Corporate governance has become a strategic and highly visible endeavor, and governance professionals must stay on top of best practices and disclosure requirements while seeking opportunities to improve at the same time. The Society for Corporate Governance's 2019 National Conference in San Diego, CA covered topics that are important for corporate secretaries and other governance professionals, including ESG, activism, proxy voting, executive compensation, corporate culture, board diversity, subsidiary management and many more.
Below are our top five takeaways from the Society's 73rd National Conference.
1. ESG Issues Material to Investors
ESG issues were front and center this proxy season, according to this "First Look at the 2019 Proxy Season," and ESG was a topic of much discussion at the Society National Conference.
In a general session on ESG, Madelyn Antoncic, CEO, Sustainability Accounting Standards Board (SASB), Barbara Novick, Vice Chairman & Co-founder, BlackRock, Inc. and Barbara Zvan, Chief Risk & Strategy Officer, Ontario Teachers' Pension Plan discussed investor ESG priorities and engagement. There is a desire for a standard, with the investors noting that they recognize how challenging it can be for issuers to approach ESG disclosure with so many requests coming from various parties.
The investors reaffirmed their focus on "value" over "values" – the focus on long-term creation of value rather than an investment strategy based on values as they related to ethical or moral pursuits. They also emphasized the importance of the "G" in ESG, noting the materiality of governance over other ESG issues. Regarding the question of relevance vs. materiality, issuers that are ready to conquer ESG challenges may want to consider disclosing information that will enable investors to make well-informed decisions.
It seemed sentiment at the conference indicated that issuers are likening ESG raters and rankers to proxy advisors, but with even more frustration given the number of organizations. Some issuers appear to be struggling to figure out where to focus their time and attention in the rating space, and it sounds like among the companies further along in this process, there is going to be a movement away from CDP responses given the time commitment and pay to play nature of that system, particularly as issuers start to do TCFD and/or SASB reporting.
Each year, Georgeson releases the Annual Corporate Governance Review, a report containing 2019 proxy season trends, voting data, shareholder proposals and corporate governance developments. Want to be the first to know when this report is released? Sign up to be notified.
2. SASB Investor Perspectives and Issuer Questions
In a popular panel titled, "Sideboard: A Conversation with SASB Investor Advisory Group," members of the SASB IAG discussed their support and usage of SASB. The discussion, which was moderated by the Society's ESG Director, Heidi DuBois, began with investors and expanded to include several issuer perspectives represented by questions coming from the audience. Despite the late addition of the panel to the conference agenda, the room was full; nearly every seat was taken and a considerable amount of attendees were standing. It was clear that there is broad interest in the topic amongst the issuer community.
Panelists from Vanguard, Nordea Asset Management, Wells Fargo Asset Management, the Capital Group, Goldman Sachs Group, Inc. (GSAM) and the Ontario Teachers' Pension Plan affirmed that they are all members of SASB's Investor Advisory Group (IAG); some founding members. In the current state of ESG issues, which can create or erode value, many investors and issuers have perhaps more questions than answers, and it seems the investors represented on this panel believe SASB is the best solution to the problem of too much ESG data and a lack of a reporting standard.
Most investors reported using SASB metrics including the Materiality Map as a data point or factor in investment decisions rather than a decisive consideration. Vanguard shared that they start with the Materiality Map when assessing a portfolio company's position and disclosure on sustainability, governance and other issues. Vanguard noted that it helps with risk mitigation as well as identifying positive opportunities. Another panelist mentioned that SASB is used to affirm investment manager decisions, but they seek the company's full story as SASB is neither comprehensive nor does it apply to every company. Another investor indicated that while SASB is an addition to their process that seeks to drive corporate value, change and engagement, they also have added SASB as a focus and a priority for engagement this year and included it in its proxy voting policy as a reference point for how they vote especially with regards to shareholder proposals.
Multiple IAG members appeared to indicate that various internal teams might utilize the SASB framework for different purposes, reinforcing the idea that it may become more widely adopted as various parties continue to see value.
DuBois asked the panelists how SASB has influenced proxy voting guidelines. One investor said they use it to help determine what is material for a company's industry with limited resources, noting that a small internal team is responsible for voting thousands of proxies. GSAM said it is a component for engagement and they actively encourage portfolio companies to use SASB as a framework, targeting approximately 200 companies by the end of the year. A third investor reported that it guides analyses that lead to decisions to support or not to support specific shareholder proposals.
Another investor suggested that issuer companies improve their primary corporate disclosures as a mechanism for loosening the grip or mitigating the power of ratings agencies.
Issuer companies in the audience expressed a desire to be more involved, perhaps seeking an outlet for feedback or opportunity to share their experience with SASB. There was also some discontent with sub-sector categorization amongst audience members who feel as though their companies have been pegged into a sub-sector that may not be the right fit. Issuers present also wanted to understand which investors are incorporating SASB and how.
It's ultimately up to the company to determine what is material. Investors care about what is material, and SASB focuses on materiality. However issuer companies must make the decision to use SASB, to report partially on SASB or to disclose reasons why they prefer to utilize other standards for reporting.
Many issuers are unsure of how to proceed when they believe the SASB factors for their sub-industry aren't relevant, and perhaps they feel trapped due to pressure to use a framework that they don't think fits. Yet investors appear likely to continue to use SASB because, in a world where many ESG data providers using different scores, ratings, guidelines and metrics, SASB allows them to filter out some of the noise and focus on factors that are more material to a specific company or industry. As a result, it appears that it would be beneficial for issuers to:
- Be familiar with the SASB framework
- Know what SASB deems material for their company
- Have some framework for establishing materiality of various factors, such as:
- What's material and how do we decide?
- What qualitatively does the company want to overlay on that data?
- Who at the board level covers it and what do they do?
- Address conflicting views head-on and provide context for any SASB questions/metrics that are not relevant:
- We can't do this and here's why
- We won't do this and it's not relevant and here's why
- Here are the questions/metrics we think should apply, based on our own materiality analysis
3. Proxy Plumbing Concerns
The "Whiteboard: Proxy Plumbing Reform" breakout session at the Society National Conference explored the potential of Blockchain technology to address some of the problems with the current voting system. The current voting system for recording, storing and retrieving data and information is inefficient and error prone. Among others, the current voting system suffers from the issues of empty voting and over-voting, errors in vote tabulation and inefficiencies in broker pass-through of voting discretion to beneficial holders. While implementation challenges would need to be addressed, Blockchain or distributed ledger technology has the potential to streamline current voting process and eliminate many of these deficiencies.
4. SEC Commissioner Hester Peirce Comments on Board Gender Diversity
SEC Commissioner Hester Peirce disfavors quotas for female board members as micromanagement of corporate governance, but is optimistic boards will become more diverse organically through creative corporate thinking. In her remarks, Commissioner Pierce explained her skepticism for quotas stems from several concerns in addition to micromanagement, including (1) mandates could potentially undermine the respect accorded to women in the boardroom; (2) that corporate governance is traditionally regulated on a state by state basis and federal policy could disrupt the federal-state allocation of responsibility and competition among states; and (3) compliance with mandates could increase costs of being a public company or discourage companies from going public. Commissioner Pierce also referenced outcomes of quotas in Europe, particularly Norway, as a basis for her concern. Specifically, she cited findings that Norway's 40 percent rule has had a deleterious effect on the quality of public board there. We note that the data used to measure quality here seems include traits such as age and CEO experience.
In filling board seats, Commissioner Pierce urges companies to think more creatively and broaden their recruitment efforts and paradigms for effective board members. In the absence of mandates, she notes that this creative thinking may already be happening, as the number of women on corporate boards among Fortune 1000 companies has increased from 14.8% to 19.8% percent from 2011 to 2017.
It is worthwhile to also note that many investors have implemented gender diversity goals or quotas, thus applying pressure on companies to disclose their policies for achieving diversity according to these thresholds. Proxy advisory firms have similarly released policies outlining expectations for female representation on boards.
5. Subsidiary Management Presents an Opportunity
In the panel titled, "Bulletin Board; Service Provider Solutions Panel 1 – Subsidiary Management," Tom Racicot, Executive Vice President at Computershare | Georgeson, discussed the increasing importance of governance and how it creates both a burden and an opportunity for Corporate Secretaries.
In addition to board, proxy and annual meeting duties, Corporate Secretaries are often faced with heavy compliance administration, regulatory uncertainty and pressure to use technology to enhance stakeholder engagement and enable revenue opportunities for the company. Vendor consolidation of things like registered agent services, entity management and business licenses into one reliable, single source can enable accessibility, flexibility and security while reducing redundancies and potentially saving time and costs.
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