Accordingly, disclosure of ESG metrics and providing ESG materials to shareholders has become the new the norm. For example:
- ISS and Glass Lewis voting guidelines motivate companies to make ESG-related changes and disclosures.
- Major institutional investors like Blackrock and State Street have published ESG investment and voting guidelines, with BlackRock voting against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.
- State Street launched R-Factor (the “R” stands for Responsibility) in 2019, a transparent scoring system that measures the performance of a company’s business operations and governance as it relates to financially material and sector-specific ESG issues.
- According to the 2020 Edelman Trust Barometer:
- 87 percent of respondents have incorporated ESG-related risk into their voting and/or engagement policies.
- 86 percent of investors would consider investing with a lower rate of return if it meant investing in a company that addresses sustainable or impact investing considerations.
- 56 percent of investors globally are hiring more ESG-focused staff.
One of the critical ways to effectuate positive ESG changes is to have the board of directors comprised of the right directors. While term limits (tenure) and mandatory retirement ages are relatively rare, these items are a concern for most investors who seek fresh perspectives with directors who are not only gender diverse but have diverse areas of expertise and diverse business strategy philosophies. The best way to achieve the right mix of board members is to have a robust and thorough self-assessment process.
Best Practices for ESG—Sample Proxy Disclosure
Below is best practice language for your proxy, including suggested N&G nominating
policy language. This is not a one-size-fits-all recommendation, and each company has its own unique situation, governance structure, workforce, and environmental impact. However, companies may use this sample best practice disclosure as a reference point to decide what is best for them in terms of board composition and governance changes, making a positive impact on the environment, and incentivizing their workforce and attracting customers and investors. Companies can start with their investor relations teams to get a pulse of what their shareholders and stakeholders care about. And finally, taking such measures may have the incidental benefit of improving a company’s governance scores.
Environmental Responsibility
- As part of our commitment to environmental sustainability, our goal is to reduce our carbon footprint by X percent by the year Y.
- We seek accountability through reporting our policies, practices, and performance to our stakeholders. A full report of our ESG data and benchmarking is available on our website under the Investor Relations tab.
- With regard to environmental sustainability on our supply chain, we have implemented a Vendor Code of Conduct, outlining basic principles for our vendors to follow in order to minimize our overall environmental impact.
Our People and Culture
- We are committed to investing in our human capital to cultivate and sustain a workplace culture that that enables our employees to feel respected, included and valued.
- Our Compensation Committee sets the tone for our culture and holds management responsible for protecting and promoting our reputation.
- Our focus on investing in human capital includes maintaining a positive workplace culture, training programs, responsive health and wellness programs, employee recruiting and retention, flexible benefits, competitive compensation, an appropriate CEO pay ratio and strong annual say on pay approval.
Board and Committee Composition
- Two of nine members on our board are female, and four of our nine members are from minority groups. As well, one in four committee chairs is a woman.
- We have separate roles for our CEO and Chairman of the Board.
- We have implemented a mandatory retirement age at 72.
- We seek to have an average tenure on our Board of no more than 10 years.
- Our Board members annually conduct annual self-assessments and evaluate the Board as a whole.
N&G Director Nomination Policy
- Our consideration of Director candidates takes into account several factors including age, gender, employment status, tenure, character, judgment, diversity of viewpoints, backgrounds, experience and other demographics, business acumen and ability to act on behalf of all stockholders.
- While Board believes that rigid director age or term limits for directors are inappropriate, the Board periodically reviews its composition against best practices.
- The Nominating and Governance Committee is focused on adding another female director and intends to identify appropriate candidates for potential future nomination to the Board.
Conclusion
Corporations are stepping into a new environment in which merely increasing shareholder value is not enough. Corporations must respond and evolve to societal values. Boards should work with their compensation governance and investor relations experts to stay informed of the evolving demands on the corporation in order to not only retain and grow shareholder value, but to increase stakeholder value as well.