Eagle-eyed members may have noticed that we recently added an “Artificial Intelligence” Practice Area to the site. Shortly afterwards, Debevoise published this 5-page memo – which does a great job of explaining why you’ll need to get your arms around AI if you’re advising boards. Here’s the intro:
As more businesses adopt artificial intelligence (AI), directors on many corporate boards are starting to consider their oversight obligations. Part of this interest is related to directors’ increasing focus on Environmental, Social and Governance (ESG) issues. There is a growing recognition that, for all its promise, AI can present serious risks to society, including invasion of privacy, carbon emissions and perpetuation of discrimination. But there is also a more traditional basis for the recent interest of corporate directors in AI: as algorithmic decision-making becomes part of many core business functions, it creates the kind of enterprise risks to which boards need to pay attention.
The memo goes on to outline current regulatory considerations and how Caremark claims could play out in this area. Especially at companies where use of AI is significant and could present an enterprise risk, the Debevoise team suggests that boards consider:
1. Having AI as a periodic board agenda item – and evaluate whether it’s a topic for the full board or a specific committee
2. Staying aware of the most critical AI systems the company employs – along with risks & steps taken to mitigate risks
3. Getting periodic updates on resources devoted to AI development & operations, along with regulatory compliance and risk mitigation
4. Assigning AI responsibility to a particular management position or committee
5. Directing management-level AI compliance and reporting structures to facilitate board oversight – including procedures for responding to material incidents, whistleblower complaints, and managing vendor risks for critical resources
6. Board briefings on material AI incidents
7. Documenting AI oversight activities and management’s compliance efforts in board minutes and supporting materials
Our new Practice Area covers regulatory developments and guidance on board oversight and AI risks. To get access if you’re not already a member, you can sign up online, email sales@ccrcorp.com or call 1-800-737-1271.
Direct listings attracted a fair amount of excitement back in 2019, which as you might recall was before meme-stocks and SPACs sucked all of the air out of the room. A recent Fenwick memo checks in on whether they’ve become the IPO alternative that some predicted. The answer: not at this time. Ran Ben-Tzur notes:
While direct listings continue to be an attractive option for certain companies, the ‘death’ of the traditional IPO that was predicted just a couple years ago has not materialized, with 2021 showing that IPOs still remain a much more popular way for companies to go public.
The memo explains that direct listings have stayed niche because they work best for companies that already have proven size, profitability and liquidity – and also because of the high standard that a company needs to be able to conduct a simultaneous capital raise.
It probably doesn’t help that the SEC also recently rejected Nasdaq’s proposal that would have allowed more flexibility for the pricing range in these deals. John had previously blogged about that proposal back in January.
A year ago, there were signs that Congress might remove a funding roadblock that has prevented the SEC from regulating political spending disclosure. That generosity was fleeting, as Cydney Posner explains in the intro to a recent blog:
I have to admit I was surprised to read that, in the new $1.5 trillion budget bill, Congress has once again prohibited the SEC from using any funds for political spending disclosure regulation. But there it is—Section 633—in black and white: “None of the funds made available by this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”
That means that, for now anyway, private ordering—through shareholder proposals at individual companies and other forms of stakeholder pressure, including humiliation—will continue to be the pressure point for disclosure of corporate political contributions. Those proposals have grown increasingly successful in the last couple of years. And, notably, it appears that the focus of many proposals has shifted recently, with more emphasis on apparent conflicts between stated company policies and values and the beneficiaries of those political contributions.
As late as December last year, it looked like political spending disclosure regulation could well be on the horizon. In questioning by the Senate Committee on Banking, Housing and Urban Affairs in connection with his nomination as SEC Chair, Gary Gensler was asked by both sides about political spending disclosure. Gensler replied that his position on the issue would be grounded in economic analysis and the courts’ views of materiality as the information reasonable investors wanted to see as part of the total mix of information. Gensler added that he considered the 80 shareholder proposals submitted last year on the topic and the 40% vote in favor as a strong indicator. In light of that level of investor interest, political spending disclosure was something he thought the SEC should consider.
Cydney goes on to detail recent shareholder proposal activity on this topic and predicts that private ordering will continue full steam ahead. We’ve been writing about these developments on our Proxy Season Blog – if you’re a member, subscribe to that blog to stay in-the-know.
Programming Note: Since tomorrow’s Good Friday and the first night of Passover, this blog will take the day off. Happy Easter and Happy Passover to those who celebrate the holidays, and Ramadan Mubarak to those observing the holy month. Enjoy the weekend and we’ll see you back here on Monday!
At a hearing about this legislation held last week by the Committee on Banking Housing & Urban Affairs, former SEC Commissioner Rob Jackson testified that:
– The Act would close a significant gap in the current common law, by clearly outlawing trading on info obtained through cybersecurity hacks. That’s because the Act’s definition of “wrongful” trading on MNPI would extend to information obtained through theft or unauthorized access, or violation of a Federal law protecting computer data or intellectual property or privacy of computer users.
– The SEC should reconsider foreign companies’ Section 16 exemptions – in order to crack down on apparent insider trading by executives at foreign firms listed in the US. That was the topic of a study released a couple weeks ago by Professor Jackson along with Bradford Lynch and Daniel Taylor, which was reported on by the WSJ.
As John blogged a couple of months ago, the comment period for the SEC’s proposal to modernize Rule 10b5-1 officially expired on April 1st – and 169 letters are now posted. Here are a few notable submissions:
– Shearman & Sterling – suggesting modifications to the proposal that would lessen the burden on companies
– Davis Polk – responding to a large number of the Commission’s specific requests for comment, including support in principle for a narrow and shorter D&O cooling-off period, but not supporting a cooling-off period for company plans
– Sullivan & Cromwell – identifying areas of concern for the proposal being too broad & burdensome, and urging a transition period of at least 12 months if the proposal is adopted
– Cravath – generally supportive of Commission efforts to prevent abuse of the affirmative defense and increase transparency around Rule 10b5-1 – e.g., supportive of a D&O cooling-off period – but unaware of empirical evidence suggesting abuse in the context of share repurchases that would justify the additional costs imposed by proposed restrictions on issuer trades
– Dorsey & Whitney – raising questions & potential resolutions with respect to the operation of open market employee stock purchase plans
The comment period for the SEC’s proposal to modernize repurchase disclosure also officially expired on April 1st – and just under 100 letters have rolled in so far. A number of prominent law firms & corporations have weighed in, as well as:
– The Society for Corporate Governance – raising concerns about the proposal’s requirements for daily disclosure and operational information about buyback programs and about the impact on investor returns, liquidity & capital formation
– Senators Marco Rubio (R-FL) & Tammy Baldwin (D-WI) – supporting the proposal & encouraging additional enhanced disclosures about alternative uses of capital and whether repurchases are financed by additional debt
– Oxfam – 8 pages on the supposed harms of share repurchases
– NYSE – supporting the proposal in principle, including enhanced periodic disclosure and XBRL data, but expressing concern over unduly burdensome disclosure requirements that would also erode information quality
– Business Roundtable – opposing the proposal due to adverse impacts on efficient capital allocation and undue costs & consequences for issuers, investors and the capital markets overall
– Better Markets – supporting the proposal, advocating for even more disclosure about financing of and motivations for repurchases, and suggesting that Form SR be “filed” rather than “furnished”
– US Chamber of Commerce & others – urging the SEC to reconsider the assumptions underpinning the proposal until it has conducted further economic analysis of the proposal’s potential impact, including in relation to the Rule 10b5-1 proposal (also see this 30-page addendum)
With new SEC rules, record support levels for shareholder proposals, and relentless regulatory & investor scrutiny, your proxy disclosures – and the actions that support them – are more important than ever. The Proxy Disclosure & Executive Compensation Conferences will inform you of what you need to know to protect your company and board. Get practical guidance about rule changes, staff interpretations, emerging disclosure risks, investor and proxy advisor positions, executive pay expectations, the board’s role, and more. Check out the agendas – 17 sessions over three days.
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The Practical ESG Conference will deliver usable, practical guidance on hot ESG topics, in a candid and conversational format. Join recognized ESG practitioners from legal, accounting/auditing and in-house corporate backgrounds to stay ahead of reputational risks, stakeholder demands and regulatory initiatives – and get meaningful pointers to design, implement and improve corporate ESG programs. Check out the agenda – and know that we’ll be adding even more content & detail as the event gets closer.
Early Bird Rates – Act Now! As a special “thank you” for early registration, we’re offering an “early bird” rate for a limited time. Get the best price by registering today – online by credit card or by emailing sales@ccrcorp.com. You can purchase access to this Conference on a standalone basis – or bundle & save by also registering for our Proxy Disclosure & Executive Compensation Conferences the same week.
Join us tomorrow, Wednesday April 13th at 2pm Eastern Time, for the first of PracticalESG.com’s 3-part DEI workshop series – “Collecting Diversity, Equity & Inclusion Data: What to Measure & Why” – to hear DiversityIQ’s Cheryl Cole, Fossil Group’s Sheri Crosby Wheeler, Aon’s Aria Glasgow, Pipeline Equity’s Katica Roy, Fortune’s Ruth Umoh, and NextRoll & PracticalESG.com’s Ngozi Okeh discuss, among other things:
– What data points are useful in driving DEI strategy & progress;
– How to measure diversity, equity & inclusion;
– How to account for intersectionality;
– Data traps to avoid; and
– How to use data to develop a unique business case for your corporate DEI initiative.
If you’ve not yet registered, you can still sign up here.
This PracticalESG.com workshop is free, courtesy of our wonderful sponsors, Morrison & Foerster and Holmes Murphy. A replay will be available to PracticalESG.com members – along with many other useful resources! If you’re working on ESG matters and haven’t already signed up for a PracticalESG.com membership, now is the time to get filtered & organized access to rapidly evolving ESG developments! You can become a member online or by emailing sales@ccrcorp.com.
The Canadian government unveiled its federal budget last week, with an entire chapter devoted to climate. As US companies assess the SEC’s climate disclosure proposal and shareholder demands, this requirement by our neighbor to the north is another sign that regulators and investors are losing patience with voluntary disclosures about emissions and climate risks to companies, and moving towards mandates for comparable info.
Among other things, Section 3.4 of the budget calls on the investment industry and federally regulated financial institutions to support the “transition economy” on the path to net-zero emissions. Here’s an excerpt:
Climate Disclosures for Federally Regulated Institutions
The federal government is committed to moving towards mandatory reporting of climate-related financial risks across a broad spectrum of the Canadian economy, based on the international Task Force on Climate-related Financial Disclosures (TCFD) framework.
The Office of the Superintendent of Financial Institutions (OSFI) will consult federally regulated financial institutions on climate disclosure guidelines in 2022 and will require financial institutions to publish climate disclosures—aligned with the TCFD framework — using a phased approach, starting in 2024.
OSFI will also expect financial institutions to collect and assess information on climate risks and emissions from their clients.
As federally regulated banks and insurers play a prominent role in shaping Canada’s economy, OSFI guidance will have a significant impact on how Canadian businesses manage and report on climate-related risks and exposures.
Separately, the government will move forward with requirements for disclosure of environmental, social, and governance (ESG) considerations, including climate-related risks, for federally regulated pension plans.
This move follows a proposal last fall by the Canadian Securities Administrators to require TCFD-aligned reporting by issuers. That particular proposal is still under consideration.