The week in GRC: Follow This drops ExxonMobil climate proposal and judge nixes Musk’s Tesla pay package

– Reuters (paywall) reported that investors that use shareholder proposals to press action on ESG issues are concerned that an ExxonMobil lawsuit bypassing the SEC could undermine their influence. Under appointees of President Joe Biden, the SEC has made it more difficult for companies to omit these proposals from their proxy materials. ExxonMobil earlier this month sidestepped the SEC and filed a lawsuit against two shareholders that had put forward a resolution calling on the company to set new targets for reducing some of its greenhouse gas emissions.

‘We’re concerned that this action could have a chilling effect, particularly on small investors that don’t have the resources to battle Exxon or other companies in the courts,’ said Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility.

Amy Borrus, executive director of the Council of Institutional Investors, said the resolutions play an important role in allowing investors to express their views to a company’s management, board and other investors. She added that if ExxonMobil succeeds, other companies may take their chances in court.

An SEC spokesperson declined to comment.

An Exxon spokesperson said the SEC’s application of the rules does not serve investors’ interests. ‘We simply want the rules already in place to be enforced to prevent increasing abuse of the system,’ the spokesperson said.

Mark van Baal, founder of Follow This, one of the resolution’s sponsors, said Exxon was ‘afraid of its shareholders’.

– The Guardian today reported that Follow This has dropped its proposal with ExxonMobil. Mark van Baal, founder of the group, said: ‘Given Exxon’s preference to fight a battle in court rather than allow shareholders the freedom of a vote at its annual meeting, we decided to withdraw the climate proposal. Now that we have withdrawn, the company has no reason to continue the lawsuit.’

According to Reuters, Exxon said in a statement that it is continuing with the lawsuit despite the withdrawal. ‘We believe there are still important issues for the court to resolve. There is no change to our plans,’ Exxon said.

– According to CNBC, activist investors are eyeing the tech industry because, following a two-year drop in M&A activity, there are signs of life in 2024 and expectations that many more deals are coming. Campaign efforts by some activists can only fully pay off if there’s an active market of buyers.

An investment banker who advises tech companies said his firm is warning clients of a changing environment. He said his team is telling companies that longer-term activist shareholders are ready to start pushing for breakups or sales as cost-cutting opportunities diminish. Additionally, an activist adviser said numerous proxy fights are ‘in the pipeline’ and that companies may be less willing to hand over control of the board without a battle.

– EU climate chief Wopke Hoekstra has warned the bloc must not fall into a ‘false narrative’ that action against climate change is undermining the competitiveness of European businesses, at a time when the EU is facing a backlash against its environmental laws, the Financial Times (paywall) reported. Speaking ahead of the February 6 announcement of a new EU plan for cutting greenhouse gas emissions by 2040, climate commissioner Hoekstra said that despite ‘significant worries’ from industry, he was ‘absolutely convinced’ Europe could continue to have a ‘world-class, second-to-none business environment’.

‘We need to stand on two legs: one leg is climate action, the other is the just transition, competitiveness and a thriving business community, because both are needed,’ Hoekstra said. The EU should not ‘be lured into the false narrative that you can only have one or the other,’ he added.

– According to The Wall Street Journal (paywall), the Financial Crimes Enforcement Network (FinCEN) said the banking industry may need to spend hundreds of millions of dollars in the first year to set up protocols to access the new corporate-ownership information database. FinCEN estimated that financial institutions would need roughly 6.5 mn hours of work in the first year to establish procedures and implement safeguards to comply with the security and confidentiality requirements to access the database. That translates into more than $686 mn at a $106 hourly rate, FinCEN estimated.

The expenses would include developing and implementing administrative, physical and technical safeguards, obtaining and documenting customer consent, submitting certification on requests and undergoing training, according to FinCEN. The agency said in December that banks and law-enforcement officials would have access to the new database in phases beginning in February.

– Reuters reported that several attorneys at major law firms are pushing back against the first proposed rule by a federal appeals court to regulate the use of AI by lawyers appearing before it, saying it is ‘unnecessary’ and confusing. Lawyers said in letters made public on Monday that although they understand the 5th US Circuit Court of Appeal’s concerns about AI, existing rules are good enough to deal with any issues it raises.

The proposed rule would require both attorneys and litigants appearing before the court without counsel to certify that, to the extent an AI program was used to generate a filing, citations and legal analysis were reviewed for accuracy. Lawyers who misrepresent their compliance with the rule could face sanctions and the prospect of their filings being stricken under the proposed rule. Some other federal appeals courts are considering how to address the rapid emergence of AI programs.

– The Big Four accounting firms have admitted hundreds of violations of regulations designed to protect the independence of their audit work following the introduction of new disclosure rules in the US, the FT reported. The admissions come as the Public Company Accounting Oversight Board (PCAOB) urges companies and investors to pay greater attention to the findings of its annual inspections of audit firms.

PwC said on Monday it had identified 129 breaches of independence rules affecting 74 clients and PCAOB inspectors had found a further breach while inspecting audit work in 2022. The figures were included in an update to PwC’s audit quality report, published on its website. Deloitte said in its audit quality report last month that it had told PCAOB inspectors of 129 breaches across 78 clients in 2022 and 107 across 53 clients in the 2023 inspection cycle. EY also said it had found independence violations affecting 3 percent of its audits in 2022. KPMG has not stated its figures, which will become public in the PCAOB’s upcoming inspection reports for 2022.

PwC, Deloitte and EY all said they had looked into each violation and concluded there were no cases in which the independence of an audit was compromised. Deloitte said the most common instances of non-compliance were ‘related to financial relationships and employment relationships of approximately 145,000 professionals monitored’. ‘I would characterize them as technical violations,’ said Dennis McGowan, vice president of the Center for Audit Quality.

PwC’s vice-chair Wes Bricker said its compliance programs ‘often go beyond regulatory requirements’.

– Reuters reported that Gabriela Figueiredo Dias, chair of the International Ethics Standards Board for Accountants (IESBA), said firms that check ESG claims made by companies will be asked to follow a proposed new ethics code to help combat greenwashing. Companies in the EU and globally from this year will have to use new, mandatory disclosures on ESG and climate-related factors in their annual reports for 2024 and onwards. These disclosures will need checking by external auditors as a safeguard against greenwashing.

Figueiredo Dias said IESBA was proposing revisions and additions to its ethics standards for auditing sustainability information from companies. The standards provide best practice for verifying a company’s sustainability claims by offering instructions in areas such as accounting for the impact of corporate actions on emissions, relying on outside experts and identifying and addressing conflicts of interest.

– Activist investor Starboard Value sent a letter to GoDaddy urging management to continue moving ‘in the right direction’ by setting specific and realistic growth targets and giving investors more detail on how management will improve margins, CNBC reported. Starboard managing member Peter Feld wrote that although GoDaddy had made a good first step on its most recent earnings call in setting new profitability targets, ‘a few months of share price outperformance do not solve a multi-year problem’. GoDaddy CEO Aman Bhutani indicated on the call that the company wanted to ‘be responsive to the feedback from investors’ on growth and expansion.

GoDaddy did not immediately respond to CNBC’s request for comment.

– Reuters reported that a Delaware judge threw out Elon Musk’s $56 bn Tesla pay package on Tuesday, calling the compensation granted by the board ‘an unfathomable sum’ that was unfair to shareholders. The ruling, which can be appealed, nullifies the largest pay package in corporate America. The judge found the share-based compensation was negotiated by directors who appeared beholden to Musk.

‘Swept up by the rhetoric of ‘all upside’ or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 bn question: was the plan even necessary for Tesla to retain Musk and achieve its goals?’ wrote Kathaleen McCormick of Delaware’s Court of Chancery.

Tesla directors argued during the trial that the company was paying to ensure one of the world’s most dynamic entrepreneurs continued to dedicate his attention to the electric vehicle maker. McCormick directed the Tesla shareholder who challenged the pay plan to work with Musk’s legal team on an order implementing the decision.

‘Never incorporate your company in the state of Delaware,’ Musk said in a post on X, formerly known as Twitter. His lawyer did not immediately respond to a request for comment.