United States: Getting ahead of the 2022 proxy season: sustainability
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This is the second in a series of five Governance Perspectives series.
The situation: ESG and DEI, including sustainability, will be the main theme of the next proxy season due to a convergence of societal issues in general.
The result: Many now see the focus on sustainability as a path to profitability and a necessary safeguard against investor dissatisfaction and criticism.
Look forward: Companies should prominently and repeatedly highlight sustainability efforts, and progress against these goals, in public disclosures and other external communications.
ESG/DEI (Environmental, Social and Governance/Diversity, Equity and Inclusion) will be the main theme of the next proxy season by a wide margin due to a confluence of events affecting society at large: acceptance in popular media and climate finance change as a paramount global risk and diversity and inclusion as critical areas for business after the Me Too movement, the social justice movement and growing income inequality. The contributing forces have of course been at work for some time, but have been supercharged by shifts in attitude brought on by the COVID-19 pandemic. Board members should take note.
ESG/DEI basically asks whether a company offers both a sustainable investment opportunity and, for many, an ethical investment opportunity. In a way, this is curious because sustainability, by definition, requires a long-term perspective, a view that some advocate is rarely in the mindset of many institutional investors. However, major fund management companies are now looking to sustainability as a way to garner even more assets under management, and myriad for-profit and not-for-profit companies have taken up exclusive and vocal advocacy of particular causes. Especially now that there is money to be made, lots of money, the intensity of the focus on sustainability has become defining for modern business.
Sustainability has, of course, long been central to the functions of the board of directors in modern corporations. It is, after all, at the heart of strategic planning, R&D budgeting, mergers and acquisitions, and virtually every other strategic capital allocation decision. However, in today’s environment, it is essential that what has been implied be made explicit in the governing documentation of the board and disclosed publicly, prominently and repeatedly, especially in an age when research provide the foundation for a numerical rating that will strongly influence institutional investors, and shareholders are increasingly filing lawsuits to reprimand directors for results they disagree with.
How a particular board should approach this specifically is yet to be determined in many companies. On this issue and virtually all other ESG/DEI issues, it matters less how or where a particular oversight is filed and what it is called, than whether it is explicitly addressed in some way or another. another in the governing documents of the board of directors and that the subject be highlighted in the company’s management documents. proxy statement and other external communications.
Nonetheless, boards should do three things ahead of their 2022 annual shareholder meetings:
- What to do about it: The board and management team need to be clearly aligned on what exactly sustainability means for their particular business. In the lumber industry, for example, durability is a very precise term of art for inventory turnover. For miners, it is about wasting assets. In a technology-driven age, component manufacturers assume that much of what they make and sell will be obsolete in just a few years. Sustainability and strategy are inextricably linked, and the board and management need to work together to align and clearly articulate what this means for their particular business. Of course, as with other corporate governance topics, there is no one-size-fits-all solution. As such, the location of the sustainability oversight will depend on many factors, including historical practice and perhaps even the particular skills of the committee members in place. When it comes to this and virtually every other ESG/DEI topic, companies should be taking action that matters to them and, more importantly, working for them, not ticking boxes on lists compiled by rating companies by proxy or large fund managers.
- where to put it: Many boards have focused on sustainability first in their nominating and corporate governance (“N&CG”) committees. Some boards have even renamed these committees to include an explicit reference to them. This may be partly due to the feeling that all ESG considerations belonged there in the first place and partly because they no longer clearly align with other committees mandated by the exchange (audit and compensation). Leaving the subject to the N&CG committee, renamed or not, might well make sense. However, although sustainability is clearly integrated into ESG, for some companies the N&CG committee may not be the best place and in these situations boards can usually deal with it at the corporate level. from the administration board. Alternatively, particularly for those most directly affected such as utilities, a separate or similarly named Sustainability Steering Committee may be appropriate. In this regard, many major oil companies have already established separate sustainability steering committees given the intensity of external attention on the effects of fossil fuels on climate change and the energy transition.
- What to say about it: For companies for which sustainable development is a primary strategic concern, the preparation of an annual sustainable development report is already commonplace. Whether to do so or simply to highlight the company’s sustainability strategy in key company documents (proxy statement, 10-K and website) depends, again, on of the situation of the company. Either way, multiple references to sustainability, including where appropriate in otherwise unrelated sections of the proxy statement like CD&A, are essential, given that much of the ESG rating/ DEI is performed by word search. For companies where sustainability is not a direct, short-term concern, or where other concerns are more pressing, an explicit and meaningful discussion of why not – and how the subject should be dealt with in the future – is nevertheless necessary in the key stages. documents, including the power of attorney. In other words, regardless of a company’s particular circumstances, explicit processing is no longer optional.
Some view current sustainability as a passing fad. This attitude is myopic and potentially dangerous.
- Companies will need to be much more direct about sustainability in the 2022 proxy season.
- Sustainability necessarily means different things to different companies. Each company must take measures appropriate to its situation.
- The focus on corporate sustainability is here to stay and should not be seen as a passing trend.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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