Skip to main content
Dec 08, 2023

The week in GRC: SEC’s Gensler warns against ‘AI washing’ and New York may ban non-compete agreements

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

The Wall Street Journal (paywall) reported that the SEC and the FASB are taking a closer look at companies’ cash-flow statements, particularly how such disclosures may lag behind other financial statements in terms of usefulness for investors and the quality of the information. The cash-flow statement helps investors determine where a company is getting its money, how it is using it and whether it has enough runway to operate and even survive. The SEC is looking at how companies treat errors in these statements. In an unrelated move, the FASB is considering whether to require expanded disclosure on the cash-flow statement for financial institutions.

An SEC official recently advised companies to be more objective and thorough in determining whether the errors made in cash-flow information are material to investors. The agency has noticed that some companies ‘don’t dedicate the same level of rigor and attention’ to the cash-flow statement compared with other statements, Anita Doutt, a senior associate chief accountant at the SEC, has said.

– According to Reuters (paywall), activist investment firm Jana Partners is pressing Frontier Communications to begin a strategic review, including a possible sale of the company. Jana is urging Frontier’s board to ‘immediately’ start a comprehensive review process, according to a letter to the board seen by Reuters. Frontier’s board should evaluate a possible sale of the company, a strategic partnership or joint venture and selling off some non-core assets to speed up the company’s transition to a pure-play fiber provider, Jana said in the letter.

‘We wish for the board to pursue whatever option generates the greatest risk-adjusted return for shareholders,’ Barry Rosenstein and Scott Ostfeld, Jana’s two managing partners, wrote. ‘We believe a bona fide evaluation of strategic alternatives would lead the board to conclude that a sale transaction offers the best risk-adjusted outcome for shareholders.’

A Jana spokesperson declined to comment. A Frontier representative said the company received the letter and added, ‘Frontier engages in open and regular communications with shareholders. The board is committed to acting in the best interests of shareholders and remains willing to consider any strategic alternatives that may maximize shareholder value.’

– According to CNBC, activist investor Ancora urged Disney to put Nelson Peltz on its board, days after Peltz and his firm Trian launched a proxy fight with the entertainment company. ‘In an effort to avert an election contest following a year of distractions and disappointing performance, we hope you join us in encouraging the board to pursue a viable compromise with Trian Fund Management and Nelson Peltz,’ Ancora wrote in a letter. ‘Mr Peltz (or a qualified designee) would make a fantastic addition to Disney’s board.’

Ancora also suggested that much of Disney’s difficulties in recent years – including streaming losses and several box office flops – could be blamed on the company’s board. ‘A degree of shareholder-driven change is certainly warranted in Disney’s boardroom following an extended period of absent-minded governance, ineffective succession planning, polarizing actions and sustained value destruction,’ Ancora said. ‘While it has been argued that challenges largely stem from the tenure of Bob Chapek, the board was in the driver’s seat before, during and after that time.’

Disney did not immediately respond to a request for comment.

– Companies have long used employee non-disclosure agreements to protect proprietary information but regulators are now trying to ensure that clauses in those agreements don’t also inhibit whistleblowers from reporting potential corporate wrongdoing, according to the WSJ.

In recent months, the SEC has taken action against companies whose employment contracts have language that might deter employees from reporting misconduct to regulators. In response, some companies are looking at the confidentiality provisions and non-disparagement clauses in their employment contracts. They are particularly trying to determine whether the language might be seen as inhibiting whistleblower tips, say lawyers.

‘I think the commission’s action is having an impact, and I expect there will be more,’ said Stephen Kohn, a partner at law firm Kohn Kohn & Colapinto who represents whistleblowers.

– According to the WSJ, New York may soon ban non-compete agreements, possibly with an exemption for higher earners. New York Governor Kathy Hochul is considering whether to sign or veto a bill that would prohibit these agreements, which typically prevent workers from taking a new job or starting a business for a period after leaving an employer. The Democratic governor said recently she would like to see a compensation cap for such a ban, floating $250,000 as a level above which non-competes would be allowed. The bill as written would apply to almost all workers, regardless of compensation.

Hochul has said she plans to act on most legislation by the end of the year, but it is possible a decision on the bill could stretch until early February, officials said. If she signs the measure without a compensation limit, as the state legislature passed in June, New York will join four states, including California, with the most extensive bans in the US.

Reuters reported that activist investor Engine Capital sent a letter to the board of cancer therapy developer 2seventy bio calling for a board refresh and the appointment of its COO Chip Baird as CEO, among other changes. Engine Capital said the company should focus solely on its blood cancer therapy Abecma and explore ways to ‘immediately cease or monetize all development programs’. The investor also pressed for a shareholder representative to be added to the company’s board and asked for a special committee of independent directors to be established for communicating with the shareholders.

In response, 2seventy bio said its board had commenced a process to consider all options to maximize shareholder value and ensure that its important therapies become available to patients in need.

– SEC chair Gary Gensler warned companies against making false artificial intelligence (AI)-related claims – or ‘AI washing’ – likening it to the green-washing phenomenon that has been the target of an agency crackdown, the WSJ reported. Gensler said securities laws bar phony claims and require companies to give ‘full, fair and truthful’ disclosures. ‘Don’t do it,’ he said at a conference. ‘One shouldn’t green-wash and one shouldn’t AI wash.’

The explosive growth in the number and sophistication of AI applications has led to concerns that marketing claims might not align with what companies are delivering. The Federal Trade Commission in February warned companies across the economy that it would be on the lookout for false AI claims in advertising, from exaggerations of AI-powered products’ capabilities to fabrications that a product incorporates AI technology.

Reuters reported that, according to a new report, major law firms plan to grow their bankruptcy and litigation teams in 2024 and will face challenges such as attracting lawyer talent and navigating the spread of generative AI. But legal industry analysts in the client advisory from Citigroup’s Citi Global Wealth at Work law firm and Hildebrandt Consulting predicted a stronger year for law firms in 2024 than in 2023, when revenue and profit growth have been modest. Firms saw revenues grow 4.8 percent on average and client demand decline 0.7 percent in the first nine months of 2023, Citi found. The time it takes firms to collect client bills grew by 5 percent and average lawyer billing rates increased by 8.2 percent, the report added.

– According to the WSJ, OpenAI’s unusual business structure that gave oversight of its for-profit business to a non-profit board will be an issue for its new board to tackle. One suggested solution would be to dissolve the non-profit, say corporate and non-profit directors, academics and lawyers. These people say sorting out that potential conflict of interest will address other governance issues, such as the board’s reporting hierarchy and the differing objectives between a non-profit mission and corporate profit motive.

Board chair Bret Taylor has said the first order of business is to stabilize the organization. Asked whether the board could revisit OpenAI’s structure, Taylor said: ‘I think it’s a great question – probably not one for my first day on the job.’

OpenAI declined to comment on the company’s structure.


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...