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Mar 22, 2024

The week in GRC: More companies voluntarily disclosing misconduct to DoJ and court temporarily halts SEC climate rules

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

The Wall Street Journal (paywall) reported that the Fifth US Circuit Court of Appeals temporarily halted new SEC rules requiring public companies to disclose climate-related risks. The court granted a request for an administrative stay on the rules just over a week after Liberty Energy and Nomad Proppant Services filed a lawsuit challenging them. The court didn’t explain the reasoning behind the order.

Shortly after the SEC ruling on March 6, a coalition of 10 states, including Georgia, West Virginia and Alaska, filed a legal challenge. The US Chamber of Commerce has said it has also filed a suit seeking to halt implementation of the rules. The SEC on Monday declined to comment. At the time of the rules being approved, an SEC spokesperson said the agency would ‘vigorously defend’ them in court.

‘These rules will enhance the disclosures investors have been relying on to make their investment decisions,’ said SEC chair Gary Gensler when the rules were approved. He added that they would give investors consistent and reliable disclosures about climate risks.

– According to Bloomberg (paywall), Glass Lewis recommended that investors in The Walt Disney Company back the company’s management in its battle with activists. In a proxy paper published on Monday, Glass Lewis said investors should vote through Disney’s slate of directors at the company’s AGM on April 3. It also recommended they withhold votes for board nominees being put forward by activist investors Trian Fund Management and Blackwells Capital.

‘We believe investors would be best served endorsing the incumbent directors at this time,’ Glass Lewis wrote, saying it’s unconvinced that the alternate proposals will ‘represent a superior change relative to Disney’s current composition’. Trian and Blackwells are separately pressing for changes to management and strategy at Disney in an effort to improve performance.

Representatives for Blackwells and Trian declined to comment.

– Filmmaker George Lucas also gave his backing to Disney CEO Bob Iger in the proxy battle between the company and activist investor Nelson Peltz, CNBC reported. Disney has lined up high-profile endorsements in its battle against Peltz and his firm, Trian Fund Management, from the heirs of Walt and Roy Disney to JPMorgan Chase CEO Jamie Dimon.

The Guardian reported that Volkswagen workers in Chattanooga, Tennessee filed a petition to join the United Auto Workers (UAW) after a supermajority of workers at the plant signed union authorization cards. It is the first union election filing for the body since it launched a campaign aimed at organizing 150,000 workers at non-unionized auto plants in the US in the wake of securing historic gains in their contracts at the big three US automakers – Ford, General Motors and Stellantis – last year.

‘Today, we are one step closer to making a good job at Volkswagen into a great career,’ said Isaac Meadows, a production team member in assembly at the Volkswagen plant in a press release on the union election filing. The Chattanooga plant is the only Volkswagen plant globally without union representation, according to the UAW.

Reuters (paywall) reported that the US Department of Justice’s (DoJ) top prosecutor in San Francisco is targeting AI and other tech start-ups that defraud investors before they go public. Ismail Ramsey, who became US attorney for the Northern District of California a year ago, said his office is uniquely positioned to crack down on tech start-ups that mislead investors on the path to IPOs given his proximity to Silicon Valley venture and angel investors.

‘These ‘fake it till you make it’ pre-IPO frauds erode the integrity of public and private financial markets,’ Ramsey said. Entrepreneurs may be tempted to mislead investors about key information, including customer reach, revenue base and product readiness, to generate interest in a prospective offering, he added.

The evidence needed for prosecutors to pursue such cases can be harder to unearth, as the private companies involved are not required to publish disclosures. AI will be a key focus, Ramsey said: ‘As with any such emerging technologies, AI is fertile ground for fraudsters to make false and exaggerated claims.’

CNBC reported that, according to a Payscale survey, 60 percent of companies now share pay ranges in job ads. That share is up by 15 percent from the previous year and includes 21 percent of employers that say they list salaries because it’s required by law and another 39 percent that do so regardless of any local or state-wide legislation. Ten states have passed pay range transparency laws: California, Colorado, Connecticut, Hawaii, Illinois, Massachusetts, New York, Nevada, Rhode Island and Washington. Other towns and municipalities, including Washington, DC, Cincinnati, Ohio and Toledo, Ohio also have salary range laws.

But 13 percent of companies say they’re actively resisting pay transparency, up slightly from the previous year. Businesses say they don’t want to follow new laws because putting systems in place to standardize and publicize their pay structure is too expensive or because they don’t want competitors to know how much they pay, said Lulu Seikaly, senior employment counsel at Payscale.

– According to Reuters, Chipotle Mexican Grill said its board had approved a 50-for-1 split of its common stock. The company said the stock split was subject to shareholder approval at its AGM on June 6. If approved, shareholders of record as of June 18 will get 49 additional shares for each share held. The shares are expected to begin trading on a post-split basis on June 26 in what the company said would be one of the biggest stock splits in NYSE history. Chipotle Mexican Grill shares closed at a record high of $2,797.56 on Tuesday, having risen more than 70 percent over the last 12 months.

– The DoJ and 17 states sued Apple, alleging the company prevented software developers and mobile gaming firms from offering better options on the iPhone, resulting in higher prices for consumers, the WSJ reported. The government’s antitrust complaint alleges that Apple used its control of the iPhone to prevent competitors from offering innovative services such as digital wallets and limited the functionality of hardware products that compete with Apple’s own devices. The suit also claims Apple makes it difficult for users to switch to devices that don’t use its operating system.

‘Consumers should not have to pay higher prices because companies violate the antitrust laws,’ said Attorney General Merrick Garland in a statement.

Apple said it plans to vigorously defend against the lawsuit. ‘This lawsuit threatens who we are and the principles that set Apple products apart in fiercely competitive markets,’ an Apple spokesperson said in a statement. ‘If successful, it would hinder our ability to create the kind of technology people expect from Apple – where hardware, software and services intersect.’

CNBC reported that Shake Shack named Rob Lynch, the current president and CEO of Papa John’s, as the first outsider to lead the company in its 20-year history. Lynch will join Shake Shack’s board and become its CEO on May 20. He will succeed Randy Garutti, who started what would become Shake Shack from a hot dog cart in New York’s Madison Square Park in 2001. At the time, Garutti was director of operations for restauranteur Danny Meyer. Shake Shack was founded in 2004 and held an IPO in 2015. Garutti will remain with the company through the end of this year to ensure a smooth transition.

– According to the WSJ, Senator Elizabeth Warren, D-Massachusetts, renewed calls for the SEC to investigate whether Tesla ran afoul of regulations governing board independence at public companies. Warren, in a letter sent this week, also expressed concern about potential conflicts of interest between Tesla and the private companies Elon Musk runs, including X. She asked the SEC to examine whether the carmaker’s board had been transparent with investors about any associated risks.

‘New evidence has emerged in recent months [deepening] my concerns that Tesla’s board lacks independence from Mr Musk, who uses his control over the board for his personal benefits, rather than in the best interest of Tesla’s shareholders,’ Warren wrote.

An SEC spokesperson said agency chair Gary Gensler would respond to members of Congress directly and that the SEC doesn’t comment on the existence or non-existence of a possible investigation. Tesla and Musk did not respond to requests for comment.

– Acting Assistant Attorney General Nicole Argentieri said more companies are choosing to voluntarily disclose misconduct to prosecutors after a policy revision last year that increased the potential benefits of doing so, the WSJ reported.

The DoJ has also started to receive disclosures on a wider range of potential criminal activity than previously reported, including securities and healthcare fraud, Argentieri said. In 2023, the department received twice as many disclosures as it did in 2021, she added. In some cases, the department has rewarded companies that voluntarily confess to wrongdoing by agreeing not to prosecute them, what prosecutors call a declination.

‘When you see these declinations… they are just a fraction of the self-reports we are getting,’ Argentieri said. ‘We are seeing a mix and I think that’s exciting and it’s showing that our policies are working.’


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...