Environmental and social issues continue to be top of mind for shareholders, institutional investors and large corporations.
The emphasis on ESG isn’t limited to U.S.-based companies. During the World Economic Forum’s annual meeting in Davos, some of the world's largest companies pledged to use a uniform set of "
stakeholder capitalism metrics.” The move signifies growing support for the idea that corporations are responsible not only for their returns to shareholders but for their impact on society at large.
Sustainable is the New Standard
Companies can no longer put sustainability plans and practices on the back burner. Stakeholders see through approaches aimed at checking the box. Now, they are voicing expectations for boards to be further down the path to connecting long-term sustainable business practices with corporate risk management and strategy, as well as devising performance indicators to drive accountability within the organization.
Boards and management teams should use a clear mandate to view sustainability as an opportunity to closely evaluate the areas of related risk and opportunity within their organizations. Comprehensive risk assessments outlining plans for mitigating risk and clear KPIs will help boards monitor progress as well as satisfy shareholders.
Human Capital Management Hits New Heights
The “S” in ESG gained long-needed prominence in 2020, and scrutiny is only likely to grow moving forward. Diversity cannot simply be discussed as a general concept or a “nice to have,” but must be pursued with intention and action. Committing to enhancing DE&I within an organization is an opportunity to invite fresh ideas, challenge traditional thinking and unlock value. Now is the time to assess the company and board’s diversity practices to ensure they will produce the results intended and update them if they fall short.
Addressing this issue goes far beyond meeting shareholder demands and should be considered from the broader stakeholder lens of an organization’s employees, suppliers, customers, and communities. Improving diversity not only at the board and management level, but throughout the organization, will help companies forge a path that increases long-term value and minimizes reputational risk.
Compensation Considerations
Responsibilities of the board’s compensation committee will continue to be scrutinized as shareholders ask for more insight into financials. Directors should plan to address how they are evolving executive compensation reporting to align with clearly defined KPIs related to company performance, ESG initiatives and other value-creation metrics. Taking a proactive approach and implementing compensation-performance measures before proposals are brought to the table will allow boards and management to demonstrate action and drive decisions.
COVID-19 highlighted a need to connect compensation to executive behavior amid claims that some executives prioritized earnings and profits over the safety of employees and the general public. Creating a link will help incentivize executives to ensure all stakeholders are considered in urgent and long-term decision-making.
For companies experiencing pandemic-related, reduced cash flow, reductions in pay, staff or both have been necessary to keep companies financially viable. Proxy advisory firms have been clear that saving money at the expense of employees should not translate into increased pay levels for executives and will continue to take notice in the current proxy cycle.
Demand for Disclosure
As the number of required disclosures continues to rise, proper communication channels with external and internal auditors will be more important than ever. Keeping up to date with new and evolving SEC requirements, guidance from institutional investors and shareholders alike will help boards in their oversight of management processes and procedures to mitigate risk.
Determining and conveying the most material aspects of a company’s business is one of a board’s most pressing areas of focus, and decisions should be driven by data. In December 2020,
SEC Commissioner Elad Roisman gave a statement reminding boards that in order for disclosures to be useful to investors, it must be easy to understand how investors are to benefit from them.
It is prudent for boards to consider securities laws and legal liability, especially until a standardized approach to ESG reporting is developed and embraced. Shareholder trust is easy to lose and difficult to regain—there is a fine line between transparency and risk.