The week in GRC: Norway’s SWF to vote against ExxonMobil director and EU’s landmark AI law to go into effect next month

– CNBC reported that CalPERS said in an open letter it would vote in opposition to all of ExxonMobil’s 12 director nominees and its CEO, Darren Woods, at the company’s AGM next week as a result of the company’s potentially ‘devastating’ actions against two environmentally focused activist investors, Arjuna Capital and Follow This. The two activists submitted a shareholder proposal requesting that the company reduce direct emissions and set a target for lowering emissions at suppliers and customers. ExxonMobil sued the investors, prompting them to withdraw the proposal but the company has continued its lawsuit to prevent the activists from ever again submitting such a proposal.

CalPERS said in its letter that ExxonMobil’s ‘reckless’ lawsuit threatened shareholder activism efforts on any issue. ‘If [the company] succeeds in silencing voices and upending the rules of shareholder democracy, what other subjects will the leaders of any company make off limits?’ wrote CalPERS CEO Marcie Frost and board president Theresa Taylor in the letter. ‘Worker safety? Excessive executive compensation?’

The oil firm said in a statement to CNBC that Arjuna and Follow This are attempting to ‘silence the voices of up to 90 percent of our voting shareholders who have rejected the proposal twice.’ An ExxonMobil spokesperson said the company had engaged with CalPERS and did ‘not understand how [it] can make such a poor fiduciary decision’, pointing to the ExxonMobil board’s role in creating ‘industry-leading shareholder value’.

– In addition, Reuters (paywall) reported that Norway's $1.6 tn sovereign wealth fund Norges Bank Investment Management (NBIM) said it will vote against the reappointment of ExxonMobil's lead independent director, Joseph Hooley, due to the company's legal action against climate activist investors.

ExxonMobil's case against two small investor groups has raised alarm among activists, proxy advisers and some shareholders who argued it would curb debate at public companies. ‘[NBIM] continues to place utmost importance on the protection of shareholder rights and raises concern around the potential impacts of litigation against shareholders stemming from the submission of a shareholder proposal,’ the operator of the Norwegian fund said.

ExxonMobil has said the SEC allows too many proposals to come to a vote, costing companies money, and that it hopes its lawsuit will help bring about reform.

– According to The Wall Street Journal (paywall), Elon Musk’s multibillion-dollar pay package from 2018 has set the tone for other high-end pay deals, despite being thrown out by a Delaware court earlier this year. More executives have secured outsize pay packages, and those packages have been bigger, in the years since Musk’s came to light. They also have the potential to keep growing for years.

‘We’ve called them moonshot awards – awards with huge potential values that executives can earn if they meet their targets,’ said Brian Bueno, a practice leader with pay consultancy Farient Advisors.

– Reuters reported that the EU’s landmark rules on AI will go into force next month after member countries endorsed a political deal reached in December. The AI Act is more comprehensive than the US’ light-touch voluntary compliance approach, while China’s approach aims to maintain social stability and state control. The vote by EU countries came two months after EU lawmakers backed the AI legislation drafted by the European Commission in 2021, having made a number of key changes. Concerns about AI contributing to misinformation, fake news and copyrighted material have grown in recent months amid the growing popularity of generative AI systems.

The AI Act imposes strict transparency obligations on high-risk AI systems, though such requirements for general-purpose AI models will be lighter. ‘The act will have global reach,’ said Patrick van Eecke at law firm Cooley. ‘Companies outside the EU that use EU customer data in their AI platforms will need to comply. Other countries and regions are likely to use the AI Act as a blueprint, just as they did with the [General Data Protection Regulation].’

– According to CNBC, one change Microsoft has made after facing criticism from the US government for failing to stop a Chinese hack of its systems last summer has been to link executive compensation more closely to cyber-security. In April, a government review board described last summer’s cyber-attack on Microsoft – attributed to China – as ‘preventable’. The US Department of Homeland Security’s Cyber Safety Review Board pointed to ‘a cascade of errors’ and a corporate culture at Microsoft ‘that deprioritized enterprise security investments and rigorous risk management’.

Microsoft launched its Secure Future Initiative (SFI) in November and earlier this month the company outlined in a blog post from Charlie Bell, executive vice president of Microsoft Security, that as part of its SFI goals it will ‘instill accountability by basing part of the compensation of the company’s senior leadership team on our progress in meeting our security plans and milestones.’

A Microsoft spokesperson declined to provide specifics on the compensation but said as a company that plays a central role in the world’s digital ecosystem, it has a ‘critical responsibility’ to make cyber-security a top priority. It is part of the company’s ‘important governance changes [made] to further support a security-first culture,’ the spokesperson said.

– Reuters reported that Intercontinental Exchange (ICE) will pay a $10 mn penalty to settle SEC charges that its subsidiaries failed to immediately alert the agency about a cyber-intrusion incident. In April 2021, ICE discovered someone had installed a code into a VPN device used to remotely access the corporate network but the person did not notify subsidiaries for several days, the SEC said. That delay meant the subsidiaries, including the NYSE, violated rules that require immediate notification to the SEC, the agency said.

A spokesperson for ICE, which did not admit or deny the SEC’s allegations, said the effort to access the exchange’s network was unsuccessful and had no impact on market operations.

The SEC has been pushing for more prompt disclosures of cyber-security incidents.

– The US Department of Justice (DoJ) is suing to break up Ticketmaster’s parent company Live Nation over alleged antitrust violations, CNBC reported. The lawsuit, which was joined by 30 states, follows a DoJ investigation into whether Live Nation maintains a monopoly in the ticketing industry.

‘We allege that Live Nation relies on unlawful, anti-competitive conduct to exercise its monopolistic control over the live events industry in the [US] at the cost of fans, artists, smaller promoters and venue operators,’ Attorney General Merrick Garland said in a statement. ‘The result is that fans pay more in fees, artists have fewer opportunities to play concerts, smaller promoters get squeezed out and venues have fewer real choices for ticketing services. It is time to break up Live Nation-Ticketmaster.’

In a statement, Live Nation described as ‘absurd’ the DoJ’s allegations of a monopoly. ‘The DoJ’s complaint attempts to portray Live Nation and Ticketmaster as the cause of fan frustration with the live entertainment industry. It blames concert promoters and ticketing companies – neither of which control ticket prices – for high ticket prices. It ignores everything that is actually responsible for higher ticket prices,’ said Dan Wall, Live Nation executive vice president for corporate and regulatory affairs.

– According to the WSJ, DuPont said it would split into three separate public companies, following in the recent footsteps of US businesses such as the former General Electric and Kellogg. After the planned separation of the chemical company’s electronics and water businesses, the ‘New DuPont’ would be a diversified industrial company with brands including Tyvek, Kevlar and Nomex. DuPont intends to ‘unlock incremental value for shareholders and customers’ and expects the three companies to have more flexibility for their own growth strategies, ‘including portfolio enhancing M&A.’

DuPont expects to complete the separations within 18 to 24 months.

– CNBC reported that Crown Castle founder Ted Miller’s attempt to secure four board seats at the telecommunications company was resoundingly rejected by shareholders. Miller had put forward four candidates, including himself, for election. He had left Crown Castle more than 20 years ago, but argued that his candidates had strategic insight that Crown Castle’s 12 incumbent directors lacked.

Shareholders rejected that argument, as well as his claims of poor governance. All 12 of the company’s nominees were elected to the $44 bn company’s board.

Lawrence Elbaum, co-head of Vinson & Elkins’ shareholder activism defense practice, said Miller’s campaign faced steep odds going up against a company that had already begun making meaningful changes at Elliott Investment Management’s urging.