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Mar 18, 2022

The week in GRC: SEC member Lee to step down after term ends and new law will require companies to report cyber-attacks

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

Reuters reported that Democratic SEC member Allison Herren Lee plans to leave the agency after her term ends in June, but will remain in office until a successor is named. ‘My term as commissioner expires in June of this year, and I have notified President Joe Biden that I intend to step down from the commission once my successor has been confirmed,’ Lee said.

Her departure will come as the agency tackles an agenda of rule changes that would affect public companies, brokers, Wall Street banks and investment funds. The SEC would still maintain a 2-1 Democratic majority as it continues to await a replacement for the empty Republican seat vacated by former commissioner Elad Roisman in January.

In January 2021 Lee began serving as acting chair of the agency until Gary Gensler was sworn in. ‘Allison Lee definitively raised the bar while serving as acting chair of the SEC,’ said Satyam Khanna, a sustainability consultant and former SEC policy adviser for climate and ESG. ‘She launched path-breaking ESG initiatives across the SEC, including issuing a request for public information on climate risk disclosure, directing the examination unit to enhance its focus on ESG and helping shine a light on how investors’ money is voted in corporate elections.’

– According to CNBC, Shell’s board is being sued for allegedly failing to prepare the oil and gas company for the transition away from fossil fuels. Environmental law firm ClientEarth, a Shell shareholder, said it had notified Shell of its claim against the company’s 13 executive and non-executive directors. It argues the board’s failure to implement a climate strategy that truly aligns with the landmark Paris Agreement is a breach of its duties under English law. The case is thought to mark the first ever attempt at holding a company’s board of directors personally liable ‘for failing to properly prepare for the net-zero transition.’

‘Shell is seriously exposed to the physical and transitional risks of climate change, yet its climate plan is fundamentally flawed,’ said Paul Benson, a ClientEarth lawyer, in a statement. ‘The longer the board delays, the more likely it is that the company will have to execute an abrupt ‘handbrake turn’ to retain commercial competitiveness and meet the challenges of inevitable regulatory developments.’

In response to the legal action, Shell said it was delivering on its global strategy that supported the Paris climate accord. This includes plans to transform its business ‘to provide more low-carbon energy for customers,’ the company said.

‘Addressing a challenge as big as climate change requires action from all quarters. The energy supply challenges we are seeing underscore the need for effective, government-led policies to address critical needs such as energy security while decarbonizing our energy system,’ a spokesperson for Shell said. ‘These challenges cannot be solved by litigation.’

The Wall Street Journal (paywall) reported that Kevin Johnson is stepping down as CEO of Starbucks, with leadership of the coffee chain returning to former longtime CEO Howard Schultz. Starbucks said Johnson, who has led the company for the past five years, will step down as CEO and board director as of April 4. He will continue in an advisory role to the company and its board through September. Schultz, who preceded Johnson, will serve as interim CEO, Starbucks said.

Johnson first signaled to company directors around a year ago that he was thinking about retiring and hoped to do so when the pandemic wound down, Starbucks board chair Mellody Hobson said. His decision to leave was his own, not the result of any board or outside push, she added. Starbucks said it hopes to pick a new CEO by the fall.

– According to Reuters, the UK government-backed Parker Review Committee, which was set up to improve the diversity of boards, said most of the UK’s top companies now have at least one ethnic minority board member.

‘Our December 2021 target of every FTSE 100 company having at least one board director from a minority ethnic background has very nearly been met,’ said John Parker, chair of the Parker Review Committee. ‘We have also secured commitments from many of the outstanding companies, which means it is likely that around 97 percent of current FTSE 100 companies will comply with the target by the middle of the year.’

Last year, the number of FTSE 100 companies to meet the voluntary target rose to 89 from 74, and a further five had done so by March 2022. Three have committed to do so and are in the advanced stages of recruiting.

– US banks are being careful over sanctions against Russia, making sure to comply with a growing list of requirements while ensuring lawful payments flow there and to Ukraine, according to the WSJ. Financial institutions have spent years beefing up control systems and adding compliance resources as sanctions have become an increasingly important tool of US foreign policy. But the pace, volume and varying requirements of sanctions and other restrictions imposed after Russia’s invasion of Ukraine create complex challenges for firms.

Daniel Gutierrez, co-chair of the legal and regulatory affairs committee at the Financial & International Business Association, said the challenges range from validating names of individuals or entities and understanding executive orders and general licenses allowing certain activities to working with complicated correspondent banking relationships.

– President Biden signed into law a requirement for key businesses to report to the government when they have been hacked, the WSJ reported. The idea, which has been long delayed due to industry pushback, could correct a fundamental problem the US government faces as it fights cyber-criminals: no one knows how many companies are attacked. But the language of the law leaves unclear what it will require from security teams at businesses and federal civilian agencies, as well as which companies will be affected.

– According to Reuters, activist investment firm Jana Partners urged Zendesk shareholders to vote its four nominees to the company’s board at the software firm’s AGM. Jana, which launched the proxy contest a week before Zendesk shareholders voted against the acquisition of SurveyMonkey parent Momentive Global, nominated four directors to the board, saying the company must be rehabilitated after the deal attempt.

– The WSJ reported that the Financial Crimes Enforcement Network (FinCEN) sent an alert advising financial institutions on how Russian elites who are under sanctions might try to evade those measures, pointing out red flags that could help identify possibly suspicious transactions by them or their families. The US Department of the Treasury launched the Kleptocracy Asset Recovery Rewards Program, which offers rewards of up to $5 mn for information that would lead to the government obtaining or repatriating stolen assets in the accounts of a US financial institution.

One means FinCEN suggested Russian elites may use to evade sanctions is through the purchase of commercial or luxury real estate. It said transactions made in the name of a foreign legal entity could be a red flag, particularly if the deal was far above the fair market value or all in cash.

Reuters reported that the US House of Representatives approved a bill that would prohibit companies from enforcing increasingly common agreements that require workers and consumers to bypass courts and bring legal disputes in private arbitration. The Democrat-led House voted to pass the Forced Arbitration Injustice Repeal (Fair) Act over the objections of Republicans and business groups that say it will deprive workers, consumers and companies of a faster and cheaper alternative to court.

President Biden signed a bill into law earlier this month that prohibits mandatory arbitration of sexual harassment claims. That bill had widespread bipartisan support in Congress, but the broader Fair Act – which would apply to any type of workplace or consumer dispute – has no Republican sponsors and a companion bill has not gained traction in the evenly divided Senate.