Category Corporate Governance

We are on the cusp of the 2019 proxy season. Reporters are getting geared up to review the proxy statements of large, household named, public companies and report what they discover. Ahh, the sweet smell of anticipation! A heady aroma of blood, sweat, tears, and a bit of nervousness?

In any event, reporters got started a bit early this year (and who could really blame them given what companies have already disclosed). There have been a number of stories that look at changes in incentive plans that have been announced by companies so far in 2019:

• Shell–will link high-level employee pay to carbon reduction targets after engaging with shareholder activist Climate Action 100+
• BP— will factor greenhouse gas emission reductions into rewards for 36,000 employees worldwide after engaging with Climate Action 100+
• Chevron— plans to set greenhouse gas emissions targets and tie executive compensation and rank-and-file bonuses to the reductions
• Facebook–plans to incorporate social issue-related metrics into its employee bonus program to reflect updated company goals; none of the factors reportedly will have pre-assigned weightings or monetary values attached to them, instead Committee will use discretion to determine performance.
• Goldman Sachs–announced that as a result of the on-going investigation into the Malaysian investment fund if the investigation reveals information that would have impacted the company’s year-end compensation decisions, the Committee may reduce or clawback the executives’ 2018 year-end equity awards.

All of the above companies are in a similar situation–events outside of their immediate control (shareholder activists or the media) caused them to revise how they will measure compensation. As shareholder activism increases and the notion of what is good for our society under goes a shift as younger folks begin taking over key roles in society, we are likely to see this trend continue.

Consequently, companies should keep a close eye on emerging issues in their industry and the broader market, identifying those that may require changes to their compensation plans and designs, and keep a “work in progress file on how such changes potentially could be made as well as potential implications for the company of both making and not making such changes. For companies with the foresight to do such planning, they will be rewarded with the ability to better respond to changing events more rapidly, instead of floundering for a bit to find the path that best suits the company’s long-term, strategic goals.

This month the CII (Council of Institutional Investors) Research and Education Fund released its report on Board Evaluation Disclosure. The report posits that there are seven indicators of strength and then provide ten examples of good disclosure by companies.

The seven indicators of strength are:

• Three-tiered review
• Consideration of peer review
• Appropriate timing and format
• Evidence of follow-through
• Linkage to succession planning
• Strong independent director leadership, and
• Prudent use of third parties and technology

The report includes examples of effective disclosures from the followig companies:

• Allstate
• Bank of America
• ConocoPhillips
• Exelon
• ICE
• McDonald’s
• Regions
• Splunk
• Unum, and
• W.W. Grainger

https://www.ciiref.org/boardevaluationdisclosure

On August 29, 2018, the activist investor, CtW Investment Group, kicked off a new initiative to engage 30 major companies (click HERE to see the list of companies) concerning their use of anti-competitive employment practices, including non-competes, no-poach agreements, non-disclosure agreements, and mandatory arbitration. CtW asked each company it contacted to:

• Review its employment contracting practices, including the use of any of these provisions.
• Report the board’s findings to shareholders before the next annual meeting.
• Commit to increased human capital management disclosure going forward.

CtW was concerned about the potential liability and costs associated with such anti-competitive practices.  CtW also sees these anti-competitive practices as constraining the ability of individual workers to seek out new opportunities, causing an artificial limit the pool of potential matches available to employers. CtW sees the recruiting difficulties reported by many employers and attributed to “skills shortages” as more plausibly explained by the limits of workers mobility that employers themselves impose.

CtW made available several documents about its efforts (click for the source documents):

• Initiative Overview
• Engagement List
• Example Letter

We will have to wait and see what impact CtW’s initiative has on these anti-competitive practices.  But, if my removing these impediments to worker mobility ultimately helps companies secure they need to grow their businesses, it should be a win for everyone.  However, it may take some time to get companies, management teams and Boards comfortable with the notion of forgoing these “protections” for their workforce. But, if CtW and other institutional shareholders take up this initiative, and large companies begin to comply, as with most things, it could eventually filter out to a broad swath of U.S. public companies.

An October 2018 survey by the Stanford Rock Center for Corporate Governance sought to understand individuals’ view CEOs who take public positions on environmental, social, and political issues. The authors of the survey are David F. Larcker, the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business, and Brian Tayan, a member of the Corporate Governance Research Initiative at Stanford Graduate School of Business.

The authors found that:

• The public is highly divided about CEOs who take vocal positions on social, environmental, or political issues.
• The cost of CEO activism might be higher than many CEOs, companies, or boards realize.
• People are much more likely to think of products they have stopped using than products they have started using because of a position the CEO took on a public issue.
• When consumers don’t like what they hear, they react the best way they know how to: by closing their wallets.

Key Survey findings include:

• The public viewpoint of CEO activism is highly mixed, with opinions varying by age and political affiliation.
• The public is positive on environmental issues, negative on politics and contentious on social issues.
• Americans are most likely to recall prominent CEOs speaking up about issues they agree – and disagree – with.
• 65% of all survey respondents thought CEOs of large companies should use their position and potential influence to advocate on behalf of social, environmental, or political issues that they care about personally.
• By age group, 71% Millennials agreed with such action, while only 63% of Gen X and 46% of Baby Boomers agreed.
• Perhaps not too surprisingly, the survey found that Democrats viewed CEO activism more favorably than Independents or Republicans.

The survey report includes more detailed demographic information and breakouts of various questions by age, political affiliation, gender, region, race, and household income.

Link to 2018 CEO Activism Survey

https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-survey-2018-ceo-activism.pdf