The week in GRC: Group asks Lyft shareholders to vote against board chair and senator unveils plan to regulate AI
– The Wall Street Journal (paywall) noted that companies are for the first time this year tabulating gains and losses in the stock awards that make up much of the pay packages for CEOs. In the past, companies have reported executive compensation as it was valued when executives received it. The new measure – compensation actually paid – under new SEC rules is designed to move disclosure beyond the moment-in-time snapshots that investors have considered for years. The numbers show that in 2022 about two thirds of top executives at S&P 500 companies ended the year with smaller pay packages than they were awarded, at least on paper. Around 140 CEOs earned more money than expected, and at 46 companies the CEOs ended with at least double what boards planned to pay them for the year, according to a WSJ analysis of data from MyLogIQ.
– European regulators approved Microsoft’s $69 bn acquisition of Activision Blizzard while the deal is being challenged in other countries, CNN reported. Concessions by Microsoft were enough to mitigate antitrust concerns arising from the deal, the European Commission said in a statement. Among Microsoft’s offers was a 10-year commitment letting European consumers play Activision titles on any cloud gaming service. Microsoft also pledged that it would not downgrade the quality or content of its games made available on rival streaming platforms.
– According to CNBC, Tesla CEO Elon Musk lost an appeal to unwind parts of a consent decree that he and the company reached with the SEC to settle civil securities fraud charges in 2018. The agreement required pre-approval for tweets by Musk that contained information material to Tesla, and which extended to ‘certain senior executives’, according to the judgment. An attorney for Musk had argued that the terms of the consent decree amounted to ‘unconstitutional’ infringement of his free speech rights. But the US Court of Appeals for the Second Circuit dismissed those claims, writing that it saw ‘no evidence to support Musk’s contention that the SEC has used the consent decree to conduct bad-faith, harassing investigations of his protected speech.’
‘We will seek further review and continue to bring attention to the important issue of the government constraint on speech,’ an attorney for Musk said in a statement.
– CNBC reported that, according to data from JUST Capital, 43 percent of Russell 1000 companies disclose that they use ESG-related KPIs in executive compensation metrics. That percentage has risen quickly in recent years, from 14 percent in 2020 to 18 percent in 2021 and 28 percent in 2022.
‘There’s an increasing recognition from boards and executives that assessing CEO performance should include profit and a more holistic, long-term set of non-financial but material indicators,’ wrote JUST Capital chief strategy officer Alison Omens in an email. ‘Issues like human capital, environmental risk and governance are connected to the health and competitiveness of the firm – and that’s what we’re seeing emerge in compensation packages.’
There has also been pressure from investors on these issues. Companies are focusing on metrics that cover the breadth of ESG, social issues often appearing in the form of diversity goals or health and safety indicators, according to JUST Capital corporate research analyst Molly Stutzman. Companies also often include metrics that Stutzman said would be labeled ‘ESG or ESG modifiers’, which suggests they are thinking about ESG performance holistically and not solely in environmental terms.
– Reuters (paywall) reported that Shake Shack added an independent director to its board in agreement with activist investor Engaged Capital, avoiding a potential proxy battle. Shake Shack said Engaged Capital would support the board’s full slate of directors at the 2023 AGM. The company has named Jeffrey Lawrence, former CFO at apparel retailer FIGS and Domino’s Pizza, as an independent director. It has also mutually agreed with Engaged Capital to add another director with restaurant operations experience.
‘Jeff and an additional director with expertise successfully scaling profitable restaurant concepts will be tremendous additions to the board,’ said Glenn Welling, founder and chief investment officer at Engaged Capital, in a statement.
– According to CNBC, more than 140 current and former Democratic lawmakers filed an amicus brief in the US Supreme Court in defense of the Consumer Financial Protection Bureau (CFPB) against challenges to its regulatory authority. The brief – led by Senator Sherrod Brown, D-Ohio and Rep Maxine Waters, D-California – relates to a case challenging the constitutionality of the CFPB and seeking to undermine its funding and mandated authorities. Upholding an appeals court decision that undermined the agency’s funding mechanism ‘would place at risk a funding model that has been used since the early republic, which now applies to the [Office of the Comptroller of the Currency] and a host of other crucial federal programs,’ the lawmakers wrote.
– The WSJ reported that Wells Fargo agreed to pay shareholders $1 bn to settle a class action lawsuit that accused the bank of overstating its progress in cleaning up after its 2016 fake-accounts scandal. The shareholders alleged Wells Fargo and its past leadership misled them about how quickly they were fixing governance issues and risk-management systems. The preliminary settlement still must be approved in the coming months. ‘Wells Fargo betrayed the trust of Rhode Island pensioners and now is rightly facing consequences because of that,’ said James Diossa, general treasurer of Rhode Island, whose pension fund is a co-lead plaintiff in the case, in a statement.
A spokesperson for the bank said the agreement resolves a lawsuit ‘involving the company and several former executives and a director who have not been with the company for several years. While we disagree with the allegations in this case, we are pleased to have resolved this matter.’
– MarketWatch reported that SOC Investment Group is asking fellow Lyft shareholders to vote against the re-election of board chair Logan Green, citing driver-safety concerns. Green, the company’s co-founder and former CEO, ‘bears particular responsibility for failing to properly address mounting concern over rideshare driver safety,’ said SOC Investment Group in a filing with the SEC.
The group, which works with pension funds sponsored by unions affiliated with the Strategic Organizing Center, cited research reports that have found ride-hailing drivers feel unsafe while working and experience verbal abuse, physical assault and robbery. The group added that it is concerned Lyft’s policies of suspending or deactivating drivers and its pay practices ‘may be penalizing drivers who attempt to protect themselves by declining rides from customers they perceive as threats.’
A Lyft spokesperson said in a statement: ‘[David Risher] signed up to drive on the platform before he became CEO to better understand the holistic driver experience. And he has made it clear that driver and rider safety continue to be paramount issues.’ The spokesperson declined to provide any additional response regarding the shareholder group’s claims about Green.
– SEC Chair Gary Gensler said the next financial crisis could emerge from firms’ use of artificial intelligence (AI) and warned of the potential ‘systemic risk’ posed by the technology’s proliferation, according to the WSJ. Data aggregators and AI platforms could be major components of future financial system ‘fragility’, according to Gensler.
Observers years from now might look back and say ‘the crisis in 2027 was because everything was relying on one base level, what’s called [the] generative AI level, and a bunch of fintech apps are built on top of it,’ he said. Many government officials have taken a skeptical posture toward AI, even as businesses have embraced the technology for its promise of enabling more work to be done with fewer workers.
– Reuters reported that a group of UK-based pension schemes and other asset owners is concerned about how the asset managers they use to handle their money are voting on climate-related issues at European oil and gas companies. Faith Ward, chair of the UK Asset Owner Roundtable, said in a LinkedIn post that the group planned to meet with major fund managers after the proxy voting season to go over the votes amid concern their long-term interests were not being served.
‘UK asset owners are concerned that despite unequivocal warnings from the United Nations and the [Intergovernmental Panel on Climate Change] of the risks of delayed action on climate change, short-term interests are trumping long-term interests of pension funds,’ she wrote.
– According to CNBC, two activist investment firms are calling on Dollar General and Dollar Tree shareholders to approve a pair of resolutions aiming to improve worker safety and wages. Dollar General proposal 7, led by Domini Impact Investments, calls for an independent audit into worker safety and well-being. It will be voted on during the company’s AGM on May 31. Dollar Tree proposal 7, led by United Church Funds, calls for the creation of a wages and inequality report. It will go before shareholders during the retailer’s AGM on June 13.
Dollar General didn’t respond to a request for comment. The company previously told CNBC it ‘regularly review[s] and refine[s] our safety programs, and reinforce[s] them through training, ongoing communication, recognition and accountability.’
Dollar Tree declined to comment. Its board has called on shareholders to vote against United Church Fund’s resolution.
– According to Reuters, ExxonMobil has pushed back against efforts to force the largest US oil producer to report on the risks to its business from restrictions on greenhouse gas emissions and potential environmental disasters. In a reply to Glass Lewis, ExxonMobil said the prospect of the world achieving net-zero carbon dioxide emissions by 2050 is remote and should not be further evaluated in its financial statements.
The company said limiting energy production to levels below consumption demand would lead to a spike in energy prices, as observed in Europe following oil sanctions against Russia over Ukraine. A shareholder proposal seeking a report on the cost of having to abandon projects faces a shareholder vote on May 31. Glass Lewis backed the initiative, concluding ExxonMobil could face material financial risks from the net-zero scenario.
Glass Lewis did not reply to requests for comment.
– Senator Michael Bennet, D-Colorado, unveiled an updated version of legislation he introduced last year that would establish a Federal Digital Platform Commission to regulate AI, CNN reported. The updated bill makes numerous changes to cover AI products more explicitly, including by amending the definition of a digital platform to include companies that offer ‘content primarily generated by algorithmic processes’. For the most significant platforms – companies the bill calls ‘systemically important’ – the legislation would create requirements for algorithmic audits and public risk assessments of the harms their tools could cause.
‘There’s no reason why the biggest tech companies on Earth should face less regulation than Colorado’s small businesses – especially as we see technology corrode our democracy and harm our kids’ mental health with virtually no oversight,’ said Bennet in a statement. ‘Technology is moving quicker than Congress could ever hope to keep up with. We need an expert federal agency that can stand up for the American people and ensure AI tools and digital platforms operate in the public interest.’
– Reuters reported that Morgan Stanley CEO James Gorman plans to step down over the next year. Gorman told shareholders the bank’s board has identified three strong candidates to succeed him and that he will become executive chair once a new CEO is chosen.
‘Gorman has taken a lot of efforts to bolster the leadership ranks and to train and promote potential successors there,’ said John Guarnera, senior corporate analyst at RBC BlueBay Asset Management. ‘I don’t anticipate any major change in strategic direction and I would think the transition would be relatively orderly.’
– The WSJ reported that Federal Reserve governor Michelle Bowman cautioned against undertaking a broad revamp of the regulatory framework facing small and regional banks, saying complex new rules could speed up the consolidation of the banking industry and potentially push more activities outside of the regulated banking system. Instead, Bowman said policymakers should focus on ‘remediating known, identified issues with bank supervision’, as well as addressing targeted issues that emerge from public reviews of recent banking failures.