Next-Gen Governance: AI’s Role in Shareholder Proposals

Arnaud Cavé is a Director and Niamh O’Brien is a Senior Consultant at FTI Consulting. This post is based on their FTI memorandum.

With AI continuing to captivate businesses, consumers and regulators, institutional investors are also increasingly focusing their attention on the implications for the businesses in which they invest. In our Responsible AI Governance white paper published in January 2024, we highlighted the risks to businesses and wider society of AI, provided an overview of regulators’ and investors’ responses, and proposed a governance framework to manage these risks. One topic covered in the report that is gaining traction is the emergence of shareholder proposals urging companies to disclose more information on the risks associated with  the deployment of AI and their efforts to mitigate them.

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Innovation: The Bright Side of Common Ownership?

Mireia Giné is Professor of Finance at the IESE Business School. This post is based on a recent paper by Prof. Giné; Miguel AntónFlorian Ederer, and Martin Schmalz.

The common ownership hypothesis has ignited a debate among scholars, policymakers, investors, and other industry stakeholders about the impact of widespread diversified investment on corporate competition. Central to the debate is the claim that when large investors such as asset management companies have significant stakes across competing firms within the same industry, they might dampen competitive incentives. Common ownership can lead companies to refrain from aggressive competitive strategies like price cutting or increased innovation, as these actions could harm the profits of their rival firms, which are also part-owned by the same institutional investors.

Proponents of the common ownership hypothesis suggest that this phenomenon could explain some puzzling trends in the economy, such as reduced business dynamism, elevated profit margins, and diminished consumer surplus. However, critics challenge these interpretations, arguing that the empirical evidence linking common ownership to anticompetitive behavior is not definitive and ignores the impact that common ownership may have for firms competing across multiple industries and for corporate innovation. They caution against regulatory interventions that could disrupt the investment landscape without clear proof of harm. This debate has not only academic implications but also practical consequences, influencing how markets are regulated and how corporate strategies are formulated. Our research dives deeper into this complex issue, exploring how common ownership affects corporate innovation across the U.S. economy.

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DOJ Pilot Program on Voluntary Self-Disclosures for Individuals

James J. Fredricks is a Partner and Bora P. Rawcliffe is Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

On April 15, 2024, the Department of Justice’s (DOJ’s) Criminal Division unveiled a new Pilot Program on Voluntary Self-Disclosures for Individuals that offers non-prosecution agreements (NPAs) to individuals who voluntarily disclose “original information” about certain types of crimes and who meet certain criteria.

By incentivizing individuals in this way, the program also intends to encourage companies to implement compliance programs that will enable them to prevent, detect, remediate and report misconduct. In practice, the pilot program — if successful — is likely to become another consideration for companies when deciding whether and when to self-disclose potential misconduct.

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Evolving lines of responsibility between the board and the management

Natalie Cooper is Senior Manager at the Center for Board Effectiveness at Deloitte LLP; Bob Lamm is Independent Senior Advisor at the Center for Board Effectiveness at Deloitte LLP; and Randi Val Morrison is Senior Vice President and General Counsel at the Society for Corporate Governance. This post is based on a Deloitte memorandum by Ms. Cooper, Mr. Lamm, Ms. Morrison, and Carey Oven.

As the business environment continues to evolve in complexity, so does the oversight role of boards. At the same time, investor, regulator, and other stakeholder expectations of board involvement in certain aspects of the business, including aspects traditionally within management’s sole purview, are changing in ways that may blur the lines of responsibility between the two. Ultimately, management’s job is to manage, whereas the board’s role is to oversee. Effective oversight relies upon maintaining clear lines of responsibility between the board and management.

This Board Practices Quarterly presents findings from a survey of members of the Society for Corporate Governance on the board’s leadership structure, independence, and involvement in a number of business matters, including activities related to corporate strategy, human capital, risk and risk management, and operations.

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Defenseless companies invite activism

Miles Rogerson is a Financial Journalist at Diligent Market Intelligence (DMI). This post is based on his Diligent memorandum.

Nearly half of the Russell 3000 companies targeted by activists in 2023 had few defenses against such advances.

According to Diligent Market Intelligence’s (DMI) Governance data, of the 103 Russell 3000 companies targeted by primary- and partial-focus activists in 2023, 50 had a “low” corporate defense score. Another 33 had a defense score ranked as “medium” while 20 companies had defenses ranked as “high.”

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Weekly Roundup: April 26-May 2, 2024


More from:

This roundup contains a collection of the posts published on the Forum during the week of April 26-May 2, 2024

The CSDDD: How the Phoenix Can Rise from the Ashes


That Starbucks DEI Case Doesn’t Stand for What You Think It Does


Climate Action 100+ Departures Put Proxy Voting in the Spotlight


Introduction to SEC v. Panuwat: Understanding “Shadow” Insider Trading


For or against? The year in shareholder resolutions—2023


UK Takeover Panel Proposes Narrowing the Scope of Companies Subject to the Takeover Code


Data in the Driver’s Seat: What Boards Need to Know about Data Governance


Against Contractual Formalism in Shareholder Oppression Law


Action Items for Boards: Where Directors and C-Suite Leaders Align and Diverge


The SEC and CFTC Overhaul Form PF


Contextual Corporate Governance



The Board Member’s Oversight of AI Risk – Moving from Middle to Modern English



Sharpened Expectations on Climate


Sharpened Expectations on Climate

Carine Smith Ihenacho is Chief Governance and Compliance Officer, Tim Smith is Lead Investment Stewardship Manager, and Kristin Verpe is Investment Stewardship Analyst at Norges Bank Investment Management (NBIM). This post is based on their NBIM memorandum.

Summary

In September 2023, Norges Bank Investment Management published a revised set of expectations on climate change to further support companies in managing the evolving climate related risks and opportunities. We present six core expectations, which apply to all companies, and provide further direction on good practices we encourage companies to adopt.[1] This blog post provides an overview of our updated expectations on climate change, and how the expectations inform our voting decisions as we enter the 2024 AGM season.

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The proxy advisory industry: Influencing and being influenced

Chong Shu is an Assistant Professor of Finance at the University of Utah. This post is based on his article forthcoming in the Journal of Financial Economics.

Investors, except for the largest ones, are generally apathetic towards corporate governance, reluctant to spend resources to effectively monitor their portfolio firms (Berle and Means, 1932). This apathy paves the way for proxy advisory firms to bridge the gap by exploiting economies of scale in information collection. However, this seemingly efficient solution becomes problematic as the industry consolidates around two major players: Institutional Shareholder Services (ISS) and Glass Lewis. This consolidation raises concerns about the diversity and quality of their advice. The role of proxy advisory firms thus emerges as both a solution and a subject of scrutiny.

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The Board Member’s Oversight of AI Risk – Moving from Middle to Modern English

Sean Dowd is a Local Market Leader, Partner, and Managing Director; Rich Kando is a Partner and Managing Director; and Chris Crovatto is a Director at AlixPartners LLP. This post was prepared for the Forum by Mr. Dowd, Mr. Kando, and Mr. Crovatto.

“Whan that Aprill with his shoures soote
The droghte of March hath perced to the roote,
And bathed every veyne in swich licour
Of which vertu engendred is the flour,
Whan Zephirus eek with his sweete breeth
Inspired hath in every holt and heeth
The tendre croppes, and the yonge sonne
Hath in the Ram his halve cours yronne,
And smale foweles maken melodye,
That slepen al the nyght with open ye…”

-Geoffrey Chaucer, The Canterbury Tales, 1.1 General Prologue

GenAI Prompt: “In Chaucer’s Middle English, please summarize the sentiment on Capitol Hill this spring as it relates to the proliferation of GenAI …”

GenAI Response: “There are too many press releases to summarize and I have not yet been properly trained in Middle English.”

Artificial Intelligence, including advanced forms of Generative Artificial Intelligence (“GenAI”), has been a headline grabbing topic for upwards of a year and arguably served as the driving force in keeping the NASDAQ Composite trading near all-time highs. GenAI can be thought of as “a machine-learning model that is trained to create new data, rather than making a prediction about a specific dataset. A generative AI system is one that learns to generate more objects that look like the data it was trained on.”[1] It is a revolutionary technology akin to the release of mobile telephones in the 70’s or better still, the introduction of automobiles a mere 500-years after Chaucer penned his literary classic. It appears that the application of GenAI spans well beyond the realm of assisting struggling high school English students across our nation in achieving their ‘Gentleman’s C’ (…or is it now a ‘Gentleman’s B’ with the advent of these wildly powerful technologies?).

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Shaping Tomorrow’s Dialogues – Bridging Gaps between Companies and Investors

Sallie Pilot is a Senior Adviser at The Investor Forum. This post is based on her Investor Forum report.

In the dynamic landscape of investment, where change and uncertainty are dominant features, the Investor Forum, has undertaken a comprehensive assessment of the pivotal dialogues between UK listed companies and their institutional investors. The standout finding is that the foundations of the relationships are robust and when companies and their investors have opportunities for meaningful dialogue, they are more likely to realise their common goal of sustainable long-term value creation. 

These insights from the Investor Forum, a non-profit community interest company set up by institutional investors in UK equities, confirm the role that effective communications can have in driving sustainable long term value creation amidst rapidly changing stakeholder interests and market dynamics.

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