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Jan 12, 2024

The week in GRC: SDNY launches whistleblower pilot program and Oregon pushes companies to stop thwarting shareholder activists

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

– The Financial Times (paywall) reported that according to a report by Lazard, companies faced a record number of attacks from activist investors in 2023. There were 252 new campaigns globally, the report found, a 7 percent increase on the previous year. Europe and Asia-Pacific saw record levels of activity, with the UK and Japan leading the charge. There were 69 campaigns launched in Europe, most of which had demands related to M&A, and 44 new campaigns in Asia-Pacific where local hedge fund firms were the most active participants.

‘Activism today has a very regional dynamic,’ said Rich Thomas, a managing director in Lazard’s capital markets advisory group. ‘Global campaigns are at an all-time high because [Asia-Pacific] and Europe have had a breakout year.’

Although activism has historically been dominated by hedge fund firms, the strategy is increasingly being deployed by other types of shareholders. More than 40 percent of activists launching campaigns last year did so for the first time, according to Lazard. Thomas said Europe in particular had seen a significant rise in the number of first-time activists, after many previously held back during the period of higher inflation.

– According to CNBC, EU officials indicated that Microsoft’s multibillion-dollar investment in AI firm OpenAI could face a merger investigation. The European Commission (EC) said it was embarking on a competition investigation looking at the markets for virtual worlds and generative AI. It also said it is ‘looking into some of the agreements that have been concluded between large digital market players and generative AI developers and providers’ and singled out the Microsoft-OpenAI tie-up as a deal it will be studying. ‘The European Commission is checking whether Microsoft’s investment in OpenAI might be reviewable under the EU Merger Regulation,’ the EC said in a statement.

Microsoft did not immediately respond to a request for comment.

The EC said it has sent requests for information to ‘several large digital players’ and is also seeking views from interested parties, which have until March 11 to submit responses.

– The FT reported that Oregon has demanded nine US companies stop efforts to undermine activist shareholders from pursuing proxy fights, becoming the first state to intervene in an intensifying legal tussle between boards and hedge fund firms. Ahead of the companies’ 2024 AGMs, Oregon’s state treasurer has asked that dissident investors’ board nominees not be ‘subjected to stricter standards than management nominees’ at companies where the state’s pension fund for public employees has a stake.

Hundreds of US-listed companies have updated their bylaws since the SEC simplified the process – by introducing the universal proxy card – for challenging incumbent directors in 2022. Some have added more onerous disclosure requirements and other qualifications for activists’ board nominees.

Philip Larrieu, head of stewardship at the Oregon State Treasury, said these changes had been made to ‘advance notice’ bylaws, under which shareholders must put forward board candidates months before shareholder meetings and provide detailed information about the nominees. Hedge fund firms and institutional investors believe companies use stricter advance notice requirements to thwart potential proxy fights.

The Wall Street Journal (paywall) noted that following a backlash against ESG, some business leaders are now making an effort to avoid using the acronym. On earnings calls, many CEOs now use new approaches and some companies are rebranding corporate reports and committees by removing ESG from their titles. Advisers are coaching executives on new ways to describe their efforts, proposing terms such as ‘responsible business’.

Many CEOs stress that they still follow sustainability commitments made years ago, even if they are no longer publicly talking about them as often. A December survey by the advisory firm Teneo found that about 8 percent of CEOs are ramping down their ESG programs while the rest are staying the course but often making changes to how they handle them.

‘We’ve seen a great deal of reframing and adjusting by CEOs in the ESG arena – not only of what they say, but also where they say it and how they characterize it,’ said Brad Karp, chair of law firm Paul Weiss. ‘Most companies are moving forward operationally with their ESG programs, but not publicly touting them, or describing them in different ways.’

Reuters (paywall) said that according to a new report, law firms will need to adjust staffing and billing approaches to succeed in what has become a buyer’s market for legal services. The 2024 Report on the State of the US Legal Market, from Georgetown Law’s Center on Ethics and the Legal Profession and the Thomson Reuters Institute, said lackluster demand for transactional work, continuing efforts by clients to reduce spending and the rise of AI will create challenges for law firms this year.

Overall average demand for legal services last year grew just 1.1 percent for the 179 US-based law firms surveyed, the report said, with midsize firms faring better than firms in the 100 top-grossing segment. Billing rates on paper increased 6 percent, the survey showed, but the amount firms charged clients declined, as did the proportion of billings that firms managed to collect.

– The US Department of Labor issued a final rule that will require companies to treat some workers as employees rather than less-expensive independent contractors, a change that business groups have criticized and will likely prompt legal challenges, CNBC reported. Most federal and state labor laws, such as those requiring a minimum wage and overtime pay, apply only to a company’s employees.

The rule will require that workers be considered employees rather than contractors when they are ‘economically dependent’ on a company. It does not go as far as wage laws in California and other states that place even greater limitations on independent contracting.

The new rule is set to take effect on March 11.

– The WSJ reported that FINRA has classified AI as an ‘emerging risk’ in its annual regulatory report, saying that using AI could affect almost all aspects of a broker-dealer’s operations. FINRA said firms looking to use such technology should focus on the regulatory implications, particularly in areas such as anti-money-laundering, public communications and cyber-security and in model risk management, including testing and data integrity and governance.

The financial industry’s use of AI, either in-house or through third parties, can provide efficiencies that help member firms better serve customers, Ornella Bergeron, a senior vice president in member supervision with FINRA’s risk monitoring program, said in a podcast accompanying the report. But the use of AI comes with concerns over accuracy, privacy and bias, she added.

Reuters reported that, according to new data from Barclays, ‘sell’ or ‘split’ were the favorite words for activist investors globally last year when their demands for companies to pursue some form of M&A activity hit a new record, appearing in roughly half of their 2023 campaigns, even as M&A activity declined. Hedge fund firms Elliott Investment Management, ValueAct Capital, Jana Partners and others urged target companies to merge, split off units or sell themselves, with these demands showing up in 49 percent of all campaigns last year. In the previous four years, M&A requests averaged 42 percent.

‘The activists told corporations that this is the new reality and it is time to move on,’ said Jim Rossman, global head of shareholder advisory at Barclays.

But their requests came during a year when takeover activity dropped to its lowest level in a decade, according to Dealogic data, leaving many with little to show for their calls. Aside from M&A, activists also asked for board changes, changes in strategy or operations and improved governance.

– Thunderstorms in 2023 caused $76 bn in losses in North America and Europe, a record for such weather events, which have in recent years begun to rival hurricanes in terms of the damage they collectively mete out to businesses and homes, the WSJ said. In the US, two thunderstorm series combined caused $17 bn in losses, contributing to the highest level of total thunderstorm losses the country has seen, Munich Re said.

Although insurers classify thunderstorms as ‘secondary perils’, behind primary perils such as hurricanes and earthquakes, their volume in 2023 led to cumulative losses that exceeded those caused by a season of hurricanes. In the latest episode of Governance Intelligence’s Governance Matters podcast we talk to Alexandra Higgins, managing director with Okapi Partners, about companies’ plans to transition – or adapt – in the face of growing physical threats from climate change.

Reuters reported that new figures show more women than men were employed as associates at US law firms in 2023. Survey data from the National Association for Law Placement (NALP) showed that 50.3 percent of US associates were women last year – the first time that women outnumbered men. Women comprised slightly more than 38 percent of law firm associates when NALP first began tracking diversity data in 1991, according to the organization’s executive director Nikia Gray.

‘It took another 32 years for women to achieve equal, and just slightly greater, representation among associates,’ Gray said. ‘Real change is slow, hard and imperceptible, but it does happen.’

Women’s representation among law firm partners has also increased, albeit more slowly. They were 27.76 percent of all partners in 2023, and their 1.1 percentage-point gain is the largest NALP has ever recorded year over year. That means the percentage of female associates is nearly double that of female partners, a gap experts have attributed to bias, a lack of inclusion and mentorship at firms, uneven caregiving demands and other factors.

Reuters reported that activist investor Land & Buildings Investment Management has nominated three director candidates at senior housing communities company Ventas, arguing that change is needed to improve performance. Jonathan Litt, Land & Buildings’ founder and chief investment officer, warned Ventas last year that he might launch a board challenge but also said he was willing to work constructively with the company.

Ventas said in a statement that it will evaluate Land & Buildings’ director candidates, ‘recognizes the importance of ongoing refreshment and has an effective and comprehensive director succession and search process in place.’ The company also said: ‘Shareholders today benefit from a strong, diverse and experienced board composed of 11 highly qualified directors, 10 of whom are independent.’

– The WSJ reported that the US Attorney’s Office for the Southern District of New York (SDNY), known for handling high-profile white-collar criminal cases, has launched a pilot program seeking to offer an incentive to individuals to report to and co-operate with authorities in the prosecution of criminal conduct. Under the SDNY whistleblower pilot program, individual participants in non-violent offenses can avoid being prosecuted if they voluntarily provide information on criminal conduct that prosecutors weren’t yet aware of and co-operate to prosecute others involved in the conduct.

The program focuses specifically on criminal misconduct undertaken by companies and financial institutions in addition to investment fund fraud, bribery by public officials and fraud related to federal, state or local funds.

‘We encourage people who qualify for the [program] to take advantage of the opportunity to come clean, co-operate and get on the right side of the law,’ said Damian Williams, the US Attorney for the SDNY. ‘Our message to the world remains: call us before we call you.’

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...