The week in GRC: DoJ appoints first AI officer and full appeals court to consider challenge to Nasdaq board diversity rule

– Reuters (paywall) reported that a challenge by conservative groups to a Nasdaq rule requiring companies to disclose board diversity or lack thereof will be reconsidered by the 5th US Circuit Court of Appeals after an earlier panel of the court upheld the requirement.

The rule approved by the SEC in August 2021 requires companies listed on Nasdaq to have one director who identifies as female, a member of an under-represented racial or ethnic minority or LGBTQ+ designation or explain why they do not. More than two thirds of the 17 active judges on the 5th Circuit were appointed by Republican presidents, making it a popular venue for conservative and industry groups challenging rules passed under the Biden administration.

A spokesperson for Nasdaq declined to comment.

– A group of investors led by Ancora Holdings said it has proposed replacing the top management, including the CEO, at railroad operator Norfolk Southern and has nominated eight directors to its board, according to Reuters. ‘Norfolk Southern, which has exceptional rail workers and the country’s best customers, has suffered for years due to its board’s poor decisions with regard to the company’s leadership,’ the investor group said.

‘Since receiving Ancora's nominations, members of both the board and management team have held multiple discussions with representatives of Ancora,’ Norfolk Southern said in a statement. The company added that members of the governance and nominating committee and the board carefully evaluated and interviewed all of Ancora's nominees.

– According to CNBC, a coalition of unions is presenting its case against Starbucks ahead of a proxy fight at the firm’s AGM next month, arguing that the coffee company has implemented a ‘flawed human capital management strategy’ in response to a years-long union movement. The Strategic Organizing Center claims the situation has put the company at reputational risk, diminishing shareholder returns and isolating customers, based on polling conducted for a shareholder presentation. The coalition is pushing to replace three Starbucks board members with its own nominees.

‘The board’s anti-union strategy has resulted in one of the most glaring and destructive examples of human capital mismanagement in modern US history,’ the proxy presentation reads. ‘Starbucks’ aggressive unionization response has not only failed to resolve the company’s dispute with employees [but] has [also] made the problem worse.’

Starbucks said in a statement that its board is ‘stocked with world-class business leaders that bring the qualifications and expertise directly relevant to drive our current operations and future success’, adding: ‘With partners at the heart of our business, we have continued to significantly invest in and improve their experience, including the more than 20 percent of profits that have gone into wage increases, training and new equipment in the last fiscal year.’

– CNBC reported that investment firm Arkhouse Management has launched a proxy fight at Macy’s, nominating a slate of nine directors for election to the department store’s board. Macy’s confirmed it had received notice of the nominations from Arkhouse, which made an unsolicited bid for the company in December. Macy’s board rejected that $5.8 bn offer and questioned the status of Arkhouse’s financing.

In a statement Tuesday, Arkhouse managing partners Jonathon Blackwell and Gavriel Kahane said they had given Macy’s board more details on financing, saying they were backed by equity partners with combined assets under management of more than $75 bn.

‘We urge the board to specifically identify any additional information they are seeking regarding our financing so that we may alleviate any of their outstanding concerns,’ Blackwell and Kahane said.

Macy’s has not yet set a date for its 2024 AGM. Under new rules adopted in 2023, its shareholders will be able to pick and choose individual director nominees from both activist and management slates at the meeting.

– The Guardian reported that Senator Elizabeth Warren, D-Massachusetts, urged regulators to block Capital One’s $35 bn takeover of Discover Financial, arguing that combining two of the US’s largest credit card companies would harm consumers and challenge financial stability.

Richard Fairbank, chair and CEO of Capital One, has argued that the planned acquisition amounts to ‘a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies.’ But Warren said the deal would dent, rather than strengthen, competition.

Announcing the deal on Monday, Capital One said it expects the transaction to be done ‘in late 2024 or early 2025’ subject to ‘customary closing conditions, including regulatory approvals and approval by the shareholders of each company’. Both companies are likely to face questions from lawmakers.

Capital One and Discover Financial did not immediately respond to requests for comment.

– The SEC announced that its small business capital formation advisory committee will discuss the accredited investor definition and IPOs at its meeting on Tuesday, February 27. The committee provides advice and recommendations to the SEC on rules, regulations and policy matters relating to small businesses.

– Delaware Chancery Court Judge Travis Laster told Tripadvisor it can move its incorporation from Delaware to Nevada, but shareholders will be allowed to seek damages from the move, MarketWatch reported. Laster declined to block the company’s move, but also denied Tripadvisor’s motion to dismiss a lawsuit brought by shareholders claiming a move would be unfair to investors because of less-stringent corporate standards in Nevada.

That suit was intended to persuade the Delaware Chancery Court to stop the company moving ahead with board-approved plans to reincorporate in Nevada. Laster said that although the court has the authority to block such moves, it was not warranted in this case. But he wrote that shareholders could seek damages if the move hurts the company’s stock.

Tripadvisor did not immediately respond to a request for comment.

– According to Reuters, the US Department of Justice (DoJ) named its first official focused on AI as the department addresses the potentially transformative effects of the technology on federal law enforcement and the criminal justice system. Jonathan Mayer, a professor at Princeton University who researches technology and law, will be chief science and technology adviser and chief AI officer.

Mayer will advise Attorney General Merrick Garland and the DoJ leadership on issues related to emerging technologies, including how to responsibly integrate AI into the department’s investigations and criminal prosecutions. Mayer will lead a new board of law enforcement and civil rights officials.

– Reuters reported that a federal judge in Texas delayed implementation of a National Labor Relations Board (NLRB) rule that would treat many companies as employers of contract and franchise workers, as he considers a bid by business groups to strike it down. Under the rule, companies would be considered ‘joint employers’ of contract and franchise workers and be required to bargain with unions when they have control over key working conditions such as pay, scheduling, discipline and supervision, even if it is indirect or not exercised.

US District Judge Campbell Barker issued an order pushing back the rule’s effective date from February 26 to March 11, saying ‘an opinion with the court’s reasoning will be issued forthwith.’

An NLRB spokesperson declined to comment. The US Chamber of Commerce and other groups involved in the lawsuit did not immediately respond to requests for comment.