Gouvernance | Page 9

Corporate Board Member fait une intéressante synthèse de la politique de démission d’un administrateur qui ne recevrait pas 50 % des votes lors de son élection : « Is A Director Resignation Policy Good For Governance? » (Matthew Scott). Promeut par les grands investisseurs de ce monde, comment résumer les effets positifs d’une telle politique ? C’est ce que vous propose l’auteur !

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While historically such policies have not been strictly enforced, adopting them challenges directors to do what’s right for the organization based on moral considerations and their fiduciary responsibility. Such a policy can also act as an indicator for when board refreshment might be necessary, particularly if support for the entire board begins to fall close to or below the 50 percent threshold.

That shareholders would lobby for this type of policy suggests they are looking for a very direct way to hold board members accountable for the work they do on behalf of the company. This is a growing trend for public companies. Shareholders have reasoned that if a director who is up for re-election to the board and is running unopposed can’t manage to get more than 50 percent of shareholders to vote for their return, then a change is needed. Shareholders aren’t happy that directors who receive less than the majority of votes are allowed to keep their board seats simply because no one ran against them. For corporate boards, the question “Why aren’t shareholders supporting that director?” must be asked, answered and dealt with swiftly. If the largest shareholders aren’t supporting certain board members, it’s only a matter of time before they suggest someone to run against them. It may be better for at-risk directors to resign gracefully before being forced out by a dissident shareholder running a candidate against them.

Additionally, this policy gives affected directors a chance to ask themselves, “Is it the best decision for me to continue to serve on a board where shareholders don’t support my service?” Future career opportunities, reputational impact and board appointments might be at stake.

Having such a resignation policy could have another positive effect on governance – it may make a few more board seats open up faster. Only a limited number of board seats become available each year, so anything that can encourage board turnover in a good way is welcome. This policy could help create more open positions for boards that are looking to add diverse candidates, and at the same time, add new perspectives and innovative thought to board discussions. And most governance professionals would favor that.

À la prochaine…

Billet à découvrir sur le site de Harvard Law School Forum on Corporate Governance pour y lire cet article consacré à la sortie de crise sanitaire et aux apports de la raison d’être et des critères ESG : « ESG and Corporate Purpose in a Disrupted World » (Kristen Sullivan, Amy Silverstein et Leeann Galezio Arthur, 10 août 2020).

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Corporate purpose and ESG as tools to reframe pandemic-related disruption

The links between ESG, company strategy, and risk have never been clearer than during the COVID-19 pandemic, when companies have had to quickly pivot and respond to critical risks that previously were not considered likely to occur. The World Economic Forum’s Global Risks Survey 2020, published in January 2020, listed “infectious diseases” as number 10 in terms of potential economic impact, and did not make the top 10 list of risks considered to be “likely.” The impact of the pandemic was further magnified by the disruption it created for the operations of companies and their workforces, which were forced to rethink how and where they did business virtually overnight.

The radical recalibration of risk in the context of a global pandemic further highlights the interrelationships between long-term corporate strategy, the environment, and society. The unlikely scenario of a pandemic causing economic disruption of the magnitude seen today has caused many companies—including companies that have performed well in the pandemic—to reevaluate how they can maintain the long-term sustainability of the enterprise. While the nature and outcomes of that reevaluation will differ based on the unique set of circumstances facing each company, this likely means reframing the company’s role in society and the ways in which it addresses ESG-related challenges, including diversity and inclusion, employee safety, health and well-being, the existence of the physical workplace, supply chain disruptions, and more.

ESG factors are becoming a key determinant of financial strength. Recent research shows that the top 20 percent of ESG-ranked stocks outperformed the US market by over 5 percentage points during a recent period of volatility. Twenty-four out of 26 sustainable index funds outperformed comparable conventional index funds in Q1 2020. In addition, the MSCI ACWI ESG Leaders Index returned 5.24 percent, compared to 4.48 percent for the overall market, since it was established in September 2007 through February 2020. Notably, BlackRock, one of the world’s largest asset managers, recently analyzed the performance of 32 sustainable indices and compared that to their non-sustainable benchmarks as far back as 2015. According to BlackRock the findings indicated that “during market downturns in 2015–16 and 2018, sustainable indices tended to outperform their non-sustainable counterparts.” This trend may be further exacerbated by the effects of the pandemic and the social justice movement.

Financial resilience is certainly not the only benefit. Opportunities for brand differentiation, attraction and retention of top talent, greater innovation, operational efficiency, and an ability to attract capital and increase market valuation are abundant. Companies that have already built ESG strategies, measurements, and high-quality disclosures into their business models are likely to be well-positioned to capitalize on those opportunities and drive long-term value postcrisis.

As businesses begin to reopen and attempt to get back to some sense of normalcy, companies will need to rely on their employees, vendors, and customers to go beyond the respond phase and begin to recover and thrive. In a postpandemic world, this means seeking input from and continuing to build and retain the confidence and trust of those stakeholder groups. Business leaders are recognizing that ESG initiatives, particularly those that prioritize the health and safety of people, will be paramount to recovery.

What are investors and other stakeholders saying?

While current events have forced and will likely continue to force companies to make difficult decisions that may, in the short term, appear to be in conflict with corporate purpose, evidence suggests that as companies emerge from the crisis, they will refresh and recommit to corporate purpose, using it as a compass to focus ESG performance. Specific to the pandemic, the public may expect that companies will continue to play a greater role in helping not only employees, but the nation in general, through such activities as manufacturing personal protective equipment (PPE), equipment needed to treat COVID-19 patients, and retooling factories to produce ventilators, hand sanitizer, masks, and other items needed to address the pandemic. In some cases, decisions may be based upon or consistent with ESG priorities, such as decisions regarding employee health and well-being. From firms extending paid sick leave to all employees, including temporary workers, vendors, and contract workers, to reorienting relief funds to assist vulnerable populations, examples abound of companies demonstrating commitments to people and communities. As companies emerge from crisis mode, many are signaling that they will continue to keep these principles top of mind. This greater role is arguably becoming part of the “corporate social contract” that legitimizes and supports the existence and prosperity of corporations.

In the United States, much of the current focus on corporate purpose and ESG is likely to continue to be driven by investors rather than regulators or legislators in the near term. Thus, it’s important to consider investors’ views, which are still developing in the wake of COVID-19 and other developments.

Investors have indicated that they will assess a company’s response to the pandemic as a measure of stability, resilience ,and adaptability. Many have stated that employee health, well-being, and proactive human capital management are central to business continuity. Investor expectations remain high for companies to lead with purpose, particularly during times of severe economic disruption, and to continue to demonstrate progress against ESG goals.

State Street Global Advisors president and CEO Cyrus Taraporevala, in a March 2020 letter to board members, emphasized that companies should not sacrifice the long-term health and sustainability of the company when responding to the pandemic. According to Taraporevala, State Street continues “to believe that material ESG issues must be part of the bigger picture and clearly articulated as part of your company’s overall business strategy.” According to a recent BlackRock report, “companies with strong profiles on material sustainability issues have potential to outperform those with poor profiles. We believe companies managed with a focus on sustainability may be better positioned versus their less sustainable peers to weather adverse conditions while still benefiting from positive market environments.”

In addition to COVID-19, the recent social justice movement compels companies to think holistically about their purpose and role in society. Recent widespread protests of systemic, societal inequality leading to civil unrest and instability elevate the conversation on the “S” and “G” in ESG. Commitments to the health and well-being of employees, customers, communities, and other stakeholder groups will also require corporate leaders to address how the company articulates its purpose and ESG objectives through actions that proactively address racism and discrimination in the workplace and the communities where they operate. Companies are responding with, among other things, statements of support for diversity and inclusion efforts, reflective conversations with employees and customers, and monetary donations for diversity-focused initiatives. However, investors and others who are pledging to use their influence to hold companies accountable for meaningful progress on systemic inequality will likely look for data on hiring practices, pay equity, and diversity in executive management and on the board as metrics for further engagement on this issue.

What can boards do?

Deloitte US executive chair of the board, Janet Foutty, recently described the board as “the vehicle to hold an organization to its societal purpose.” Directors play a pivotal role in guiding

companies to balance short-term decisions with long-term strategy and thus must weigh the needs of all stakeholders while remaining cognizant of the risks associated with each decision. COVID-19 has underscored the role of ESG principles as central to business risk and strategy, as well as building credibility and trust with investors and the public at large. Boards can advise management on making clear, stakeholder-informed decisions that position the organization to emerge faster and stronger from a crisis.

It has been said before that those companies that do not control their own ESG strategies and narratives risk someone else controlling their ESG story. This is particularly true with regards to how an organization articulates its purpose and stays grounded in that purpose and ESG principles during a crisis. Transparent, high-quality ESG disclosure can be a tool to provide investors with information to efficiently allocate capital for long-term return. Boards have a role in the oversight of both the articulation of the company’s purpose and how those principles are integrated with strategy and risk.

As ESG moves to the top of the board agenda, it is important for boards to have the conversation on how they define the governance structure they will put in place to oversee ESG. Based on a recent review, completed by Deloitte’s Center for Board Effectiveness, of 310 company proxies in the S&P 500, filed from September 1, 2019, through May 6, 2020, 57 percent of the 310 companies noted that the nominating or governance committee has primary oversight responsibility, and only 9 percent noted the full board, with the remaining 34 percent spread across other committees. Regardless of the primary owner, the audit committee should be engaged with regard to any ESG disclosures, as well as prepared to oversee assurance associated with ESG metrics.

Conclusion

The board’s role necessitates oversight of corporate purpose and how corporate purpose is executed through ESG. Although companies will face tough decisions, proactive oversight of and transparency around ESG can help companies emerge from recent events with greater resilience and increased credibility. Those that have already embarked on this journey and stay the course will likely be those well-positioned to thrive in the future.

Questions for the board to consider asking:

How are the company’s corporate purpose and ESG objectives integrated with strategy and risk?

1. Has management provided key information and assumptions about how ESG is addressed during the strategic planning process?
2. How is the company communicating its purpose and ESG objectives to its stakeholders?
3. What data does the company collect to assess the impact of ESG performance on economic performance, how does this data inform internal management decision- making, and how is the board made aware of and involved from a governance perspective?
4. Does the company’s governance structure facilitate effective oversight of the company’s ESG matters?
5. How is the company remaining true to its purpose and ESG, especially now given COVID-19 pandemic and social justice issues?
6. What is the board’s diversity profile? Does the board incorporate diversity when searching for new candidates?
7. Have the board and management discussed executive management succession and how the company can build a diverse pipeline of candidates?
8. How will the company continue to refresh and recommit to its corporate purpose and ESG objectives as it emerges from the pandemic response and recovery and commit to accelerating diversity and inclusion efforts?
9. How does the company align its performance incentives for executive leadership with attaining critical ESG goals and outcomes?

À la prochaine…

Nouvel article sur la raison d’être par Martin Lipton et al. : « On the Purpose and Objective of the Corporation » (Harvard Law School Forum on Corporate Governance, 5 août 2020).

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Recent events—notably including the pandemic, its disparate impact on various segments of society, and the focus on inequality and injustice arising in the wake of the death of George Floyd—have accelerated the conversation on corporate purpose. The result has been substantial, salutary reflection about the role that corporations play in creating and distributing economic prosperity and the nexus between value and values.

For our part, we have supported stakeholder governance for over 40 years—first, to empower boards of directors to reject opportunistic takeover bids by corporate raiders, and later to combat short-termism and ensure that directors maintain the flexibility to invest for long-term growth and innovation. We continue to advise corporations and their boards that—consistent with Delaware law—they may exercise their business judgment to manage for the benefit of the corporation and all of its stakeholders over the long term.

In looking beyond the disruption caused by the pandemic, boards and corporate leaders have an opportunity to rebuild with the clarity and conviction that come from articulating a corporate purpose, anchored in a holistic understanding of the key drivers of their business, the ways in which those drivers shape and are shaped by values, and the interdependencies of multiple stakeholders that are essential to the long-term success of the business.

This opportunity leads us to reiterate and refine a simple formulation of corporate purpose and objective, as follows:

The purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to ensure its success and grow its value over the long term. This requires consideration of all the stakeholders that are critical to its success (shareholders, employees, customers, suppliers and communities), as determined by the corporation and its board of directors using their business judgment and with regular engagement with shareholders, who are essential partners in supporting the corporation’s pursuit of its purpose. Fulfilling purpose in such manner is fully consistent with the fiduciary duties of the board of directors and the stewardship obligations of shareholders.

This statement of corporate purpose is broad enough to apply to every business entity, but at the same time supplies clear guideposts for action and engagement. The basic objective of sustainable profitability recognizes that the purpose of for-profit corporations includes creation of value for investors. The requirement of lawful and ethical conduct ensures generally recognized standards of corporate social compliance. Going further, the broader mandate to take into account all corporate stakeholders, including communities, is not limited to local communities, but comprises society and the economy at large and directs boards to exercise their business judgment within the scope of this broader responsibility. The requirement of regular shareholder engagement acknowledges accountability to investors, but also the shared responsibility of shareholders for responsible long-term corporate stewardship.

Fulfilling this purpose will require different approaches for each corporation depending on its industry, history, regulatory environment, governance and other factors. We expect that board committees—focusing on stakeholders, ESG issues and the stewardship obligations of shareholders— will be useful or even necessary for some companies. But for all the differences among companies, there is an important unifying commonality: corporate action, taken against the backdrop of this formulation of corporate purpose, will be fully protected by the business judgment rule, so long as decisions are made by non-conflicted directors acting upon careful consideration and deliberation.

Executed in this way, stakeholder governance will be a better driver of long-term value creation and broad-based prosperity than the shareholder primacy model. Directors and managers have the responsibility of exercising their business judgment in acting for the corporate entity that they represent, balancing its rights and obligations and taking into account both risks and opportunities over the long term, in regular consultation with shareholders. Directors will not be forced to narrow their focus and act as if any one interest trumps all others, with potentially destructive consequences, but will instead have latitude to make decisions that reasonably balance the interests of all constituencies in a manner that will promote the sustainable, long-term business success of the corporation as a whole.

À la prochaine…

Alors que tout le monde évoque le changement de paradigme lié à l’émergence d’un « stakeholderism », le Wall Street Journal lance un pavé dans la mare sous la plume notamment du professeur Bebchuk : rien n’a vraiment changé ! « ‘Stakeholder’ Capitalism Seems Mostly for Show » (Wall Street Journal, 6 août 2020)

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Notwithstanding statements to the contrary, corporate leaders are generally still focused on shareholder value. They can be expected to protect other stakeholders only to the extent that doing so would not hurt share value.

That conclusion will be greatly disappointing to some and welcome to others. But all should be clear-eyed about what corporate leaders are focused on and what they intend to deliver.

Pour un commentaire du Board Agenda, voir « Stakeholderism: Study finds evidence in short supply ».

À la prochaine…

Quel est l’impact des médias sociaux sur les médias sociaux ? Un article publié dans SSRN y répond : James S. Ang, Charles Hsu, Di Tang et Chaopeng Wu, « The Role of Social Media in Corporate Governance » (20 février 2020).

Résumé :

We examine whether social media criticisms posted by small investors can predict subsequent firm acquisition decisions. Specifically, we use textual analysis to examine the Internet stock message board postings of 303 value-reducing acquisition attempts.

Our empirical evidence shows that small investors’ negative postings are able to predict a potential acquirer’s subsequent decision to withdraw its attempt.

We further find that this predictive ability increases with the information quality of postings, and that the predictive information extracted from social media is incremental to that captured by proposal announcement returns, conventional media coverage, analyst reports, and institutional investors’ responses related to the proposed acquisition.

Finally, we show that message board criticisms are also able to predict governance outcomes beyond acquisition decisions.

Overall, our results are consistent with the notion that social media play a role in corporate governance by gathering crowd wisdom and uncovering additional value-relevant information.

À la prochaine…