Wachtell Lipton Discusses AI in the 2024 Proxy Season: Managing Investor and Regulatory Scrutiny

Corporate disclosures concerning artificial intelligence have increased dramatically in the past year, with Bloomberg reporting that nearly half of S&P 500 companies referenced AI in their most recent annual reports.  And some investors are clamoring for even more, using shareholder proposals to press public companies for detailed disclosures concerning AI initiatives, policies, and practices — including, most recently, an Apple shareholder proposal that attracted significant support at a meeting last week.  Regulators, meanwhile, have signaled increasing scrutiny of AI-related corporate disclosures, including in a February speech by SEC Chair Gensler cautioning against “AI washing” — the practice of overstating or misstating corporate AI activity.  For the 2024 proxy season and beyond, public companies will need to balance the competing demands of regulators and investors, in order to craft effective, responsive strategies for engaging with their stockholders on AI topics.

During last year’s proxy cycle, a handful of companies received shareholder proposals that sought enhanced AI disclosure or review of governance structures related to AI.  These proposals targeted not just major software companies like Microsoft — which saw shareholder support for a proposal to report on risks of AI-facilitated misinformation and disinformation exceed 20% at its December 2023 annual meeting — but also companies in more traditional sectors.  The Royal Bank of Canada, for example, faced a shareholder proposal that would have compelled an internal review of its AI policies, prompting it to make additional public disclosures of those policies.  This trend is sure to grow in the coming proxy cycles, as AI’s economic significance grows.  Kicking off the season, last week an Apple shareholder proposal for a report on business uses of AI and related ethical guidelines received support from nearly 40% of votes cast at the company’s annual meeting.  Other public companies are fielding similar demands.

AI-related investor engagement will vary by company and industry, but boards of directors — within and without the technology sector — should anticipate investor questions about the evaluation, use, and oversight of AI across business operations.  In certain cases, boards and management may consider proactively seeking input on key AI-related concerns and priorities during regular investor engagement.  More generally, boards and management can stay on the front foot by developing an intentional, well-documented approach to AI strategy and governance, coupled with a clear plan for investor communication.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “AI in the 2024 Proxy Season: Managing Investor and Regulatory Scrutiny,” dated March 4, 2024.