Alphabet’s $500 Million Settlement Shows Need for Risk Oversight

Alphabet Inc. board’s $500 million commitment to improve its global regulatory compliance structure should alert companies to ensure their corporate overseers are actively and clearly monitoring risks, attorneys say.

And it’s a reminder of the force of shareholder derivative actions such as the ones now settled by Google’s corporate parent to compel internal reform, they add.

Alphabet shareholders last week asked a federal court to preliminarily approve the accord, which would include the creation of a new board committee dedicated to risk and compliance, as the company and its Google LLC face antitrust regulators’ scrutiny.

The agreement lands as another US judge weighs how to curtail Google’s dominance—potentially by divesting its Chrome browser—after finding it held an illegal monopoly of the online search market in a case brought by the US Justice Department. Another federal judge found Google had an illegal monopoly in two markets through its online advertisement technology in April. Meanwhile US regulators investigate whether Google violated antitrust law through a deal to use artificial intelligence technology from a popular chatbot maker.

Breaking out a separate risk committee from Alphabet’s audit one “should help ensure that directors are not forced to divide their attention between financial oversight and compliance matters,” said Veronica Root Martinez, a Duke University School of Law professor.

“More generally, I view the settlement as an interesting and potentially innovative example of how shareholder litigation can catalyze meaningful compliance reforms within a large, multinational corporation,” she said.

The agreement is still subject to the approval of San Francisco federal court Judge Rita F. Lin. And it will likely come under heavy scrutiny from her and other shareholders, said Justin A. Kuehn, founder of Kuehn Law, adding that the US District Court for the Northern District of California is very familiar with stockholder litigation.

Ephemeral Communications

The investors’ derivative suit, filed against Alphabet’s leadership, ostensibly on the company’s behalf, alleged those leaders let it engage in various anticompetitive practices. This put the company at risk for billions of dollars in fines, damaged its reputation, and exposed it to antitrust investigations and enforcement actions by the Justice Department, state attorneys general, federal lawmakers, foreign governments, and private plaintiffs.

As part of the agreement, Alphabet will spend about $500 million over the next 10 years on its compliance and risk monitoring, including for new committees at different levels of the company and to preserve communications that the investors said were “previously ephemeral.”

The massive funding commitment fits with Alphabet’s size, but is unique, said the lead attorney for the shareholders. “The amount of money that Google/Alphabet has, if you compare that to the Facebook/Meta‘s of the world, it really sends a message that it’s a commitment to be taken seriously,” said Patrick Coughlin, who’s with Scott & Scott Attorneys at Law LLP, the law firm that leads the litigation.

“Over the years, we have devoted substantial resources to building robust compliance processes,” Google spokesperson Peter Schottenfels said in an email. “To avoid protracted litigation we’re happy to make these commitments as we continue to prioritize our compliance obligations.”

Board Committees

In context, the amount of money makes sense for a commitment at this large company “to have real teeth,” Kuehn said. But what the deal demonstrates is potentially wider adoption of risk committees—which would be a good trend to help alleviate some of the responsibilities balanced by traditional audit committees, Kuehn said, noting his surprised that a company of Google’s size didn’t already have one.

Companies often monitor such undertakings of their peers, Martinez said. “One company’s innovation is likely insufficient to establish industry practice, but if others adopt similar reforms, we may witness the emergence of Risk and Compliance Committees as a broader governance trend among large corporations,” she said.

The deal is a reminder that board members should purposefully monitor evolving risks to the institution, which could “be different in the future based on the global economic environment, the geopolitical factors,” said Jim Kramer, a partner at Orrick, Herrington & Sutcliffe LLP.

“Generally, the lesson here is board members need to be purposeful,” Kramer said. “They need to consistently be aware of risks facing the company, ensure that information to allow them to monitor that risk is making its way to the board, and when it does, that there’s a clear record that the board is going to own protecting the company from that risk.”

And boards should pay attention to changes in international antitrust regulators’ rules and enforcement. “Their boards should be updated on how this has changed—not just how the laws have changed, but how enforcement is approached,” Kramer said.

Derivatives Outlook

Coughlin, who said the Alphabet settlement was hotly negotiated for well over a year, said he wasn’t sure whether this would attract more shareholder derivative litigation, given the time and expense.

“First of all, you have to get by the demand, and everything else aside from making records’ requests. So you can spend $10 million and not be anywhere. It’s not cheap litigation. So we’re not necessarily sure this action will lead to more litigation,” he said. “I think what it’ll do is kind of wake up companies.”

Working on remedies like this is difficult, Kuehn said, particularly with large companies that don’t necessarily want to be told what to do: “To get any company to agree to governance is no small feat, but especially so with a company like Google.”

Any state limitations on shareholder litigation pose serious risks for investors in being able to engage with a company, and this case “demonstrates the value of what can be accomplished,” he said.

Still, boards should be prepared for it, because shareholder derivative litigation isn’t likely to cool down, said Orrick’s Kramer. “The Google case is a continuation of the trend that these cases are real, and the plaintiffs’ lawyers are looking very hard at how boards are monitoring risk and responding to risk,” he said.