Regulatory Upheaval Is Coming. How Businesses Prepare and Respond Will Separate Winners and Losers
“Every regulation is going to be questioned. … And that'll be a better environment for many businesses once the regulations are wiped away. But they're going to have to adapt their businesses to exploit that," said Sean West, co-founder of Hence Technologies.
November 13, 2024 at 10:03 PM
10 minute read
The only constant is change, the adage goes. And it was particularly salient at Berkeley Law’s Fall Forum on Corporate Governance this week, where business and legal leaders convened to hear what they can expect in the year ahead, and how to navigate an ever-shifting regulatory environment.
Angeli Patel, executive director of the Berkeley Center for Law and Business, which hosted the event along with Cooley, said change management could be deemed the loose theme of Tuesday’s program. Attendees were treated to a slate of panel discussions on how to manage volatility and risk in areas such as artificial intelligence, climate and environmental, social and governance, and the incoming Trump administration.
Here are highlights from Tuesday’s sessions:
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The State of AI Regulation
If change and uncertainty are the closest descriptors for the current state of corporate governance, “safety” is the buzzword most closely associated with regulating AI. But federal efforts to put up legislative guardrails have largely fallen flat. More than 120 AI bills have been introduced in Congress, but not one has passed.
“Congress has deeply struggled for many years to regulate the tech sector,” California state Sen. Scott Weiner, D-San Francisco, noted at a panel on regulatory developments in AI.
President-elect Donald Trump has vowed to repeal President Joe Biden’s sweeping executive order on AI, and members of the U.S. House of Representatives have expressed an interest in defunding the National Institute of Standards and Technology, Weiner said. “California more than ever has not just a role, but a responsibility to act,” he said.
But California's Democratic governor, Gavin Newsom, recently vetoed SB 1047, an ambitious bill written by Weiner that required testing of large and expensive “frontier” AI models and held AI developers liable for catastrophic harms those models may cause. It also mandated a “kill switch” that could shut down AI models if they started to do anything “problematic.”
“I think there were some in the opposition to SB 1047 who, I thought, were in a very flippant way dismissing any idea of regulating anything at the model level,” Weiner said. “They would refer to it as ‘regulating math.’ OK, sure. But it's math that has incredible power, and the power is at the model level. The model level is what allows those applications to happen.”
Weiner said there’s no way to remove any chance of risk or force companies to certify that their AI models will cause no harm. “All we were asking is, 'Hey, can you please do a basic safety evaluation of your model to determine if there is a risk of catastrophic bargain? And if you do identify that risk, can you please take reasonable steps not to eliminate the risk, but to reduce the risk?'"
Gerard de Graaf, the European Union's digital envoy to the United States, took a similar tack. “The keyword is safety here," he said. "You step into an airplane, you believe it's safe. If you buy a car seat for your kids, you believe it's safe. Because it's regulated. And AI has tremendous potential. It's a fantastic technology. But there are safety issues. If you look at some of the automated decision-making systems, many of them are like black boxes or are biased in a way.”
The EU passed its AI Act in March and will be phasing it in incrementally, starting in February 2025. By 2027, the law will apply to AI embedded in products.
"It is something to get used to," de Graaf said. "If you're a social media company, you haven't been regulated for a very long time, and suddenly you're regulated. But that's the way life has changed. In the EU, you're regulated.”
As for the United States, substantive AI regulation will fall to the states. “You will continue to see not much being done around tech policy on AI, especially with the Trump administration,” said Irene Liu, founder of Hypergrowth GC and an AI adviser for the California Senate. She noted that nearly 700 AI bills have been introduced in 45 states this year, with topics ranging from deepfakes and restrictions of digital replicas to the government's use of AI.
Liu anticipates more collaboration between tech and government, and even more lobbying around the issue.
“Companies are investing a lot in advocacy so that they can try to help governments understand the technology so that it's not stifling their innovation,” she said. “And what you'll continue to see is that continued collaboration and, if anything, more advocacy and more investment in advocacy and lobbying teams. You'll hear louder voices, particularly from Big Tech, that are asking for particular regulations, particularly at the output level versus the input level, or regulating at the application level versus the model level.”
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Board Oversight of Climate Risk
The incoming president has made it pretty clear that climate change regulatory rollbacks are on the way. But investors still will expect companies to plan for and disclose their climate risks.
Boards, which are entrusted with thinking about longer-term risk, will have a critical role in this, said Kristina Wyatt, a former senior counsel for climate and ESG at the U.S. Securities and Exchange Commission. “Whether we're talking about climate risk, or other financial risk, they need to be able to look around the corner and project out where that risk is going to manifest over the short, medium and long term," said Wyatt, now the deputy general counsel and chief sustainability officer at the carbon accounting firm Persefoni.
Wyatt, who helped write the SEC’s climate change disclosure rule, said that despite the regulation’s uncertain future, boards that comply with existing climate reporting frameworks, such as Europe’s Corporate Sustainability Reporting Directive and California’s recently enacted law requiring some companies to disclose greenhouse gas emissions and climate-related financial risk, will be better prepared to respond to investor pressure. “It seems much less likely that there will be an SEC rule, but it almost doesn't really matter because of the pressure put on companies from the CSRD and California,” Wyatt said.
Cooley partner Beth Sasfai said boards should focus more on compliance and data, rather than the granularity of reporting. “Boards should be asking for data. If you don't understand what your company's carbon footprint is, you can't really understand what kinds of climate goals may or may not be appropriate. You can't understand what your risks may be,” she said.
“Just like in every other area in connection with board oversight, you need to understand your business, your strategy, your operations and how those are affected by climate considerations. So just the act of gathering the data, making sure that it's good data, understanding where it's coming from and processing that is important.”
Sasfai said ESG started as a voluntary exercise. Environmental and social governance plans were more aspirational in nature, and boards may not have even known about them. What has changed in the last 10 years is that boards are starting to ask about climate goals.
"We see loads asking very tough questions about what is the line of sight to our goals. Do we need to adjust our business strategy or operations in any way? Are there assumptions that we made at the time we set these goals that today aren't holding true, such that we need to reconsider and reevaluate? And then all of that translates into thinking about your disclosure. Are you talking about these challenges in meeting your targets? And sometimes that's very, very hard for companies and boards to get their arms around.”
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'There's Volatility Everywhere'
Corporate leaders are viewing Trump’s reclaiming of the White House with a mix of consternation and anticipation. Some look forward to a more business-friendly climate and easing of burdensome regulation. Others are concerned that the ever-pugnacious and vindictive incoming commander in chief will single out political enemies for retribution.
Expect no sacred cows, said Sean West, co-founder of tech company Hence Technologies, whose AI software helps law firms and corporate legal departments forecast geopolitical events and translate them into risk. “Every regulation is going to be questioned," he said. "We're going to start to see a reduction in the sheer amount of regulation. And that'll be a better environment for many businesses once the regulations are wiped away. But they're going to have to adapt their businesses to exploit that. That's a lot of work. And figuring out how to do that is challenging.”
Trying to game out AI regulation, for example, will be particularly challenging for legal departments. “We don't have settled law about what you can do with respect to using technology, but if you wait competitors are going to speed ahead of you,” West said. “Businesses are going to win in the market because they're going to get so far ahead of companies that are cautious. But that's a really tough position for legal departments to take. I think that's where the money is going to be made for businesses, and that's where legal departments will either be enablers of change or will be brakes on that.”
As companies prepare themselves for pullback in regulation, they’ll also need to brace for implementation of the incoming president's immigration agenda, including mass deportations.
“Look, the world is an unruly place right now. There's volatility everywhere,” West said. “Trump is a force for more of that change, which is probably good news for the private practice folks in the room—you've got a lot of work to do. But for the corporate legal teams here, increasingly these political questions wash up to your desks."
John Christiansen, a partner at the consultancy FGS Global, said workers are seeking guidance from their employers on whether they should avoid going back to their home countries during the holidays because of the risk they won't be allowed to reenter the United States.
“We don't have these answers," he said. "For the most part, companies don't. So what I think is key at this moment in time is to be very thoughtful about showing empathy with employees, being very factual to the extent we can, and having the right managers trained appropriately so that companies don't say things that they later regret to employees in an environment where we just don't know.”
State Sen. Nancy Skinner, D-Berkeley, projected that Trump's immigration policies will have a negative impact on segments of the state's economy heavily reliant on migrant labor, such as construction and agriculture. On the other hand, she predicted that businesses, particularly large corporations, will be very influential with the new administration.
Though Trump vowed to go after his enemies, including California, he is a savvy politician and recognizes that large companies won’t stand for drastic measures, such as punishing tariffs. “Trump is going to be responsive to business, and Trump is going to be responsive to prices. So I think the business community can have a significant say in moderating—in effect, influencing—the policies,” Skinner said. “There will still be some dramatic performative policies—there will be. But ones that really get at the core of hurting certain business sectors, maybe not. But that will be up to how businesses themselves unite and communicate to that administration.”
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