Jon Ocker joins host Joel Simon to discuss how environmental stewardship became a top priority for corporate boards, the importance of having well-informed board members monitoring environmental compliance and risks, and ways companies can measure the implementation and effectiveness of their related governance policies.
(Editor’s note: transcript edited for clarity.)
Hi, and welcome to Pillsbury’s Industry Insights podcast, where we discuss current legal and practical issues in finance and related sectors. I’m Joel Simon, a partner at the international law firm, Pillsbury Winthrop Shaw Pittman. Today, I’m pleased to be joined by Jonathan Ocker. Jon is the co-leader of Pillsbury’s Board Advisory & Corporate Governance team, advising public companies, boards of directors and high-profile executives on compensation and corporate governance issues. Jon is often referred to as the “Say-on-Pay Doctor.” How’s that for a title? And if there was ever a clear indication of clients valuing someone’s advice, it’s worth noting that Jon is the only lawyer known to have represented chip war adversaries Intel and Advanced Micro Devices simultaneously. Thanks for being here, Jon.
Jonathan Ocker: Thanks, Joel! Pleased to be here.
Joel Simon: In light of the wide array of things you advise companies and boards about, there are so many interesting topics I’d love to chat with you about. Historically, boards of directors focused on governance risk and executive compensation. But today, there’s a raft of issues that have jumped the queue. Let’s talk about ESG. And in particular, the “E” in ESG.
Ocker: So, ESG means Environmental, Social and Governance, and I would say, until 24 months ago lawyers like me focused primarily on governance. We worry about board governance issues like proxy access, independence of directors, and in the appropriate cases making sure that the chairman and CEO function is separate (and if it’s not separate, that you have an effective lead and director).
In August of 2019, Jamie Diamond of JP Morgan Chase said to the Business Roundtable, the priority of companies is no longer the stockholder, it’s the stakeholder. And with that we had a tectonic shift as companies started looking beyond governance to environmental and social. A little later, the World Economic Forum held a 2020 Davos Forum and the Chairman and CEO of Bank of America was quoted as saying in part in the manifesto, “A company is more than an economic unit generating wealth. It fulfills human and social aspiration as part of a broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives.” So, what does this mean to a board of directors? It means that they need to start thinking about more than just economic returns to shareholders. They need to think about the place the company holds in the community in which it does business, the world and the environment in which it does business, and environmental stewardship. The reason that is important is that in 2006, the United Nations inaugural report on Principles for Responsible Investment reported at that time there was $6.5 trillion in assets under management on ESG issues. As of June of last year, there were more than $80 trillion in assets under management for ESG.
Ocker: Turning to another statistics the boards would pay particular attention to—exchange traded funds had $19 billion of investor flowing into them in 2020 compared to $8 billion the year before. That’s more than double. So, investors are paying attention to whether the company has a good ESG track record. But then, let’s look at what’s happened since June of 2019. We have a pandemic, we have social injustice and we have climate change. We’ve gone from a check-the-box exercise to the board looking at the long-term strategy of the company and what its relevance is to the world, to its shareholders and to the communities in which it does business. Companies and boards now look to strategies, and at what industry you’re in. If you’re a food processor, you become concerned about social injustice and genetically modified materials that are causing cancer in less than privileged workers. If you’re a homebuilder or construction company, you start thinking about not only where you get your concrete and timber, but what kind of houses you want to be known as building for the future. And if you’re an energy company, you start thinking about renewable resources. So, Joel, we’ve gone from a simple shift in words—shareholder to stakeholder—to the importance of environment to the future strategy of a company.
Simon: That’s an incredible story of evolution, Jon. It can seem a little overwhelming, particularly with the environment being such expansive issue. How does a board go about getting its arms around just the environment aspect of that? Is there a playbook for this type of thing?
Ocker: There’s no one-size-fits-all playbook. Each company, each industry is different. But one thing is pretty common. I was reading an article about Intel where one of its former directors—or director, I forget which—was talking about they only had one chip expert on the board and they want to get more chip experts on the board as Intel decides whether to build these chips in the United States or to outsource to factories as some of its competitors are doing. Taking that analogy to environmental, I think each board needs to look at its members and figure out if it has an environmental expert on the board. Boards are going to be looking at their existing expertise and whether they have a hole in terms of the space in the environmental world the company plays. Then, once the company has assessed that, it might determine it wants to have a separate ESG company. And I would say right now, a minority of companies have separate board committees devoted just entirely to ESG. More likely it’s going to be delegated to the nominating and governance committee or an audit committee. But it will go to a committee where there’s someone with some expertise to monitor this. Not all board member are environmental experts. And where that expertise is lacking, they’ll be looking for expertise.
The next step for that committee or for those directors who are tasked to do this is to work with management and the parts of management. That would include the CFO because there’s reporting of environmental risk. Investor Relations are very important to determine what shareholders are saying about sharing environmental stewardship. Legal, and to get those management teams to identify the environmental risks for the company. And often, most good companies that are ahead of the curve on this, probably the Fortune 200, will have a sustainability report where management will report to the board and on the website to shareholders the issues of environmental compliance, environmental risk mitigation, and environmental looking forward as a strategy that are important to the board. The board will review that sustainability report with management to put it forward to the world and the communities in terms of their environmental strategy.
Simon: Once a company has all these things in place, how do they determine whether their policies are working or not? Are there formal feedback mechanisms from investors, or regulators or the public? Or is it simply just the court of public opinion, lawsuits and news reports?
Ocker: It’s certainly the latter. But that would truly be the last resort. There are now institutional advisors that would advise. There are institutional shareholder services. Glass Lewis will actually give your proxy—they’ll grade your proxy on environmental compliance. And ISS uses The Global Reporting Initiative standards, The Sustainability Accounting standards and The Task Force on Climate-Related Financial Disclosure factors to grade on a scale of 10 how a company is doing relative to its peer group. And a peer group would be the companies you identify in your proxy that are similar in size to you, footprint, market cap revenues—those sorts of things. They would compare you to your peers and give you a score. And the last thing the board wants to do is have a low score in its ISS and Glass Lewis report. So, there is a reporting system, there is a scorecard system, and it would behoove management to prove to the board that they’re doing the necessary appropriate things to get scores.
There are also institutional shareholders that have their own scoring system. For example, State Street has an “R factor,” which is a responsibility factor. They look at emissions, air quality, energy management, water and wastewater management, and ecological impacts, and they’ll grade companies as well in terms of good companies to invest in. This gets back to my initial point about the exchange traded funds. You won’t get investors’ money unless you’re getting a good score, either or both from ISS Glass Lewis or one of the big institutional funds like Black Lock or State Street.
Simon: It sounds like this expansion of board scrutiny involves a lot of knowledge and understanding in areas previously left to management. Any parting words of advice for boards that are just beginning to grapple with these issues?
Ocker: It is the latest flavor of the week, but it’s really grounded in reality in terms of what’s happening in the world where the next catastrophe will come from. You generally want to raise consciousness, and boards should seek out podcasts like this. Should seek out websites like the Harvard Law School Forum on Corporate Governance. Should learn as much as they can from their own about environmental risks and climate change. But most importantly they should have, if they don’t already, an environmental expert among their colleagues on the board—someone to lead that committee and be in charge of environmental compliance and working with management to ensure you get the best scores possible.
The last thing I would recommend, beyond getting good scores, is actually being a responsible corporate citizen and looking at your long-term strategy and seeing what the sustainability of the company is depending on what industry you’re in. And then, in your proxy and your reports, tell what you’re doing to be a good citizen along the lines of the Davos Manifesto or the Business Roundtable. I really think this is going to be a game-changing exercise, with people taking this seriously to get the business to a better place in terms of environmental sustainability. It’s about time.
Simon: Jon, thank you for a great conversation on some cutting-edge issues facing boards today. It’s been great having you here.