“The Mentor Blog” has been pretty much dormant for the past couple of years, but I’m excited to announce that the blog is returning to active status today and our that Contributing Editor, Meaghan Nelson, will be blogging there Tuesday through Thursday of each week. There’s a story behind this decision, so please bear with me for a moment while I share it with you.
When Broc started The Mentor Blog, it was intended to serve as a platform for advice to help readers advance their careers. Over the years, however, it drifted away from that objective, and often just served as a place for blogs that didn’t make the cut for inclusion on this blog. That’s not exactly the kind of “value add” that we thought our members were looking for in a members-only blog, so we eventually let it go dormant.
That’s when Meaghan entered the picture. The idea of possibly bringing the Mentor Blog back entered my mind the first time I saw Meaghan’s resume. I think she’s the ideal person to provide insights to help readers manage their careers. Not only is Meaghan a super-smart person who has taken the lead on updating all of our handbooks this year, she’s also enjoyed a diverse and high-achieving legal career before joining us.
Meaghan’s worn a bunch of hats – she’s been at BigLaw firms on Wall Street and in Silicon Valley, worked in-house at public companies and startups, and is now teaching law school in addition to serving on our editorial team. What’s more, she also has a young family and is dealing with the same challenges of balancing career and family that many of you are facing.
We’re really excited that Meaghan is going to be contributing her insights on the Mentor Blog, and we think you’re going to enjoy reading what she has to say. Members of TheCorporateCounsel.net should be sure to check out her first blog, which she posted this morning. Not a member? We can fix that – email sales@ccrcorp.com to sign up today and get access to The Mentor Blog – or sign up online.
Deloitte recently published the results of a survey of CFOs of North American entities with more than $1 billion in revenues. The survey focused on identifying issues that CFOs were concerned about, and – aside from the impact of the US presidential election – respondents reported that they were worried about how talent shortages, wage inflation, and recent regulatory changes and proposals could impact their ability to manage and retain a skilled workforce. Survey respondents also identified external and internal risks that were keeping them up at night. This excerpt summarizes those concerns:
When asked to select the three external risks that worry them the most, CFOs put geopolitics near the top (52%), trailing only inflation (57%) and the economy (54%). After the election, a shift in foreign policy—or trade policy—could impact organizations with extensive overseas operations. But beyond the impact on their organizations, all three of the top three risks can directly impact key elements of the CFO’s remit: risk management, budgeting, and forecasting.
So, too, can the arrival of breakthrough technologies. Nearly half (49%) of respondents named technology transformation as one of their top three internal risks. A nearly equal amount (48%) ranked efficiency and productivity as a top internal risk, likely related to the adoption of innovative technologies. Curiously, generative AI—the most cited internal risk in our 2024 second quarter survey—fell down the list (44%) and out of the top three. The drop may have to do with CFOs now seeing gen AI as a critical enabler or element of larger concepts like tech transformation and enhanced productivity.
Overall, the CFOs surveyed were pretty downbeat about the current business climate, with only 12% of CFOs saying that now is a good time to be taking greater risks, compared to 26% in the second quarter and 41% in the third quarter of 2023. That’s probably not surprising given election year uncertainties, but public company disclosure committees and others involved in drafting SEC filings ought to take a look at the results of this survey when considering risk factor updates and trend disclosures in their upcoming 10-Qs.
In addition to the results of Deloitte’s CFO survey, you might want to keep this recent Fenwick blog in mind when you think about what might need to be updated in your “Risk Factors” disclosure. This excerpt includes a few of the specific potential risks outlined in the blog:
Risk related to Chevron and related decisions – As previously noted, we have observed that life sciences companies are adding risk factor language in response to the U.S. Supreme Court overturning the Chevron Doctrine and related decisions. Companies in life sciences or other highly regulated industries should consider whether it is appropriate to include such disclosure. Please see our alert for an example of such risk factor language.
Ongoing risk related to CrowdStrike outage – Companies impacted by CrowdStrike’s defective software update should consider updating their risk factors and forward-looking statements about systems downtime and/or reliance on third parties to operate critical business systems. Remember to revise relevant hypothetical language about outages or systems downtime to indicate that such risks have already occurred. Finally, impacted companies should also consider discussing any material impacts (if any) in the management’s discussion and analysis section of their next Form 10-Q.
In addition, software and technology companies that similarly update systems, including automated updates, should ensure their risk factors cover risks associated with errant updates, and that their boards have oversight visibility on how those risks are mitigated where it may be deemed mission critical to the company. Please see our alert for more information.
Risk related to AI – As a reminder, the EU AI Act entered into force on August 1. Companies should review and update any relevant language in their AI risk factor to reflect this development. Note that the Securities and Exchange Commission (SEC) and the plaintiffs’ bar also continue to focus on AI washing. In a recent video about AI washing, SEC Chair Gary Gensler reminded companies that “any claims about prospects should have a reasonable basis and investors should be told that basis.”
Other potential risks noted in the blog include inflation and interest rates, trade tensions between the US and China, new export control rules and – inevitably – the US presidential election.
Labrador recently announced the winners of its 6th annual disclosure transparency awards. Here’s an excerpt from its press release:
Intel, Dow, and Mastercard have emerged as champions, securing top honors in the 2024 U.S. Transparency Awards unveiled today by Labrador, a leading global communications firm specializing in transparent corporate disclosure documents. The rankings are based on a rigorous evaluation of corporate disclosure documents among the top 250 companies in the S&P 5001 and recognize companies dedicated to building investor and stakeholder trust through clear, concise, and effective communication.
The Transparency Awards celebrate the 10 most transparent U.S. companies, the top three leaders in 11 industries, and the best performers in individual disclosure categories—from best overall transparency, proxy statement, and ESG reporting to Form 10-K, investor relations websites, codes of conduct, and plain language usage.
Be sure to check out the Transparency Awards website for more details about the awards and the companies that received them. University of Michigan alums in the audience – including our own Meredith Ervine – will no doubt recognize the reference to the Wolverines’ fight song in the title of this blog. That’s intentional, because as many of you know, our former colleague & Michigan alum Broc Romanek has been leading the charge on disclosure transparency for Labrador for the past couple of years. Here’s Broc’s 8-minute video announcing the winners of this year’s awards.
Those of you who know Broc probably won’t be surprised to learn that he remains the hardest working man in show business. In addition to his Labrador gig, he’s recently joined the folks at Cooley where he’ll provide corporate governance guidance on the firm’s new “The Governance Beat” blog.
If you’re on the risk management side of the business – like most in-house lawyers – the risks associated with emerging technologies like artificial intelligence are likely taking up an increasing amount of your time & mental energy. Concerns about those emerging technology risks and identifying effective risk management programs to address them aren’t likely to go away anytime soon. Fortunately, over on Radical Compliance, Matt Kelly recently flagged a new “AI Risk Repository” developed by the smarty-pants at MIT that offers assistance in identifying the risks associated with AI.
This excerpt from Matt’s blog provides an overview of what this resource is all about:
A team of MIT researchers known as the FutureTech Group published the catalog, formally known as the AI Risk Repository, earlier this month. It’s free to all and designed to help a wide range of audiences, from academic researchers to policy makers to, yes, corporate risk managers trying to develop risk assessments for the AI systems running at your company. (Credit to compliance consultant Mark Rowe for noting the repository on LinkedIn earlier this week.)
The 700+ risks are organized into seven primary domains, such as discrimination, privacy, and system safety. Those seven primary domains are then split into 23 more precise sub-domains, which are divided again into even more precise risk categories.
The actual repository exists as a Google spreadsheet you can download, with various columns classifying each risk, describing its potential severity, identifying the potential cause (human versus AI itself; accidental versus deliberate action), and otherwise giving you a wealth of context.
Matt goes on to offer some thoughts on how to put the repository to work in your own risk management and compliance program. He points out that the 700+ risks in the repository were pulled together from 43 separate risk management frameworks and asks whether the existing frameworks used by companies to manage AI risks – like the NIST AI Risk Management Framework and the ISO 42001 standard – are sufficient to meet the challenge.
According to a new report from Arize AI, the number of Fortune 500 companies citing AI-related risk factors in their annual reports has increased by nearly 500% since 2022, with 281 companies currently addressing AI in their risk disclosures. The report says that media and entertainment (92%), software and technology (86%), telecommunications (70%), healthcare (65%) and financial services (63%) lead all other industries in disclosing risks from AI.
The report also includes excerpts from various categories of corporate risk factor disclosures, including competitive risks, regulatory risks, security risks, and what the report calls “general harms”. This latter category encompasses “physical, reputational, or other harms to company or its stakeholders from AI”. Here’s an example of this general harm risk disclosure from Motorola’s annual report:
As we increasingly build AI, including generative AI, into our offerings, we may enable or offer solutions that draw controversy due to their actual or perceived impact on social and ethical issues resulting from the use of new and evolving AI in such offerings. AI may not always operate as intended and datasets may be insufficient or contain illegal, biased, harmful or offensive information, which could negatively impact our results of operations, business reputation or customers’ acceptance of our AI offerings.
Although we work to responsibly meet our customers’ needs for products and services that use AI, including through AI governance programs and internal technology oversight committees, we may still suffer reputational or competitive damage as a result of any inconsistencies in the application of the technology or ethical concerns, both of which may generate negative publicity.
If you found today’s AI-related blogs interesting, you won’t want to miss our “In-House Insights: Governing and Disclosing AI” panel at our 2024 “Proxy Disclosure and 21st Annual Executive Compensation Conferences” – and that’s just one of the 15 timely, topical panels you’ll hear from over our two days of programs. As we’ve mentioned before, one of those panels will feature our SEC All-Stars participating in a “Game Show Lightning Round: All-Star Feud” – and we’re back with another request for your responses to one of the survey questions they’ll be asked to address.
Please take a moment to respond to our latest anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you will have to join day 1 of our Conferences to hear whether your response made the “most popular” list.
If you haven’t done so already, today is a great day to sign up for our Conferences, which are taking place on October 14th & 15th in San Francisco. There is also a virtual option if you are unable to attend in person. You can register by visiting our online store or by calling us at 800-737-1271.
Earlier this month, the CII released a report on what it refers to as “stealth” dual-class structures – alternatives to multi-class capital structures that allow insiders the control benefits associated with owning high-vote stock without the potential investor relations downsides. Here’s the intro:
Traditional dual-class or multi-class stock structures have received significant attention from market participants because of the disconnect they create between voting rights and economic ownership, thereby insulating company insiders from accountability to the company’s owners. However, it is important for investors to understand that companies can deliver substantially similar entrenchment mechanisms without creating multiple classes of common stock or adopting widely understood anti-takeover devices such as poison pills. In fact, there may be an incentive for insiders to achieve the same control enhancing outcomes without adopting a traditional dual-class structure.
By doing so, they may receive the private benefits of outsized decision-making power without receiving the negative attention and stock price discount accompanying dual-class stock. This paper reviews nine examples of arrangements that could constitute “stealth dual class”: identity-based voting power, side agreements with favored shareholders, stock pyramiding/cross-ownership, umbrella partnerships and C corporations (Up-Cs), employees granting irrevocable proxy voting rights transferred from employees to insiders, golden shares, situational super-class issuances, non-equity votes and vote caps.
The article goes on to explain how each of these alternatives replicates the benefits of a dual-class structure and offers some specific real-world examples. It also says that Delaware’s adoption of new Section 122(18) of the DGCL may facilitate their increased usage, which is a topic about which the CII has previously expressed concern.
Given the wailing and gnashing of teeth over dual-class structures in the US by proxy advisors & investor representatives, it may come as a surprise to learn that UK regulators recently adopted a rule change permitting dual-class companies to list on the LSE. An ISS report on the change notes that it was opposed by many prominent UK & European institutional investors, but also acknowledges a big reason why their objections didn’t carry the day:
As others have highlighted, many of the institutional investors and pension funds that have concerns in relation to the so-called watering down of UK shareholder rights and protections do invest in other financial markets with lower corporate governance standards, and often where the use of multiple class share structures has been the norm for many years.
Indeed, this is not the first time that this has been noted by external observers. Earlier in June 2024, the Chair of Marks & Spencer, Archie Norman, blamed UK pension funds for the decline of the LSE on the grounds that they had cut their UK equity exposure to a shadow of what it had been just decades before. According to a release by the Office for National Statistics, published in December 2023, the proportion of UK shares held by UK insurance and pension funds has fallen dramatically since 1997 when the two sectors held a combined total of 45.7% of quoted shares. By 2022, the holdings of the two sectors had fallen to 4.2%, “the lowest proportion jointly held by them on record”.
As a result, it is not surprising that some observers contend that the recent arguments of some UK pension funds regarding the need to retain shareholder rights and protections ring hollow, given their apparent willingness to invest in other international markets despite the lower protections and corporate governance standards, coupled with their reduced ‘skin in the game’ in the UK market.
ISS goes on to argue that UK regulators should’ve paid more attention to investors’ negative reaction to multi-class structures in jurisdictions where they’re permitted when deciding whether to permit listings on the LSE. On the other hand, maybe regulators just paid more attention to investors’ actions than their words, since they still seem to gobble up dual class companies’ IPOs whenever they get the chance.
The SEC issued its first fee rate advisory for the 2025 fiscal year. The bad news is that filing fees are going up for the third straight year, but the good news is that they’re rising at a much slower rate than they have during the past two fiscal years. For fiscal 2025, the SEC says that the filing fees will increase from $147.60 per million dollars to $153.10 per million dollars, effective October 1, 2024. That’s a 3.7% increase, but it’s a lot less than the 34% fee increase for fiscal 2024 and the 19% increase for fiscal 2023.
The fee rate advisory points out that the SEC doesn’t set filing fees arbitrarily:
The securities laws require the Commission to make annual adjustments to the rates for fees paid under Section 6(b) of the Securities Act of 1933, which also adjusts the annual fee rates under Sections 13(e) and 14(g) of the Securities Act of 1934, as well as Rule 24f-2 under the Investment Company Act of 1940. The Commission must set rates for the fees paid under Section 6(b) to levels that the Commission projects will generate collections equal to annual statutory target amounts.
The Commission’s projections are calculated using a methodology developed in consultation with the Congressional Budget Office and the Office of Management and Budget. The Commission determined the statutory target amount for fiscal year 2025 to be $864,721,147 by adjusting the fiscal year 2024 target collection amount of $839,771,535 for the rate of inflation.
