zero carbon emitters by 2050 as well as various short and medium-term decarbonization targets.

‘During this period, dialogue with oil and gas companies was significantly intensified to encourage them to produce verifiable transition plans that support the goal of the Paris Climate Agreement,’ PFZW said. ‘Most of our fossil fuel investments have now been sold off, as these companies have made insufficient steps in the transition to a cleaner energy mix.’

In response, Shell said: ‘We appreciate societal perceptions in the Netherlands, but this decision has no benefit to the climate. It will not change actual use of energy and continues to portray an incorrect understanding of the needed changes to today’s energy system.’

TotalEnergies said in response: ‘We believe exclusions only transfer shareholding to other investors that might be less ambitious than PGGM and PFZW in terms of climate transition.’

BP said it ‘aims to transition from an international oil company to an integrated energy company, investing in today’s oil and gas system and building out tomorrow’s [system of] lower carbon and higher margin. We are confident in our strategy.’