Corporate Secretary – Summer 2020

Governance, risk and compliance. Covid-19 and employee safety

Covid-19 puts spotlight on employee safety

The pandemic has placed greater focus on boards’ oversight of human capital management

Editor’s note Good governance matters

Learning from phase one of Covid-19

Good governance matters

Learning from phase one of Covid-19

For many of us, the last few months have been a blur. The Corporate Secretary team has talked to countless governance professionals about the whirlwind spring months when proxy statements were filed, annual meetings were converted to a virtual format, and investors and the media probed companies on their employee health and safety protocols.

As I write this note in mid-June, it feels as though we’re entering phase two of Covid-19. The reported cases aren’t falling, but there’s a desire to relax the shelter-in-place measures that many of us have been living under. This will pose new challenges and risks, as well as exacerbate the challenges companies already face around employee safety.

While you all navigate phase two of Covid-19, we hope this issue – which documents the governance changes during phase one of the virus – helps you to identify and implement best practices from your peers. In the first couple of articles, we hear from Chevron and Regions Financial about their virtual annual meetings.

Our lead feature covers the role boards must play in monitoring human capital management, an issue that threatened to become a major proxy season talking point even before Covid-19. Later in the issue we cover highlights from Corporate Secretary's virtual conference on Covid-19, and our friends at Sullivan & Cromwell provide tips for how boards can prepare for post-pandemic activism.

And while Covid-19 provides the backdrop for most of our reporting in this issue, there are – of course – other issues worth exploring, including employee-shareholder activism, what the SEC’s proposed 14a-8 rule change could mean for SRI investors, and a look at how a couple of different investors are integrating ESG into their stewardship priorities.

We hope you enjoy this issue of Corporate Secretary. But more importantly, we hope you are staying safe and sane. The last few months have posed tremendous personal and professional challenges for all of us, and I fear we’re not out of the woods yet. Thank you for reading and for your support of Corporate Secretary, and please take care this summer.

Ben Ashwell
Editor
ben.ashwell@corporatesecretary.com
+1 212 430 6869

Editor Ben Ashwell
Editor-at-large Ben Maiden
Managing editor & chief copy editor Kathleen Hennessy
Contributors Frank Aquila, Jeff Cossette, Melissa Sawyer, Mike Schnitzel
Design and production executive James Noden
Head of marketing Marie Paul

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Interview First time’s a charm

Chevron Corporation was among many companies holding their first ever virtual annual meeting this year. Here Chevron’s corporate secretary and chief governance officer Mary Francis talks to Ben Ashwell about how the company changed its plans – and saw a 200 percent increase in attendees

Mary Francis, Chevron

First time’s a charm

Chevron Corporation was among many companies holding their first ever virtual annual meeting this year. Here Chevron’s corporate secretary and chief governance officer Mary Francis talks to Ben Ashwell about how the company changed its plans – and saw a 200 percent increase in attendees

Chevron decided to hold a virtual shareholder meeting this year. Had you held one before?

This was our first virtual shareholder meeting. We had discussed it in the past and had always decided against it.

You filed your proxy statement in early April, and announced the potential for a virtual meeting, which you confirmed in mid-April. What preparation was required?

As we approached the date of filing our proxy, it was looking more likely that the meeting would need to be virtual but we weren’t certain, and we didn’t have arrangements in place. We preserved the optionality in the proxy and then about two weeks later it was clear we would be going virtual, which we communicated in a press release.

It wasn’t that radical a shift: our in-person meeting has a lot of security and in-person features: catering, traffic flow, registration desk, seating, and so on, so a lot of that work could be dispensed with. It came down to modifying the script.

How did you approach that?

With an in-person meeting it’s very visible to everyone that your directors and auditors are there. We wanted to adapt the script to make it clear that even though you couldn’t see them, they were with us. We also wanted to be clear about how proposals would be presented. We reached out to all the proponents and asked them whether they’d like to phone in at the appropriate time or submit a prerecorded statement.

Our biggest concern was technology failure and we offered this option so we could test it in advance and eliminate the risk that presenters would be unable to connect during the meeting. All proponents chose to submit a prerecorded statement that we played; then our chairman responded.

How did your board of directors feel about moving to a virtual meeting format? What did you do to ensure directors were comfortable with the technology in advance?

Clearly, under the circumstances we had to do a virtual meeting and the board was very happy we were doing it that way as it considered it an efficient use of time. In our experience we don’t get large shareholders at our meetings, and relatively few shareholders of any size actually attend, so the fact that we were able to reach more people safely and more efficiently was welcome news to our board.

As far as addressing things that might go wrong, I think we did a very good job of thinking expansively in our planning. We pre-identified people who would help for different issues. I made sure the board directors knew in advance who to contact if they had trouble connecting.

Were you concerned about criticism from investors?

Because this was new for us, and service providers for virtual meetings were clearly stretched this year, we went for the plain vanilla version of a virtual annual meeting. I know a lot of investors and governance critics prefer a live video feed to simulate the in-person meeting. I did look at some of the companies whose meetings have a high production quality and they tend to be technology companies where a high-tech video meeting is aligned with their brand offering.

I’m on the board of the Council of Institutional Investors and it takes the position that it will support virtual meetings only if they replicate the in-person experience as far as enabling participation goes. In some engagements with investors, we have been asked for a commitment that we’ll go back to an in-person meeting next year or do a more fulsome production of a virtual meeting. But I think everyone got a pass this year under the circumstances of the pandemic.

Did you notice any change in the attendance for the annual meeting?

We had more than 200 percent higher attendance. Not including employees, we had more than 200 people on the call, whereas we would normally have 50 attendees, at best, in person. We also had some Tier 1 media listening in, which doesn’t normally happen.

We reached out to all the proponents and asked them whether they’d like to phone in at the appropriate time or submit a prerecorded statement

How did you approach the Q&A section of the meeting? Many investors have expressed concerns about feeling marginalized in a virtual format, so how did you manage that?

We received more questions than we typically would. We allowed questions to be submitted in advance as well as during the meeting, though we reserved the right to summarize or combine similar questions in the interest of being able to address more questions overall. In total, we answered about the same number of questions that we normally would – more if you include those we posted on our website after the meeting – but they spanned a wider range of topics this year.

At our in-person meetings, we tend to get questions from people who take issue with our company for various reasons. In this virtual meeting, we got questions about our dividend, the outlook for OPEC production, how we attract talent in a downturn, gender balance on our board and other issues.

Our chairman was pleased that we got more business-oriented questions this year. The questions were broadly in line with what we expected and reviewed in the prep sessions we held.

I’m aware that some people have concerns that when companies see questions in advance, they can edit or exclude them in a virtual format. We committed upfront that any questions we didn’t address during the meeting would be displayed and answered on our website. A commitment to integrity guided us, so there were no planted questions, and we made sure that we presented questions on climate change and environmental issues, because they are clearly of interest to our shareholders.

What has the feedback been since the virtual meeting?

Directors were positive about the experience. We’re thinking about how to enhance this if we hold a virtual meeting again.

If we do repeat this, I would like to find ways to make it more evident that our directors are on the line

We are keen to get investor feedback and we will weigh that, along with the safety and security concerns, cost and other considerations of holding the meeting when we make a decision on whether – and how – to do our next virtual meeting.

We know that in-person meetings are really important to some people – even if they themselves don’t attend the live event. If we do repeat this, I would like to find ways to make it more evident that our directors are on the line – whether that’s through them introducing themselves, or depicting them visually.

At the moment, we’re still working remotely and we have no line of sight as to whether conditions will be back to normal next year. We really liked the virtual experience and are proud of how we conducted the meeting. It was a lot cheaper and simpler, and we got a lot more participation.

Interview Navigating to a ‘new normal’

Ben Maiden talks to Hope Mehlman, executive vice president, corporate secretary and chief governance officer with Regions Financial Corporation, about how the company’s AGM, reporting and engagement have adapted to the challenges of the pandemic

Hope Mehlman, Regions Financial Corporation

Navigating to a ‘new normal’

Ben Maiden talks to Hope Mehlman, executive vice president, corporate secretary and chief governance officer with Regions Financial Corporation, about how the company’s AGM, reporting and engagement have adapted to the challenges of the pandemic

Regions held its first virtual AGM this year due to the pandemic. How did you prepare for that?

Planning for the unexpected and being proactive are key components of good governance. A few years ago we amended our bylaws to allow for a virtual meeting in case there was an emergency or other disruption. Then toward the end of January we started hearing a lot about the pandemic and started considering the need for a virtual meeting, so we put contingency plans in place to enable us to move to that smoothly if necessary.

We did things like call Broadridge to see whether it had a list and, if so, whether we could get on it. We made sure we understood the state law requirements and put the necessary language in our proxy statement to reserve the right to transition to a virtual meeting. And we started talking to the board about what we were doing and saying that this was a possibility.

As Covid-19 continued to emerge, the board and management started having more frequent dialogue. We now have a weekly board call to keep directors informed about what is going on – including the move to a virtual meeting – so they can fulfill their oversight duties. We prepared them for how they would participate, and they all took part in the virtual meeting. Everybody did it remotely to protect everyone’s health and safety.

What rules did you have in terms of shareholder participation?

We did not have any shareholder proposals but we wanted to make sure shareholders could submit questions either before or during the meeting, so we opened a portal allowing them to [do that]. We wanted to be as open and transparent as possible. If we had had a shareholder proposal, I know we would have allowed [the shareholder] to present [it] and would have given it sufficient time. Our shareholders are an important stakeholder and we want to make sure they are heard.

We had more participation in our meeting because we allowed guests to log on. We wanted to make sure people were hearing our message because a lot of that centered around Covid-19. Everything was already out there publicly but we wanted to make sure that anyone who wanted to hear it could hear it.

Are you expecting to stay with a virtual meeting next year?

We’re going to evaluate the situation. I think there are pros and cons of having a virtual meeting. Everything went very smoothly for us and we’re in Birmingham, Alabama, so one benefit is that we can have more shareholders tune in. But I think you lose something by not having it in person. I don’t think we’re at the point of making a decision.

I know there’s a lot of discussion with shareholders [in general] about virtual meetings and their opinions on them. While we may not see the same number of virtual meetings [next year] as we did this year, I think this will be a turning point. My opinion is that if you have concerns about a virtual meeting as a shareholder, that’s understandable, but you should also be thinking that this may be a transformative year and that if more companies are going to go down this route then this is your opportunity to weigh in on that and shape things.

Has the pandemic affected your ESG reporting?

We are getting close to publishing our ESG report and what you’ll see this year is that we are going to talk about Covid-19 in that report. Part of the reason I have delayed it is because I’ve wanted to talk about [the pandemic] and our response from a human capital-management perspective and in terms of our customers and communities. I think it’s very important for our investors to be able to see how we responded. We have materials on the website but to bring it all together in one [place] while talking about ESG was important to me.

We engage Gallup to survey our associates regularly and this spring we introduced two Gallup pulse surveys related to Covid-19. One was about [the company’s response to] Covid-19 and the other was about returning to the ‘new normal’. We want to make sure our associates have a voice.

We’ve done things like paying premium pay bonuses for more than 9,000 personnel, we’ve had free Covid-19 testing with doctor approval, enhanced facility cleaning and coaches on calls [to help] team leaders with associate engagement. We’ve had about 10,000 associates, or roughly half of our workforce, working remotely. The decisions we have made are in line with our strategic priorities and our values, which include building the best team and doing what’s right.

A few years ago we amended our bylaws to allow for a virtual meeting in case there was an emergency or other disruption

What metrics might you use for reporting around Covid-19?

One metric would be results from the Gallup polls we conducted among associates so that we can understand what’s going on with the workforce. Also disclosing how many people are working remotely and how many people are getting the premium pay, those types of things.

How has the pandemic impacted your engagement program?

The investor relations team continues to have engagement calls. It’s slowed things down a little for us because I would normally have in-person engagement with investors at events such as the Harvard corporate governance forum or the Stanford institutional investors forum, and some of the March events were canceled. Stanford did its event virtually and Harvard split its event into three virtual segments.

When you have in-person engagements, you can sit down with investors and talk to them, and I don’t think this virtual engagement is the same. You don’t have the same kind of separate, stand-alone [interactions].

Usually with our in-person engagement we would bring investors to the board – last year we had a dinner with investors. Unfortunately you can’t have those personal engagements [this year] but what I am contemplating – now that people have become better with the technology – is that when we do our usual summer investor calls we make them virtual so we can at least see the people. If that works well, we may change things in the future.

We had more participation in our meeting because we allowed guests to log on

How might the pandemic affect the board’s long-term thinking, and how can you best help the board evolve its thinking?

I think it’s all about trying to be a thought leader, trying to figure out what the risks and opportunities are and going outside of day-to-day issues. This is all part of strategic thinking about where the company needs to be, and thinking of where things can go wrong and preparing for that. Any well-managed company is constantly thinking about crisis management.

It’s like when we were considering moving to a virtual meeting. My job is to think about how things can work smoothly so there’s not some kind of panic. My job is to challenge myself to think about where we need to be. And that’s all about having good governance in place.

Dorothy Flynn (right), president of corporate issuer solutions at Broadridge, presents Corporate Secretary's 2019 award for governance professional of the year (large cap) to Hope Mehlman, executive vice president and chief governance officer at Regions Financial Corporation

ESG Safe and sound? Covid-19 puts spotlight on human capital

Despite initial claims the pandemic and associated economic turmoil would cool interest in ESG issues, the reverse appears to have happened – with a particular focus on social issues such as human capital management as companies tackle employee safety and the future of work. Ben Maiden looks at how governance teams are responding

Safe and sound? Covid-19 puts
spotlight on human capital

Despite initial claims the pandemic and associated economic turmoil would cool interest in ESG issues, the reverse appears to have happened – with a particular focus on social issues such as human capital management as companies tackle employee safety and the future of work. Ben Maiden looks at how governance teams are responding

Corporate leaders have in recent years proclaimed their company’s employees as their greatest asset – statements that have sometimes been met with skepticism. So when Covid-19 emerged to threaten the lives of workers, it was time for employers to put not just their money but also their attention and efforts where their mouths were.

Human capital management had been growing in prominence for investors and companies before 2020, but the pandemic thrust it into the spotlight. For companies, there is not just a need to address the immediate health and safety of employees, but also an array of associated issues such as wellness, mental health, ensuring employees have the right tools and policies for working from home, helping employees return to work safely and dealing with layoffs and morale, to name but a few.

Rishi Varma, HPE

Employees’ experience has to extend beyond the four walls of the office

Governance teams are helping boards with their oversight of these challenges while reporting about their company’s efforts and engaging with investors. At Hewlett Packard Enterprise (HPE), general counsel Rishi Varma describes a new work environment as employees return to its facilities, not just in terms of a focus on safety but also that ‘employees’ experience has to extend beyond the four walls of the office.’

Thought is being given to what it means to be an HPE employee working from home, including ensuring access to the right technology, Varma says.

Beyond where and how people work, boards and management at companies need to consider issues such as diversity, inclusion and talent development, says Derek Windham, vice president and associate general counsel at HPE.

Joanna Daly, vice president of compensation, benefits, corporate health and safety and HR business development at IBM, says the pandemic has acted as a stress test for the company’s human capital management – including moving 95 percent of employees worldwide to working from home within two weeks. This went smoothly, partly because the firm had been investing in tools to enable remote working, she says. Since then, her team has taken the pulse of the workforce through polls asking such questions as ‘How are you doing?’ and ‘Are you getting the support you need?’

Another human capital issue to come to the fore is succession planning, notes Tierney Remick, vice chair and co-leader of Korn Ferry’s board and CEO services team. This includes boards gaining more awareness of key roles beyond the C-suite and plans to fill those posts if people fall ill, she explains. With many companies looking at a shift in business model, boards may also need directors with new skillsets, she adds.

One of the most obvious governance impacts of the pandemic has been the boom in virtual AGMs in an effort to protect shareholders, directors and employees. Last year Broadridge hosted 326 virtual AGMs. By comparison, the company worked on 860 virtual shareholder meetings between January 1 and May 22 this year, with more to come. Cathy Conlon, head of corporate issuer strategy and product management at Broadridge, reports that these meetings have seen an increase in the number of attendees and questions asked by shareholders.

‘In their presentations, almost all our clients are proactively addressing how they are operating during the pandemic, including outlining steps they have taken to protect the health and safety of employees,’ says Jennifer Warren, CEO for issuer services in North America at Computershare. ‘Investors also took the opportunity to ask questions about the impact of the virus on employees, both on their health and long-term implications around employment practices.’

Peter Reali, Nuveen

Taking positive steps around human capital may not always go down well with shareholders

Shareholder scrutiny
Filing deadlines meant the door was closed to Covid-19-related shareholder proposals this year. But governance professionals and investors expect to see measures put forward in the fall and during 2021. Timothy Smith, director of ESG shareowner engagement at Boston Trust Walden, says proposals are more likely to arise if investors or the public perceive a company to have behaved badly, such as by not offering adequate protection to workers or awarding its CEO a large bonus despite having made layoffs.

Peter Reali, senior director of responsible investing at Nuveen, says shareholder voting relating to the pandemic is more likely to focus on punishing directors for poor performance. His firm has also been making a list of companies where it may want to revisit executive compensation plans. Say on pay and equity grants are likely to attract a lot of scrutiny, he adds.

Taking positive steps around human capital may not always go down well with shareholders if they see efforts such as paying good benefits to employees being laid off as a cost, says Anuj Shah, managing director with KKS Advisors. But those efforts build goodwill with clients, improve morale and retention among remaining employees and may make it easier to hire back the same workers when business conditions improve, he adds.

Lots to discuss
In the meantime, human capital management related to the pandemic has been a core aspect of engagement during 2020. Varma describes a shift from investors asking about attracting and retaining top talent to enquiring how the company has been protecting employees and how the board has been involved in those efforts.

Frank Sedlarcik, vice president, assistant general counsel and secretary at IBM, says the company proactively raised its Covid-19 response during engagement, with discussions focusing not only on health and safety but also on the company’s efforts to provide assistance elsewhere, such as its work with the Weather Channel. Meanwhile, at Boston Trust Walden, Smith says firms in general have proven willing to discuss their pandemic responses, including human capital issues, provided questions are not framed as an attack.

‘The crisis has illuminated the need to focus on human capital being a company’s most valuable asset,’ says Aeisha Mastagni, a portfolio manager in the sustainable investment and stewardship strategies unit at CalSTRS, adding that every call with companies has included discussion of the issuer’s response to Covid-19 in terms of employees, customers and communities.

Mastagni's approach to engagement this year has three main themes: companies’ business continuity planning, including around suppliers and communities; the health and wellbeing of employees in the short and long term; and whether the company’s approach aligns with long-term value creation by not allowing for one stakeholder, such as employees, to be impacted disproportionately.

Reali notes the many questions about the future of work, including working from home and deciding how to arrange office space so that it can be used safely. Many companies would admit they don’t have answers to these questions, but Reali wants to see that they are thinking about it – for example, how often is the board getting updates? What is the level of board oversight? Is there a timeline for changes? What future problems is the company preparing for?

Aeisha Mastagni, CalSTRS

Getting the message right
Corporate governance teams have also been preparing disclosures that address human capital-management issues in relation to the coronavirus. As with much ESG reporting, some of the key decisions entail the use of metrics.

‘In terms of Covid-19, I think a lot of work is being done to figure out best practices for reporting,’ says Jonas Kron, senior vice president and director of shareholder advocacy at Trillium Asset Management.

AT&T delayed publication of its ESG report in part to include information related to the pandemic. ‘We want to make sure we’re telling all the stories,’ explains Ben Kruse, director of global ESG reporting and insights at the firm. For example, the report now includes a page on AT&T’s business continuity planning and related governance. It also includes a page on the company’s efforts to help employees by working from home, its philanthropic initiatives and its work for Covid-19 first responders by providing them with their own wireless network. Kruse says this reporting takes more of a narrative approach in part because the situation has been shifting so rapidly that data could be out of date overnight.

Regions Financial Corporation also delayed the release of its ESG report to include details of its pandemic response from a human capital management and community perspective. Hope Mehlman, executive vice president, corporate secretary and chief governance officer, explains that part of that response has been to conduct Gallup polls among employees to get feedback on the company’s handling of the crisis and to gauge how the workforce feels about returning to normal operations. ‘We want to make sure our associates have a voice,’ she says. The company’s reporting includes metrics such as the results of the polls, how many people have been working remotely and how many workers have received extra pay.

Mastagni says CalSTRS is supportive of companies using a narrative approach but would like to see some basic metrics regarding human capital management. According to Reali, Nuveen has not decided what metrics it will be looking for from companies around Covid-19, but that they are likely to include measurements of employee safety and retention. In terms of ESG, the firm prefers to see data showing how far the company is getting toward meeting goals outlined in its narrative.

In terms of Covid-19, I think a lot of work
is being done to figure out best practices
for reporting

Guidance on human capital metrics is available. Kron says the Human Capital Management Coalition’s 2017 petition that the SEC require firms to disclose information about their human capital-management policies, practices and performance remains a good ‘touchstone’ for companies, investors and regulators. The petition seeks categories of workforce information such as demographics, stability, composition, skills and capabilities, culture and empowerment, health and safety, productivity, human rights and compensation and incentives.

Kron also notes that Trillium has for two decades been asking companies to release their Employer Information Report EEO-1 tables, which must already be filed with the US Equal Employment Opportunity Commission and include company employment data categorized by race/ethnicity, gender and job category. He adds that this would be particularly important given the racial disparity in terms of the health impacts of Covid-19: ‘Given the conversation we are having about gender and race in this country, it’s the least companies can do.’

Jonas Kron, Trillium

Hannah Orowitz, a managing director on Georgeson’s corporate governance advisory team, notes that reporting will be company-specific, but recommends that issuers look at Boston Trust’s Q1 ESG impact report, which spells out what investors are asking for. She also points to an SEC proposal that would add human capital to corporate disclosures, SASB's human capital-management category and the Task Force on Climate-related Financial Disclosures’ four-pillar structure: governance, strategy, risk management and metrics and targets.

Meanwhile, Rodolfo Araujo, senior managing director in the strategic communications segment at FTI Consulting and head of the segment’s corporate governance and activism practice, notes that while the pandemic has made companies aware they need the right policies to ensure they can keep employees safe, it will also expose those that do not. He points to a phrase attributed to Warren Buffett: ‘Only when the tide goes out do you discover who’s been swimming naked.’

Hannah Orowitz, Georgeson

Best practices Working from home, but learning together online

Corporate Secretary in May hosted its first ever virtual conference, bringing together governance professionals and directors who were working remotely to share their experiences of how the Covid-19 pandemic has impacted governance and their insight into what its legacy will be. Ben Maiden reports

Working from home, but learning together online

Corporate Secretary in May hosted its first ever virtual conference, bringing together governance professionals and directors who were working remotely to share their experiences of how the Covid-19 pandemic has impacted governance and their insight into what its legacy will be. Ben Maiden reports

Changing how the board works

Health and safety issues raised by Covid-19 have led to boards taking up virtual meetings with fellow directors and executives to an unprecedented extent. Many are likely to switch to virtual meetings being the default option, at least until a vaccine is implemented, Dottie Schindlinger, executive director of Diligent Institute, told the audience. In doing so, boards will need to work out how to better conduct deeper, strategic conversations while using the technology – discussions that cannot wait until boards are able to meet in person again, she said.

The move to virtual meetings has been accompanied by more frequent and often shorter sessions as boards tackle fast-changing events and conditions. Catherine Kilbane, retired senior vice president, secretary and general counsel of The Sherwin-Williams Company, lead director at The Andersons and a member of the Cleveland Clinic board, told the audience that her boards had started meeting at least weekly.

The SEC requires companies to disclose if a director attends less than 75 percent of meetings during a year so to avoid triggering this, these meetings are referred to as ‘update calls’. Kilbane advised allowing all directors to attend committee meetings, making sure records are kept accurately and checking that the company’s bylaws allow for virtual board meetings.

Fellow panelist Eileen Kamerick, board member at Associated Banc-Corp, Legg Mason Closed-End Mutual Funds, Hochschild Mining and AIG Funds, noted that it is very difficult to hold a typical nine to 10-hour meeting virtually so the agenda should be shortened and reprioritized. Directors can be sent reading materials ahead of time rather than sitting through presentations, she said, adding that if a committee is working on a specific project or decision, it can break that process up into a few separate calls laying out the issues and a final call to make the decision.

Amid an ‘explosion’ of meeting requests and ‘Zoom fatigue’, directors can be updated without the need for a call by being sent materials and posting comments on shared documents in the board portal, Schindlinger advised. An online board evaluation tool could also be used to ask for directors’ opinions on a topic – and thereby avoid a meeting if everyone is in agreement, she added. Asked whether the shift to more frequent, shorter meetings will continue, Schindlinger said: ‘I sure hope so. We would not be sorry to see the end of sitting passively listening to reports.’ Her fellow panelists nodded.

Kamerick said board members should do better in terms of engaging with management in setting the agenda and determining what is presented to them, asking what risks and opportunities management sees and focusing on the information directors need to have robust discussions.

A renewed ESG focus

The second panel of experts highlighted how ESG issues, far from going away amid market volatility and heightened uncertainty, have cemented their importance – and their role in boards’ thinking – as a result of the pandemic.

One of the most visible signs of this has been the renewed focus on human capital management. Kaley Childs Karaffa, director of board engagement at Nasdaq, noted that traditionally human capital management has focused on compliance with regulations and looking at the quality of the workforce. But the Covid-19 pandemic has presented an opportunity for boards to view ESG issues in a new way as they relate to risk oversight, and has shifted the approach to human capital from one of regular reviews by management to boards considering how human capital is important to strategy, Karaffa said.

Melanie Adams, vice president and head of corporate governance and responsible investment with RBC Global Asset Management, noted that her firm’s investment teams have been engaging with companies extensively throughout the pandemic, although the topics of discussion have shifted.

She said issues on the agenda amid the pandemic have included business continuity planning, the numbers of employees working from home, employee health and safety – including benefits for those still working at facilities – culture and morale (including issues such as how those working from home are coping with childcare), supply chain management, whether companies need government assistance or are facing layoffs, and executive compensation.

It’s becoming clearer that ESG principles are here to stay and can drive long-term value creation and build brand loyalty

Adams said ESG issues had led to increased board involvement in shareholder engagement even before Covid-19, but that the pandemic will likely increase this by highlighting the importance of boards communicating how their company is addressing issues such as employee health and safety.

The timing of deadlines to file shareholder proposals meant Covid-19-related ballot measures have not been a feature of the 2020 proxy season. But Adams said she expects to see requests from investors for disclosures around issues such as employee health and safety and supply chain risk to be top of mind going into 2021. In the meantime, she noted a growing number of questions from clients about supply chain and employee health and safety matters.

This situation highlights the importance for boards of understanding investors’ interests and priorities, Karaffa pointed out. They should work with management and investor relations (IR) teams to make sure they understand how these interests and priorities are shifting, and ensure the company has sufficient liquidity to help it deal with any activist that might try to take advantage of an ESG-related issue such as health and safety, she advised.

Amanda Cimaglia, managing director for ESG at Solebury Trout, noted that the pandemic has brought IR and governance teams together, particularly at small and mid-cap companies, as they have faced the challenge of finding the right balance of tone and content in their disclosures around ESG issues.

This presents an opportunity to bring the heads of in-house teams such as governance and IR together with the board to consider strategic thinking on communications regarding a company’s response to the pandemic, she said. ‘It’s becoming clearer that ESG principles are here to stay and can drive long-term value creation, build brand loyalty and demonstrate resilience during a difficult time,’ Cimaglia told the audience.

Matt Geekie, senior vice president, secretary and general counsel with Graybar Electric Company, noted that the pandemic will give his firm cause to review its controls and disclosures to ‘assure people that on the ESG front we are doing what we say we do.’

ESG issues, far from going away amid market volatility and heightened uncertainty, have cemented their importance – and their role in boards’ thinking – as a result of the pandemic

A renewed ESG focus

Adjusting to virtual meetings

The final panel struck a positive note for the hundreds of companies switching to virtual AGM formats this year in the face of the pandemic. Two of the speakers reported having positive experiences as first-time users of virtual AGM platforms, while Sherry Moreland, president and COO of Mediant, assured the audience that doing so is about ‘planning, preparing and communicating’.

Moreland’s advice for first-timers includes general counsel checking state regulations and their company’s own bylaws to make sure virtual AGMs are possible. Governance teams need to pay close attention to communicating via the proxy statement information, such as how shareholders can join the virtual event, how they can ask questions and what the rules of conduct are, she said. They should also work closely with the board and management to determine what format the AGM should take – and have a dry run, she added.

Paycom is among the companies that have held a virtual AGM for the first time this year. Jericah Cummings, managing attorney for governance and risk at the company, emphasized the importance of clear communications to both shareholders and other stakeholders. In that spirit, Paycom filed an amended notice to its proxy statement, issued a press release about the move online and amended its website materials on the meeting. Ultimately, the company was able to hold the AGM with everyone taking part remotely, and it worked ‘seamlessly,’ Cummings said.

Michael Reilly, executive vice president, general counsel, chief compliance office and secretary at FMC Corporation, which also went virtual for the first time this proxy season, described a similar process to Paycom’s. Part of his preparation involved sitting in on other companies' virtual AGMs to help get comfortable with the technology. On the day, executives took part from the boardroom – while suitably spaced apart – in the interest of being able to share visual cues where necessary. Reilly described it as a great experience – and one that generated higher investor participation.

Both Reilly and Cummings said they were able to take the templates and scripts from their previous in-person AGMs and adapt them to the virtual format without too much work. Both companies allowed shareholders to submit questions ahead of the meeting. The greater challenge was getting to know the technology they would be using, they reported. ‘It was a very reasonable process. It was more a [question of] understanding the unknown as this was the first time we were approaching this task in a virtual way,’ Cummings told the audience.

HP has been holding its AGMs virtually since 2015. ‘The good news is that what seems difficult now will be very familiar by next year,’ said Rory Ross, global head of strategic legal matters and assistant corporate secretary. His team looks at governance issues and discusses with the board each year whether to go with a virtual AGM. HP, facing a proxy contest, had been expecting to hold an in-person event this year but went back to a virtual format after the contest was withdrawn and the pandemic arose, Ross said. The company allows shareholders to pose questions before and during the AGM, commits to answering every question and provides a transcript or audio recording of the event, he added.

Looking ahead to next year, Moreland said she expected to see ‘a huge shift to virtual. Our lesson is that we’re capable of doing this.’ In the future, a virtual AGM is a viable option to be considered each year although no decision has been made on 2021, Cummings said. Again, while no decision has yet been made, Reilly said FMC is ‘very likely’ to stay virtual next year, adding that he too expected to see a big shift at companies in general.

M&A matters

To round out the day’s content, Josh Lawler, partner with Zuber Lawler, shared some insight on corporate governance in the context of M&A. He noted the less-forgiving environment outside of a bull market, with shareholders likely to be more critical if they are not getting the same returns as previously. This is ‘new territory that elevates the stakes,’ he said, urging the audience to guide boards to ‘do the right thing’ in terms of taking a careful approach to compliance and using sound decision-making.

There will also be opportunities to acquire bargains in this environment but, in the context of M&A activity, steps must be taken to help insulate the board, Lawler said, adding that these include:

Understanding the motivation for transactions
Recognizing – either as a buyer or a seller – that every business has changed
Noting that if a company needs to change tack, the board should determine this first and then apply the same analysis to any potential target
Being conscious that relying on historical data and making predictions will be more challenging than before.

This is new territory that elevates the stakes

Activism The threat of employee-shareholder activism

Several recent high-profile examples have shone a light on employee-shareholder activism in the US. Ben Ashwell reports

The threat of employee-shareholder activism

Several recent high-profile examples have shone a light on employee-shareholder activism in the US. Ben Ashwell reports

Boardrooms across the country are increasingly discussing human capital-management issues, as investors bring subjects like diversity and inclusion, employee safety, retention and engagement into focus. With so many CEOs of US companies signing the Business Roundtable statement on stakeholder value, and Covid-19 raising legitimate concerns about employee safety, companies can expect greater scrutiny of how they treat their employees in the future.

The majority of shareholder proposals on human capital management have asked for more detailed disclosures from companies. At Alphabet, Amazon and Walmart, meanwhile, employee groups have co-sponsored shareholder proposals that made it to the ballot during the last couple of years. In each instance, existing employee-activist groups decided a shareholder proposal was an appropriate escalation of their lobbying of management.

At Amazon, employees filed a shareholder proposal in late 2018 asking management to publish a detailed description of how it intends to address climate change, in what is believed to be the first ever employee-led shareholder proposal at a technology company.

Alphabet, meanwhile, has had employee-related shareholder proposals for two consecutive years. In 2018 the company faced a proposal brought by Zevin Asset Management, and endorsed by an employee group, asking for a link between executive compensation and diversity and inclusion goals. The following year, the company faced a proposal asking for employee representation on the board. In its proxy statement, Alphabet outlined its process for selecting board directors, including a requirement for directors to have served as a public company CEO or CFO.

Employee representation in the boardroom is an issue Walmart has also had to address. At the 2019 annual shareholder meeting, Bernie Sanders presented a shareholder proposal requesting employee representation. This year the company faced a similar proposal, this time filed with the SEC, suggesting that management did not move quickly enough to address employee safety in light of the Covid-19 outbreak. The proposal did not make it to the ballot. Alphabet, Amazon and Walmart did not respond to requests for comment for this article.

Facing an employee-backed or employee-led shareholder proposal generates media attention and causes embarrassment for senior management. But are these recent examples a flash in the pan, or should more companies be bracing for employee-shareholder activism?

We're not creating employee-activism but, where we do see that it exists, we take that into account

A confluence of circumstances
Pat Tomaino is director of socially responsible investing at Zevin Asset Management and has filed shareholder proposals at Alphabet and Amazon, as well as other large technology companies, in recent years. He worked with an employee group at Alphabet, following a mass employee walkout at Google in 2018.

‘It’s a strategy that we as impact investors want to leverage more in the future, but it really depends on a confluence of circumstances,’ he says. ‘We’re not in the business of instigating employee activity inside companies – that’s not the role of investors. We have a stake in the financial outlook of the company. We’re not creating employee-activism but, where we do see that it exists, we take that into account. What are employees asking for and why are they acting that way? What signal should we take for how companies are handling their long-term ESG goals?’

Tomaino says that when he has talked to employee groups at large technology companies about shareholder proposals, there’s a feeling that they have tried other avenues of feedback and activism internally. ‘These employees had tried the usual channels and were looking for levers to make change,’ he says. ‘They’d done direct action, they’d talked to the press and they'd noticed that there’s power through shareholder proposals.’

In Germany, employee-shareholder activism is much more established. Labor groups have experimented with shareholder proposals since the early 1990s, according to an academic report from Natascha van der Zwan, assistant professor of public administration at Leiden University. One particularly notable example she highlights is the Deutsche Telecom annual meeting in 2007, when around 1,000 employees entered the meeting to voice discontent about increased working hours and pay cuts as part of a corporate restructuring. Employee-shareholders reportedly signed their voting rights over to local labor unions to oppose the restructuring, as part of a broader campaign involving employee walkouts and labor union protests.

For board directors in the US, Gillian Emmett Moldowan, partner at Shearman & Sterling, says it’s never been more important to receive meaningful updates about non-executive employees.

‘Employee campaigns of any nature get significant press attention,’ she explains. ‘Boards have historically been more separated from non-executive employee issues, whether it’s compensation or workers’ issues, or how employees feel about the firm as a whole. I would encourage boards to get an understanding from those who report into the board of human capital-management risk and enterprise risks, as well as an understanding of what the company is doing to assess and mitigate those risks.

'If boards have not historically received information about employee satisfaction and employee sentiment about the company management, then getting hold of that information is a good first step.’

Employee campaigns of any nature get significant press attention

Structural issues
Instances of recent employee-shareholder activism have defining traits that may not be replicated elsewhere. For instance, Tomaino explains that many Alphabet employees involved in the shareholder action feel aggrieved at how they think the company’s mission has changed. Google’s motto in its IPO documents was ‘Don’t be evil’, but it has since dropped the slogan and employees have expressed concerns about the direction the company is moving, including in its bidding for national defense contracts.

Aalap Shah, managing director at Pearl Meyer, highlights several structural issues that may make companies more at risk of employee-shareholder activism in the future.

‘Part of the issue is the power some companies have given to their employees through equity,’ he explains. ‘In addition, many of these companies are recruiting from the same talent pool, where there’s a desire to work for a company that has some sort of positive purpose. There is significantly more desire [on the part of] millennials and Gen Z to be part of an organization that has purpose, and you’re going to have to compete for that top talent by giving them equity.’

Tomaino says employees with large amounts of their personal net worth tied up in company stock will view themselves as engaged investors as much as employees. But Moldowan says this shouldn’t make companies think differently about granting stock options to employees as part of their compensation packages.

‘Shareholders can bring a proposal if they qualify to do so under the proxy rules, and those shares can be bought on the market – they need not come from an equity compensation plan,’ she says. ‘Not giving equity awards won’t stop an employee acquiring equity by other means.’

An Amazon employee group recently filed a comment letter with the SEC expressing concerns and opposition to proposed changes to Rule 14a-8, on the grounds that planned shifts to share ownership and proposal resubmission thresholds would make it harder for employee groups to advocate for change.

All of the interviewees for this article agree that it’s important for boards to receive information about employee sentiment and for boards or management to be seen to respond appropriately when employee groups express significant levels of discontent. Tomaino acknowledges that it’s unlikely large passive investors would vote in favor of employees and against management – unless the proposal was on something truly egregious – but that a proposal can help cause embarrassment for management that may drive change.

As Covid-19 shines a greater light on the treatment and recognition of employees, and the Business Roundtable’s statement equally prompts stakeholders to question companies when they feel they’re not being given a fair hearing, this may not be the last we see of employee participation in shareholder proposals in the US.

ESG Influential proposal providers face uncertainty

Values-based investors have counted many recent proxy season successes in ESG matters, achieved through engagement and litigation. Ben Ashwell explores whether that’s about to change

Influential proposal providers face uncertainty

Values-based investors have counted many recent proxy season successes in ESG matters, achieved through engagement and litigation. Ben Ashwell explores whether that’s about to change

On May 21, 1971, shareholders at General Motors’ (GM) annual general meeting voted on an unusual resolution put forward by the Episcopal Church. Shareholders were asked to consider whether GM should withdraw its workforce from South Africa entirely, given that ‘many potential GM customers, employees and dealers here and abroad’ would be offended by the policy of apartheid. The resolution received support from 1.29 percent of the company’s shareholders – including one board director.

Several other religious groups took note, however, and supported the Episcopal Church’s anti-apartheid campaign, leading to the creation of the organization that is known today as the Interfaith Center on Corporate Responsibility (ICCR).

‘[The groups] were very much motivated by their commitment to social justice – it wasn’t financial at all,’ recalls Tim Smith, who led ICCR from 1971 to 2000, before joining Boston Trust Walden as senior vice president of ESG and shareholder engagement. ‘Companies said, We understand your moral passion but we’re responsible to shareholders.’

Unfazed, ICCR ramped up its shareholder advocacy throughout the 1970s and 1980s. By 1986 the organization had filed anti-apartheid resolutions at 185 companies. That year, 50 US corporations – including GM – announced that they would be withdrawing their businesses from apartheid South Africa.

ICCR’s work on apartheid demonstrates the iterative process required to influence a broader investor base, garner public momentum and – eventually – emphasize that an issue can be material from an ethical and financial perspective. For shareholder advocates today, the journey is strikingly similar – and may be about to get harder.

Working with passive investors
On the face of it, the investment community is more united than it has ever been in asking corporations to consider material ESG issues. BlackRock, Goldman Sachs, Citigroup and Bank of America all signed the Business Roundtable statement last year that called for a shift from shareholder capitalism to stakeholder capitalism. The average support for ESG resolutions from the 50 largest asset managers during last year’s proxy season was 46 percent, up from 27 percent in 2015, according to Morningstar.

That should bring them much closer to the SRI investors that have seen their assets under management increase from $639 billion in 1995 to $12 trillion in 2018, according to data from US SIF. But this year BlackRock, Goldman Sachs, Citigroup and Bank of America will all face shareholder resolutions – filed by shareholder advocates As You Sow and Harrington Investments – that ask how they will apply the Business Roundtable’s statement to their own businesses.

For many shareholder advocates, there exists a paradox: gaining the support of large passive institutional investors can make a big difference to a resolution building momentum, but it doesn’t mean those institutions get a free pass for their own corporate ESG performance, portfolio construction or proxy voting.

For Mindy Lubber, president and chief executive of sustainability non-profit organization Ceres, this isn’t too much of a concern. She has seen ‘radical change’ from the ‘days when we were almost laughed at by the largest money managers.’

Ceres brings together more than 175 institutional investors, representing $29 trillion in assets under management, in eight working groups and on campaigns such as Climate Action 100+, a five-year effort to target greenhouse gas emitters and bring them in line with the Paris Agreement.

‘There are still some topics – like guns, nuclear weapons or any number of sin stocks – that are values-based,’ Lubber says. ‘But the largest investors couldn’t have been brought into the broader ESG debate if it was just about values. For them, it has to be about material risk and opportunity.’

Both Ceres and ICCR have seen a significant uptick in year-round engagement between values-based investors and large passive funds that have increased the size of their stewardship teams in recent years. ‘There’s a group of natural allies – such as CalPERS, CalSTRS, the New York State Comptroller and others – that we have engaged with and worked with for many years,’ says Josh Zinner, CEO of ICCR, which now has more than 300 members. ‘But we’re also trying to engage the large fund managers as a key part of our strategy. Once you get that support, it really turns the tide.’

ICCR has noticed a particular uptick in engagement between large passive funds during the last two years, a spokesperson confirms.

Fine margins
The margins by which some ESG resolutions get defeated are pretty small. Of the 23 ESG resolutions that achieved between 40 percent and 50 percent support in the 2019 proxy season, 19 would have passed if supported by Vanguard, 15 would have passed if supported by BlackRock, four would have passed if supported by T Rowe Price and one would have passed if supported by JPMorgan.

The influence of these large asset managers was in evidence at Sturm Ruger’s proxy meeting in 2018, held shortly after the Parkland school shooting that left 17 children dead. Members of ICCR, led by Colleen Scanlon, chief advocacy officer at Catholic Health Initiatives, submitted
a resolution asking the gun manufacturer to develop safer firearms and monitor gun violence. The resolution received majority shareholder support, helped in no small part by the backing of
BlackRock – Sturm Ruger’s largest investor – and ISS.

Of course, taking an issue all the way to the proxy meeting is expensive and time-consuming: according to commentators at the SEC’s roundtable on the proxy process in 2018, the cost per shareholder proposal for companies is approximately between $87,000 and $150,000.

It’s preferable to influence issuers through engagement, as Mercy Investment Services did with Dick’s Sporting Goods in 2018, also on the topic of gun control. The investment group, which manages investments on behalf of the Sisters of Mercy nuns group, filed a resolution with Dick’s Sporting Goods in December 2017, requesting that it stop selling assault rifles and raise the minimum purchase age to 21. The company’s management invited Mercy Investment Services to meet with it in January, and by February it had announced that it was taking the steps outlined in the original resolution.

In the spirit of bringing together investors with different perspectives and motivations to lead concerted issue-based campaigns, ICCR operates the Shareholder Exchange, an online platform that facilitates the tracking, co-ordination and evaluation of its members’ corporate engagements. The exchange is currently used by more than 550 users from ICCR’s coalition, and it tracks corporate dialogues, resolutions and proxy solicitations, investor letters, press campaigns and other tools of corporate engagement.

The largest investors couldn’t have been brought into the broader ESG debate if it was just about values. For them, it has to be about material risk and opportunity

The iterative process of gaining support
Naturally, the issues that values-based, faith-based and SRI investors advocate on almost always fall within the ESG moniker. The number of ESG-focused shareholder proposals filed at US companies has grown by 12 percent since 2010, according to a recent study from the Sustainable Investments Institute (Si2). During the same period, the average support has increased by 40 percent, rising to nearly 26 percent last year.

One of the reasons for the increase in support is the ability of shareholder advocates to wield greater influence. ‘Religious investors are still committed to advancing social justice and environmental issues but if you look at their language, they’ve got much better at couching these issues in business terms,’ Smith says. ‘Twenty years ago, some of the language was more divisive. Now these groups can discuss social issues, such as the opioid epidemic, in a way that resonates for businesses.’

Andrew Behar is CEO of As You Sow, a non-profit whose engagements have changed policies at the likes of PepsiCo, Apple, Coca-Cola, Dell and ExxonMobil. He’s also the sponsor of this year’s shareholder resolution at BlackRock regarding its commitment to the Business Roundtable Statement. He describes the process of advocating on an issue through shareholder resolutions as an iterative process that evolves over time.

‘We’re always writing proposals that are considered to be about non-material issues when we start writing them,’ he says. ‘We always get low votes in the first year because nobody understands the issue.’ But over the course of years of refiling the resolutions and engaging in dialogue with the issuer and its shareholders, the tide of public sentiment can change – just like it did for ICCR on apartheid. As the momentum builds on an issue, Behar says it’s common for resolutions to be handed over to larger asset managers, such as the public pension funds CalSTRS, CalPERS and the New York State Comptroller, for sponsorship or co-sponsorship. But this entire process relies upon being able to file and refile shareholder resolutions that have been voted down – a process that is in jeopardy for many shareholder advocates.

We’re also trying to engage the large fund managers as a key part of our strategy. Once you get that support, it really turns the tide

Proposed changes to rule 14a-8
In November 2019 the SEC voted in favor of proposed amendments to rule 14a-8, which governs the shareholder proposals that make it onto the ballot. The proposal has proved controversial, with thousands of comment letters submitted during the comment period. Two of the most concerning changes for interviewees for this article are to shareholder proposal resubmission thresholds and ownership thresholds.

Supporters of the proposed change – including the US Chamber of Commerce and the Business Roundtable – suggest that the current rules are outdated. Shareholder ownership thresholds have not been updated since 1998 and resubmission thresholds have largely stayed the same since 1954.

The SEC has proposed a significant increase to the amount of support a resolution needs to have received during its prior submission, provided that submission was in the last five years. According to a study by Si2, 30 percent of the 4,300 ESG resolutions filed between 2010 and 2019 would not have been eligible under the SEC’s proposed rule.

Business groups suggest the rule change will prevent companies from facing costly resolutions on very similar grounds during a short period. But investor groups – including As You Sow, Ceres, the Council of Institutional Investors, ICCR and US SIF – suggest it will stifle shareholder democracy and would prevent resolutions from building momentum over time, as these groups have successfully managed up to now.

Regarding ownership thresholds, the SEC last revised its policy in 1998. Since then, shareholders have needed to own $2,000 of a company’s stock for at least one year in order to file a resolution. The SEC’s proposed change would require the following ownership thresholds:

$2,000 of the company’s securities held for at least three years
$15,000 of the company’s securities held for at least two years
$25,000 of the company’s securities held for at least one year.

In the event a resolution is co-sponsored, all shareholders named on it would be required to pass this threshold. Interviewees for this article suggest they would be open to an increase in ownership thresholds that is in line with inflation since 1998, but that the proposed change would reduce the number of shareholders that could afford to submit resolutions. The comment period for the rule change closed in February and it remains to be seen how the SEC will respond.

For the faith-based, values-based and SRI investors that have been ramping up their advocacy efforts as ESG has come to the foreground, these are uncertain times. While they are largely encouraged by engagement with the big passive funds that can be so pivotal – though still skeptical of their true integration of ESG – the ability to drive change at the ballot box casts a shadow of doubt over what the future holds.

This story also appears in the summer 2020 issue of IR Magazine

Interview How Calvert examines ESG information and puts it to use in investing

John Streur, president and CEO of Calvert Research and Management, talks to Mike Schnitzel about how his company uses ESG metrics to improve returns for its clients

How Calvert examines ESG information
and puts it to use in investing

John Streur, president and CEO of Calvert Research and Management, talks to Mike Schnitzel about how his company uses ESG metrics to improve returns for its clients

Your firm is all about ESG investing. How did the decision come about to make ESG the centerpiece of your investing strategy?

Responsible investing is what we do and we take it from the perspective of our responsibilities to our clients. So in terms of fully meeting our responsibilities to our clients, we use ESG information to really work in two areas. First, we use ESG to inform our security selection. Second, we use ESG metrics to determine how to form engagement opportunities with companies. We focus everything we do on responsible investing because we believe it is the best way to create long-term value and competitive investment results for our clients. That’s why we do it.

Tell me about how ESG integration works at Calvert. Do you have a team responsible for an overall ESG outlook that then works with the rest of the company on education, implementation and integration, or do you use a different method?

We have a dedicated ESG research team of 12 sector analysts who work across global capital markets. That team identifies key environmental risks and opportunities and social risks and opportunities that different groups of companies are exposed to and analyzes how a given company manages those risks and exposures. The team then creates the ESG information we use to inform security selection across global capital markets and to identify engagement opportunities to improve companies.

We have built [ESG] scores across issuers of securities, as well as across developed and emerging markets. It’s a research system and we give data on this, plus a sector thesis and individual company write-ups that we distribute to our quantitative team and our fundamentals team. They then integrate this information into all investment decisions.

What are the key ESG metrics on which you focus?

They are specific to the industry and sector we are analyzing. We have a number of metrics related to the environment, climate risk and natural resources. We also gather metrics on issues such as how companies treat people and how companies deal with society. These are the so-called social metrics. We then use the metrics appropriate for the specific company and/or industry we are analyzing. It’s a very specific, targeted approach.

How do you decide your key ESG metrics? Are these guiding principles ingrained in the firm’s philosophy or do you revisit these metrics on a regular basis?

Calvert has a set of principles for responsible investing, but the metrics we use are dynamic. The world and companies are changing, and our processes are designed to stay current with those changes. Our stock in trade here is innovation, so we are always looking at these metrics and working to test theories on how to change and improve those methods.

How does Calvert itself approach ESG reporting? Do you use a variety of platforms?

We are part of Eaton Vance, which is a public company, so our main reporting is [in accordance with] the UN Principles of Responsible Investing (UN PRI). It is a transparent public report that you can find on the UN PRI website, in which we report very detailed and comprehensive metrics that describe our business practices and their impact, our integration of ESG and the principles of responsible investing and how we use them throughout our investment processes. It also examines how we integrate ESG across global capital markets. There is not a section in Eaton Vance’s annual report or 10K on Calvert’s ESG disclosures, nor is there one on our website.

Are you finding that the ESG information investors are seeking has changed over time? If so, where has the focus shifted?

It has definitely changed over time. It has shifted in two major ways. First, there is a desire for more science-based or metrics-based information on companies’ management of environmental impact. So we want details, we want data on how the company understands its impact, how it is progressing toward the achievement of its mitigation goals. Second, we look for specific information on a company’s workplace, both its ability to achieve diversity and how the company engages with its workforce, as well as the specifics on how the company manages ESG exposure in its supply chain. Those are ongoing developments in the information we are seeking and getting from companies.

In the past, ESG investors used to be focused more on information involving risk. They wanted to know what kind of risky businesses companies were exposed to. Are you exposed to fossil fuel? Alcohol? Weapons? That information is still relevant, but investors are much more interested in understanding the specifics of how companies are creating positive change and managing those exposures. The focus now is on how you can make companies better, rather than being concerned about risk. That’s a big evolution.

As a shareholder, do you work more with the corporate secretary or the investor relations team when it comes to engagement?

We work with the corporate secretary and the board. That’s where our engagements happen. What is common across our engagements is that we are working to improve a company, work with it to drive positive change. We use our ESG research system to identify companies we think can improve relative to their peer group to help drive long-term value at that company.

We build a case in terms of what we want a company to do and then we write a detailed letter telling that company what we found, what we’d like it to do and what we believe the results would be in long-term value creation for the company if it were to adhere to our recommended actions.

After this, our six-person engagement team works with the company’s board or management to find out where we are in long-term implementation of those strategies. Those engagements can run for multiple months or years. They are fairly deep as we work with management to drive the kinds of changes we seek.

Advertisement feature Top considerations for choosing a virtual shareholder meeting

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About Broadridge

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Interview ESG's key role at SSGA

Ben Colton and Rob Walker, co-heads of asset stewardship for the company, tell Mike Schnitzel how State Street Global Advisors views and implements its ESG policies

ESG's key role at SSGA

Ben Colton and Rob Walker, co-heads of asset stewardship for the company, tell Mike Schnitzel how State Street Global Advisors views and implements its ESG policies

What roles do you play with regard to your company’s ESG function?

Ben Colton – Our primary responsibility is voting and engagement. We developed a stewardship program focused on governance and sustainability issues. We work closely to integrate R-Factor [SSGA’s sustainability score] into our stewardship work and to integrate ESG across our company.

Rob Walker – A lot of stuff we do has wide applications and often we’re at the forefront of things changing on a sector basis as well. Social issues around health and safety and working from home are front and center for us right now, and I think will be so in a post-Covid-19 world as well.

How do you decide your key ESG metrics? Are these guiding principles ingrained in the firm’s philosophy or do you revisit these metrics on a regular, periodic basis?

BC – R-Factor is our ESG scoring methodology and that focuses on financial materiality. We’re really going to center everything around that. It focuses on a transparent framework – that’s why we really like SASB because that is very transparent. We’re a long-term investor and we’re interested in long-term sustainable returns, so we focus on value, not just values.

We update our R-Factor scores on a monthly basis. There are a number of proprietary data points we gather during engagement in order to figure out how companies are incorporating sustainability into their corporate structure. We also take into account market trends and emerging issues as we establish our market and sector focus areas. Gender equality, capital management and climate change are all long-term issues.

Social issues around health and safety and working from home are front and center for us right now

What are these key metrics?

BC – In 2019 we introduced corporate culture as a long-term metric for ESG. If you look more recently, we have shifted priorities to focus more on Covid-19, and we understand discussions have shifted in light of the crisis we all face. Employee wellbeing and safety, crisis management and liquidity issues are all critical now.

RW – Our sector/theme approach lets us have the best of both worlds. Our sector basis lets us look at shorter-term issues while our thematic approach lets us look at three to five-year trends we think will affect business globally. We spend a lot of time talking to clients asking for their input on these issues because we are engaging on their behalf. In 2020 we have a new thematic focus on environmental management, which came from talking to clients interested in hearing about how operations affect environmental impact.

BC – We often like to take a deep dive on sectors because they are frequently industry-specific, and we like to see how boards are reacting to these issues. We see the opportunities and challenges boards are facing within specific industries.

Ben Colton, SSGA

How do you collect data for reporting purposes?

BC – In terms of our reporting, we collect primary and secondary data. We have a stewardship database that houses a lot of the information we seek, not just information and insights from engagement. We have a proprietary tiering system on how we tier companies in terms of their ESG. We also use this data for screening within our stewardship program.

RW – Our engagement insights are one of the most valuable because we are a holder of capital and we want to be a long-term partner with these companies. These insights allow us to look back and see the transition a company has gone through, whether the issue is compensation, climate or board diversity. It allows us to access information that is extremely valuable.

BC – Our stewardship database/ engagement platform collects our insights from engagement and we also have our R-Factor scoring available to everyone in the firm to help them make judgments on ESG.

How do you approach ESG reporting? Do you use a variety of platforms and could you elaborate on those?

RW – We spend a lot of time on our annual stewardship report where we can discuss how we have engaged and voted on ESG issues. The evolution we’re seeing this year is that there are more shareholder proposals on climate lobbying than is typical, and that’s a significant change.

Starting with last year’s report, we’ve been using the R-Factor to give sector insights. Our quarterly stewardship reporting is another area where we’re trying to show our clients how we’re voting, what we’re doing on a regulatory/collaborative basis. As we continue to develop the R-Factor platform, there will be other ways we can do that.

BC – Reporting is absolutely key for us. We rely on disclosure to make our analyses and we also have an obligation as fiduciaries to report our activity to our shareholders. We try to be as transparent as we can be on our voting guidelines and provide frameworks on how we are analyzing shareholder proposals.

All of our votes across our holdings will be available on a quarterly basis [in the future], and that improves transparency and accountability. We are looking to improve our climate reporting and plan a stand-alone report on how we are approaching climate and climate issues.

A lot of institutions are increasingly looking at ESG information as financially material and part of their fiduciary duty, and that trend will continue

Rob Walker, SSGA

How has technology changed the way you approach reporting?

BC – We continue to leverage technology to make our program as impactful as possible. Reporting from the issuer side has improved as well, and the ability to gather reporting is more easily accessible. It has allowed us to scale up our ability to synthesize information.

Are you finding that the ESG information investors are seeking has changed over time? If so, how has the focus shifted?

BC – I think we’ve seen a shift toward not just focusing on valuations of tangible assets, but also a focus on intangible assets such as human capital. Investors are recognizing ESG more as a fiduciary duty and incorporating this into their processes.

A lot of institutions are increasingly looking at ESG information as financially material and part of their fiduciary duty, and that trend will continue, especially as standards continue to evolve, such as SASB's.

RW – I think in the past the focus for investors was to gather ESG data to understand characteristics of firms. Where the focus is heading now is the emergence of one or two global standards, of which SASB is definitely one that allows investors to focus on materiality, that is transparent and allows a comparability of companies. I hope that's where we end up because that is the only way you can ensure your data is material and robust.

In terms of shareholder engagement, do you work more with the investor relations (IR) team or the corporate secretary’s office?

BC – I think this has a regional component. The engagement component varies by jurisdiction, with a different engagement culture in different jurisdictions. In the US, the dialogue came from an IR level, which was increasingly wanting access to boards and board members, and often you want to talk to a board member on certain issues, but for other issues it might be worth a quick check with IR. In Japan, we’re seeing more access to corporate secretaries and board members themselves.

RW – The biggest change I see is that we deal more directly with the board in Europe. Any interactions with IR involve getting the chair or the head of the remuneration committee into the room. Conversations with boards tend to be more high profile, and they require a bit more preparation. These conversations also tend to be more specific in nature and that’s useful for insights we can develop for our sector or thematic approach.

BC – We’re long-term investors, so we are looking to have constructive relationships and partnerships with the companies we invest in. We’re trying to work together toward the goal of long-term sustainable returns.

RW – Companies appreciate that and recognize that we’re trying to be constructive. We take a long-term view so when we do voice our opinion, we are listened to.

Is it important to address opportunities, and not just risks, posed by issues you focus on in your ESG reporting and engagement?

RW – Definitely. As part of our stewardship program, we are looking to help companies improve their ESG. We have been engaging with and voting against companies where we feel they are laggards based on our criteria.

We want to reduce our risk across portfolios, and over the years we have been running screens, such as our sustainability screens and corporate governance screens. This allows us to engage with those companies and improve their disclosure in terms of ESG. Companies recognize we’re here to help and we’ve published a lot of thought leadership on things like compensation and climate change.

BC – When I think about opportunities and the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework, I think when boards start to approach climate change in a more systemic manner you see them incorporate more climate risks and opportunities into their operational framework. We integrate the opportunity set into our criteria. We want to see how companies are making themselves climate-resilient and taking the opportunities to improve themselves in these areas.

What advice would you give to Corporate Secretary readers in terms of how they could formulate their own ESG reporting actions?

BC – You need to agree upon what the financially material ESG metrics are for your company. Familiarize yourself with SASB, and understand it’s a floor, not a ceiling. Think about how you are approaching ESG in a long-term strategy. Think of what the risks and opportunities are and evaluate the proper way the board can oversee things. Create an infrastructure internally for receiving information on the ESG metrics you’ve identified and build an urgency around getting data and metrics at the board level.

Have ESG goals, manage them and align everything with appropriate incentives. Articulate those metrics to investors transparently and publicly.

RW – I think the biggest challenge for companies is understanding what investors want in terms of ESG metrics. They often don’t know what they should be disclosing to investors. I’d like companies to use SASB as their floor, because it’s about materiality, and that’s what investors are increasingly looking for so they can understand the quality of ESG in their portfolios. The more companies that do that, the more quality data you have that can be understood.

If you comply with SASB, you’re fairly aligned with TCFD and the CDP. The board also has to be engaged and taking an interest in aligning goals and making sure everyone is on board.

We have been engaging with and voting against companies where we feel they are laggards based on our criteria

Activism How boards can prepare for post-pandemic activism

Periods of equity market turmoil often lead to increased activity. Frank Aquila and Melissa Sawyer offer boards advice on making sure they’re ready

How boards can prepare for post-pandemic activism

Periods of equity market turmoil often lead to increased activity. Frank Aquila and Melissa Sawyer offer boards advice on making sure they’re ready

The Covid-19 pandemic has caused significant volatility in the equity markets, with companies across different sectors experiencing sometimes precipitous declines in share prices coupled with significant changes in share ownership.

Public companies often experience an uptick in activist demands and unsolicited offers after such periods of exceptional turbulence. The 2008 financial crisis, for example, was followed by a significant increase in unsolicited offers, proxy contests and event-driven activism.

Activist investors may focus their attention on companies that have been particularly impacted by the pandemic, including those that already have significant activist representation in their stocks and those facing new vulnerabilities. Although public company boards and managements are understandably focused on managing the immediate and critical issues associated with the unprecedented crisis affecting their employees, customers and communities, in the longer term boards and management may need to expend substantial energy preparing for:

Unsolicited takeover bids and short-selling
Proxy contests, including through special meetings and written-consent campaigns
Activist demands that combine the activist's primary investment theses with criticism of the company’s or management’s Covid-19 preparedness and/or response.

Unsolicited takeover bids and short-selling
The Covid-19 pandemic may leave companies more susceptible to unsolicited takeover bids. Declining share prices at many public companies may incentivize a rise in unsolicited proposals, as lower share prices decrease the cost of gaining an equity position in a company.

Furthermore, due to general socio-economic uncertainty and potentially constrained alternative buyers, some companies may experience obstacles to a board-supported or negotiated strategic transaction, such as a merger, spin-off or securities offering. This may limit the number of viable options the board can present to shareholders as attractive alternatives to an unsolicited offer. Convincing shareholders that depressed share prices do not justify selling the company for less than its intrinsic value may be particularly challenging in a volatile environment.

Proactive steps a company can take to avoid these challenges include:

– Working with its proxy solicitor to monitor changes in its shareholder base: Careful monitoring is particularly important when equity values are depressed, because whether or not an antitrust filing is required under the Hart-Scott-Rodino (HSR) Act is based on a dollar (not a percentage) threshold for the value of voting securities acquired. The current HSR threshold of $94 million is sufficiently high in relation to some companies’ depressed stock prices that an activist may be able to accumulate a substantial stake without having to make an HSR Act filing.

Therefore, unless the activist’s or potential bidder’s stake surpasses 5 percent and a Schedule 13D filing is required, the company may not be on notice that its shares are being accumulated by the activist or bidder.

Even if a Schedule 13D filing requirement is triggered, the activist or bidder still has a 10-day window in which to disclose its position. Short-selling activity may be particularly difficult to detect because SEC rules do not mandate disclosure of a short position and also permit an activist short-seller to close out a disclosed short position at any time after publication, even at a price different from the activist’s stated valuation.

– Reviewing the company’s projections and business plans and working with its financial advisers to identify alternate counterparties and strategies: A clear view of the company’s future plans and the strategic opportunities available to the firm will help management and the board prepare to defend the company’s stand-alone value if faced with an unsolicited bid or a publicity campaign from a short-seller.

– Providing regular updates on business planning to the board: Taking steps to ensure alignment on the company’s prospects and intrinsic value, as well as to promote cohesion among the members of the board and management, is especially critical to a successful defense against an unsolicited bid.

– Considering takeover defenses: With counsel, companies should explore the advisability of adopting additional takeover defenses such as shareholder rights plans. Among other things, an appropriate set of takeover defenses will provide a company’s board additional time and leverage to fully and adequately consider the fairness of a bid for the company, as well as to engage with its shareholders.

– Engaging with regulators: Companies in regulated industries may also consider proactive engagement with regulators to address any increased risk of an unsolicited offer and any meaningful accumulation of its shares in an activist’s or hostile bidder’s hands.

Proxy contests
A proxy contest is always a substantial drain on the time and resources of a company’s board and management. It would be particularly distracting for a management already working hard to respond to the impacts of Covid-19. But if there have been significant changes in the shareholder base of a company due to Covid-19 volatility, it could be more vulnerable to a proxy contest even if it has recently defeated a proxy contest from the same activist.

Typically, proxy contests to replace incumbent directors with an activist’s slate are voted on at the annual shareholders meeting. For most US public companies, the window for shareholders to submit a proposal for the firm's 2020 AGM has passed, mitigating the near-term risk of an AGM proxy contest. But a proxy contest or other shareholder demand remains a more immediate risk for issuers that have non-calendar year-end fiscal years, or an advance-notice period tied to disclosure of the annual meeting date if they have not yet announced the date of an upcoming AGM.

In the aftermath of the Covid-19 pandemic, some activists may act opportunistically to undertake the additional costs and risks of conducting a proxy contest, even when the annual meeting window has closed, through special-meeting demands and written-consent campaigns.

Therefore, companies whose governing documents allow shareholders to call special meetings or act by written consent need to be cognizant of when shareholders are allowed to make proposals or nominate directors after the window closes for the annual meeting.

Many companies’ governance documents mandate blackout periods ranging from 90 days to 120 days following their annual meeting, during which shareholders may not call a special meeting or act by written consent. These blackout periods give management an opportunity after the annual shareholder meeting to focus on operational issues and prepare defensive strategies.

Companies that have special-meeting or written-consent provisions should also review the scope of actions that are allowed to be taken at a special meeting or by written consent, including whether or not directors may be removed or elected.

For example, some companies have special-meeting provisions that would permit the company to exclude a shareholder-requested action that was already substantially addressed at a shareholder meeting or within a specified period of time since the annual meeting. Companies should also check the ownership thresholds for calling a special meeting or taking action by written consent.

Criticism of company or management
There may be an increase in activist demands that combine the activist’s primary investment theses with criticism of a company’s – or its management’s – Covid-19 preparedness and/or response. These criticisms could add fuel to an activist’s publicity campaign as part of an unsolicited bid, short-selling thesis, proxy contest or other type of activism.

In anticipation of these potential criticisms, a company should consider preparing shelf response decks or other relevant materials, so that it can swiftly counter a publicity campaign launched by an activist. An expeditious and persuasive response in these situations is critical, particularly as companies have very few, if any, other effective tools to respond to false, incomplete or misleading public statements issued by activists.

A compelling narrative may further help the company in its engagement with institutional investors and regulators, which may need additional assurances in these unprecedented and highly sensitive times. Of course, as always, the company should be mindful of Regulation FD in making these communications.

Management should also consider whether the company’s public disclosures provide a cohesive narrative regarding the company leadership's efforts to respond to and mitigate the crisis. Presenting a consistent message to the market – one that is specific to the company and the challenges it is facing – will be essential to the success of a company’s activism preparedness. Presenting key developments contemporaneously will be more effective in gaining shareholder confidence than a retrospective narrative.

Many companies have been providing substantial disclosure related to Covid-19. Such disclosures may include revising earnings guidance, announcing the cutting of dividends or executive pay, or presenting the ways in which Covid-19 has affected – or may affect – a company’s business. Companies and management teams are making these disclosures across a variety of platforms, including SEC filings, press releases, public videos and social media postings.

Boards and management are well advised to work closely with their communications and investor relations teams in order to ensure the company’s messaging about its response to Covid-19 is as effective and organized as possible across platforms. In preparing a narrative relating to Covid-19’s impacts, companies should consider not only the impact on shareholder value, but also how the interests of other stakeholders may impact shareholder value.

For the majority of companies, shareholder value is closely linked to the welfare and safety of employees and the communities in which the company operates, as well as the sustainability of its supply chain and other relationships.

Many companies have been forced to lay off employees, otherwise curtail operations and cut costs in order to mitigate the risks of Covid-19. A Boston Consulting Group survey of portfolio managers and other investment professionals earlier this year finds that 89 percent of respondents believe it is important for companies to prioritize building key business capabilities to create advantage, drive future growth and be better positioned to bounce back after the crisis, even if that means lowering earnings-per-share guidance or delivering below-consensus estimates.

Ensuring those key business capabilities are in place means companies should be responsive to customers, employees, suppliers and the communities in which they operate so they are able to drive shareholder value over the medium-to-long term as the crisis subsides.

The most effective narrative for any company is one that is tailored to its particular situation, its shareholder base and the specific challenges the company and its stakeholders face. ISS in March published its climate proxy voting guidelines, which illustrate the importance of company-specific Covid-19 disclosures. The guidelines recommend case-by-case voting on shareholder proposals requesting reports on the impact of health pandemics on firms based on their potential geographic exposure, and support of their employees’ healthcare through healthcare policies, benefits and access, as well as their donations to relevant healthcare providers.

Although ISS generally recommends a vote against shareholder proposals seeking the establishment, implementation and reporting on a standard of response to pandemics, it may recommend a vote in favor of those proposals if companies have significant operations in the affected markets and have not adopted policies and procedures comparable with industry peers.

Frank Aquila and Melissa Sawyer are partners with Sullivan & Cromwell

Research The governance papers

A roundup of GRC research from the academic world, as seen by Jeff Cossette

The governance papers

A roundup of GRC research from the academic world, as seen by Jeff Cossette

Scientists discover a new governance mechanism

Despite decades of academic research, little consensus has emerged as to what factors – and which configuration thereof – lead to an effective corporate governance framework. Now Canadian investigators may have discovered a missing piece of the puzzle.

‘A company’s communications culture has a profound influence on corporate governance,’ says Azadeh Babaghaderi, a PhD candidate at Concordia University and co-author – with Sam Kolahgar and Harjeet Bhabra – of a new study that presents diverse and far-reaching implications for academics and business leaders alike. ‘Our findings show that communication is an effective, stand-alone governance mechanism.’

To test corporate communications’ governing power, Babaghaderi and her colleagues analyzed more than 150,000 disclosures published by a sample of 98 TSX/S&P Composite Index companies. They find strong evidence for a ‘substitution-complementary’ relationship with other governance mechanisms. Moreover, their results consistently show a U-shaped association between communication levels and a company’s risk, and an inverted U-shaped correlation between communication and company value.

‘This points to an optimal level of communication beyond which the cost of disclosure outweighs its benefits,’ says Babaghaderi, adding that too much information dissemination can both erode a company's competitive advantage and add ‘noise’ to valuation efforts.

Babaghaderi says ascertaining where that ‘Goldilocks’ level falls depends on each company. ‘Communications specialists can do a cost-benefit analysis that takes into account an individual firm’s other governance mechanisms as well as peer company governance characteristics,’ she says. ‘Companies with relatively weak governance aspects may consider added communications. Those with stronger governance may be able to devote less money and effort to it.’

Hunting better executive heads

Canvassing shareholder opinion isn’t top of mind for most directors looking to hire a new CEO, but new research suggests it should be. An analysis of 700 CEO appointments during hedge fund activist campaigns reveals shareholder input leads to better stock market reactions followed by stronger, more sustained profitability improvements than without.

‘You seem to get a better CEO with shareholder involvement,’ observes study author Thomas Keusch, assistant professor of accounting and control at INSEAD. Keusch traces the positive outcome to the fruits of a more diligent and robust search process. His investigation shows, for instance, that activist-influenced boards are about 10 percent more likely to form a search committee or hire an executive search firm. Meanwhile, 75 percent of CEO appointments made with activist assistance – typically in the form of an activist presence on the board – are outsiders, compared with a rate of just over 50 percent otherwise.

‘Activist investors can prompt boards to look beyond internal successors,’ posits Keusch. ‘Then they often offer access to a network of experienced candidates who can broaden and complement what professional recruiting firms [discouraged from ‘poaching’ past clients] can do alone.’

Despite being a sensitive topic, Keusch advises that ‘succession planning shouldn’t be shied away from as a component of a company’s larger shareholder engagement conversation.’

World o’ research

Firms with the highest number of executives having financial backgrounds are those least likely to be innovative. Researchers say such companies tend to have more financial assets, fewer fixed assets and spend less on R&D. Strong corporate governance minimizes the negative effect.
The introduction of major corporate board reforms worldwide between 1990 and 2012 has led to an overall 13 percent reduction in company stock price crash risk. Investigators say better financial transparency and investment efficiency account for the decrease.