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Jan 26, 2024

The week in GRC: ExxonMobil goes to court to stop shareholder climate proposals and US appeals courts form panels on AI use

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

CNBC reported that ExxonMobil filed a lawsuit against US and Dutch activist investors in an effort to stop them from submitting climate shareholder proposals during the company’s AGM. The complaint was filed in the US District Court for the Northern District of Texas against Arjuna Capital and Follow This. A growing number of environmental and social shareholder proposals have been voted on in recent proxy seasons. The SEC usually decides whether companies are allowed to exclude proposals.

In a statement, ExxonMobil said: ‘The breakdown of the shareholder proposal process, one that allows proponents to advance their agendas through a flood of proposals, does not serve the interests of investors. We are simply asking the court to apply the SEC’s proxy rules as written to stop this abuse and eliminate the significant resources required to address them.’

‘With this remarkable step, ExxonMobil clearly wants to prevent shareholders using their rights,’ said Follow This founder Mark van Baal in a statement. ‘Apparently, the board fears shareholders will vote in favor of emissions reductions targets.’

Follow This said it and Arjuna Capital filed a proposal for ExxonMobil’s upcoming AGM in compliance with their shareholder rights and SEC regulations.

‘Investors face economy-wide risks from climate change,’ Natasha Lamb, co-founder and chief investment officer at Arjuna Capital, said in a statement. ‘We have a fundamental right and duty to voice concern over climate risk, its impacts on the global economy and shareholder value.’

– According to The Wall Street Journal (paywall), the bipartisan leaders of a congressional committee have urged the Biden administration to do more to clamp down on the import of goods linked to Chinese forced labor, including by potentially bringing criminal prosecutions and closing a trade loophole. The administration should do more to enforce the Uyghur Forced Labor Prevention Act, the leaders of the House Select Committee on the Chinese Communist Party said in a letter sent to Homeland Security Secretary Alejandro Mayorkas and Attorney General Merrick Garland.

A spokeswoman for the Department of Homeland Security said the department responds to congressional correspondence through official channels and will continue to respond appropriately to congressional oversight. A representative for Garland did not respond to a request for comment.

– Andy Griffiths, executive director of the Investor Forum, a UK industry group for asset managers, insurers and pension groups, said he hoped expanding the organization to involve listed companies would allow it to replicate the success of the Takeover Panel in resolving tensions in London’s stock market, according to the Financial Times (paywall).

Griffiths said the move was designed to help repair the ‘fractious’ relationship between UK boards and institutional investors. Many directors have become frustrated at major investors’ reluctance to approve larger executive pay packages and what they see as a box-ticking approach to voting at AGMs, partly a result of the rise in passive investment.

Unlike the Takeover Panel, the forum would be aimed primarily at facilitating debate rather than imposing new codes or rules, Griffiths said. The Financial Reporting Council is also set to look at the relationship between investors and companies in a review of its stewardship code.

The Guardian reported that Shawn Fain, president of the United Auto Workers (UAW), reaffirmed plans to lead a general strike in the US in 2028. Speaking to union members at the UAW national political conference in Washington, DC, Fain said it was time for union members to come together.

‘We have to pay for our sins of the past,’ Fain said. ‘Back in 1980 when [Ronald] Reagan fired [Professional Air Traffic Controllers Organization] workers, everybody in this country should have stood up and walked the hell out. We missed the opportunity then, but we’re not going to miss it in 2028. That’s the plan. We want a general strike. We want everybody walking out just like they do in other countries.’

He confirmed plans to organize a general strike for May 1, 2028, coinciding with International Solidarity Day or May Day.

CNBC reported that according to government data, although unions attracted headlines last year, they didn’t attract higher membership rates. The US Bureau of Labor Statistics said 10 percent of hourly and salaried workers were members of unions in 2023, or around 14.4 mn people. That is an all-time low, down from 10.1 percent of workers in 2022.

The number of unionized workers in the private sector increased by 191,000 to 7.4 mn last year. That includes workers at auto companies, Las Vegas hotels and Hollywood studios, all of whom went through high-profile contract negotiations in 2023. But the percentage of unionized workers in the private sector – 6 percent – remained unchanged from the previous year, as unionization rates didn’t keep pace with overall hiring.

– According to Reuters (paywall), plaintiffs are increasingly focusing securities litigation claims on risk-factor disclosures in SEC filings. Following some recent decisions from the 9th US Circuit Court of Appeals, those who prepare risk-factor disclosures should pay special attention to updating cautionary language to make sure disclosures do not describe risks in hypothetical terms when the risks are alleged to have been occurring or to have occurred at the time.

– The SEC adopted new rules and rule amendments, it said, in order to ‘enhance disclosures and provide additional investor protection in [IPOs] by special purpose acquisition companies (Spacs) and in subsequent business combination transactions between Spacs and target companies.’

The new rules and amendments require, among other things, improved disclosures about conflicts of interest, Spac sponsor compensation, dilution and other information that is important to investors in Spac IPOs and de-Spac transactions. The rules more closely align the required disclosures and legal liabilities that may be incurred in de-Spac transactions with those in traditional IPOs.

Reuters reported that IKEA said it aims to cut emissions by 50 percent by its 2030 financial year, an increase from its previous target of 15 percent, which it already exceeded in 2023. Inter IKEA, which manufactures IKEA products and is franchisor to IKEA store owners, plans to reduce absolute greenhouse gas emissions across the value chain. The company cut its emissions by 12 percent in the latest financial year as more of its manufacturing facilities used fully renewable energy.

‘It’s still going to be challenging and a lot of hard work, but there is at least a realism in the goal of 50 percent,’ said Pär Stenmark, chief sustainability officer at Inter IKEA. The company aims to reach net-zero emissions by 2050, without using carbon offsets.

– According to the WSJ, the SEC is asking some community and regional banks about their exposure to commercial real estate in their loan portfolios, as potential losses on the loans could lead them to further cut lending. Banks are increasingly facing scrutiny around the effects of the commercial real estate credit crunch, which threatens to trigger failure for banks that are highly concentrated in property debt.

CNBC reported that according to outplacement firm Challenger Gray & Christmas, US companies in 2023 announced 55 percent more CEO changes than the year before. The 1,914 departures in 2023 set a record since the firm started tracking the data in 2002. The firm tracks US public, private, government and non-profit companies that have CEO positions.

‘There was a lot of reticence among CEOs to leave their organization in the middle of the Covid crisis,’ said Andy Challenger, senior vice president at Challenger Gray & Christmas. ‘Covid rocked retail in a really significant way. Boards didn’t want to make changes, CEOs didn’t want to leave. And now as that storm has passed, I think there’s been this pent-up demand for people to leave.’

Challenger said the pandemic accelerated changes in consumer preferences, which has forced boards to look for new strategies and forced leaders to adapt.

– Two federal appeals courts are forming committees to examine how AI will affect the courts, Reuters reported. US Circuit Judge Eric Miller will chair an AI-focused committee for the San Francisco-based 9th Circuit Court of Appeals, which has yet to develop rules governing the use of the technology by lawyers. The Philadelphia-based 3rd US Circuit Court of Appeals’ chief judge, Michael Chagares, has also established an AI committee.

The decisions to form AI-focused committees comes as judges nationally are grappling with the rapid rise of generative AI programs and how to regulate their use in court proceedings. Chief US Supreme Court Justice John Roberts devoted his annual report to the potential benefits of AI while saying its use requires ‘caution and humility’. He noted publicized incidents of AI ‘hallucination’ in which lawyers using AI programs submitted briefs with citations to non-existent cases.