What’s ahead for this proxy season?

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In a 2020 paper, Equilar and the Rock Center for Corporate Governance at Stanford dicussed how COVID-19 had affected CEO compensation.  Were boards focused more on making sure that CEOs had the right incentives to continue their jobs under trying circumstances? After all, in the case of the pandemic, the trying circumstances are not of their own making.  Or are boards more inclined to focus on showing the public and other stakeholders, especially employees, that CEOs are sharing the pain?  CEO pay attracts a lot of attention in ordinary times, but in times of severe economic distress when corporate performance and stock prices plummet and companies engage in substantial layoffs, furloughs and pay cuts for employees—who likewise are not responsible for the economic crisis—CEO pay can attract intense scrutiny.  If CEOs usually benefit from positive outside events and rising stock markets, should they “be sheltered from reversals in these same factors?” Accordingly, in these circumstances, paying the same or greater levels of CEO comp can seem unfair to the employees and invite shareholder and public criticism. (See this PubCo post.)

How did boards address this issue? The paper had only a portion of the year to look at, but now data for all of 2020 is becoming available. Hot off the press, the WSJ is reporting that

“CEO pay surged in 2020, a year of historic business upheaval, a wrenching labor market for many workers and unprecedented challenges for many leaders. Median pay for the chief executives of more than 300 of the biggest U.S. public companies reached $13.7 million last year, up from $12.8 million for the same companies a year earlier and on track for a record, according to a Wall Street Journal analysis. Pay kept climbing in 2020 as some companies moved performance targets or modified pay structures in response to the Covid-19 pandemic and accompanying economic pain. Salary cuts CEOs took at the depths of the crisis had little effect. The stock market’s rebound boosted what top executives took home because much of their compensation comes in the form of equity.”

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As discussed in this Reuters article, the welfare of workers “is having a moment on Wall Street.” Issues surrounding paid sick leave and safe working conditions have become a top priority for managements and boards; for some investors, they have become “a golden opportunity to apply the principles of ethical investing.” While, previously, investors tended to focus on the environment (“e”) and governance issues such as proxy access (“g”), now social issues (“s”), especially human capital management, have become predominant. The WSJ is also reporting that investors are pressuring companies to “strengthen employee benefits after the coronavirus pandemic exposed shortcomings in U.S. labor policy. Investors have scrutinized how U.S. companies have managed their workforces during the crisis to determine how ready they are for future global emergencies. Issues include offering paid sick leave, counseling, protective equipment, flexible work and the option to work from home.”  The article reports that both BlackRock and State Street are focusing on “more immediate ESG issues,” such as employee health and safety.  According to one commentator cited in the article, the “crisis presents the best opportunity yet for companies to prove whether they are pledged to stakeholders as many have claimed for years, like workers and local communities, and not just stockholders. ‘This is a litmus test for corporate commitment.’” The next question is whether the concern for employee welfare survives the pandemic?  According to one union spokesperson cited in the article, “[i]t is too early to know how the pandemic will affect the balance between corporate social responsibility and pursuit of shareholder value above all else.” As the article notes, “the longer it takes economies to recover from the pandemic, the greater the pressure on companies to cut costs, including jobs.”  (See this PubCo post.)

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The Shareholder Commons is a non-profit organization that uses “shareholder activism, thought leadership, and policy advocacy to catalyze systems-first investing and create a level playing field for sustainable competition.” In essence, TSC seeks to shift the focus from the impact of a company’s activities and conduct on its own financial performance to “systemic portfolio risk,” the impact of the company’s activities and conduct on society, the environment and the wider economy as a whole, which would affect most investment portfolios. What is “systems-first investing”?  According to TSC, it is the concept that “investors should work to prohibit all companies from engaging in business strategies that have a negative impact on people and planet. Even if this behavior boosts financial performance at an individual company in an investor’s portfolio, it will damage society, the environment, and the economy, thus dragging down the overall performance of most investment portfolios. It will also reduce the quality of life for the people whom the portfolios are intended to benefit, along with the rest of humanity.” TSC distinguishes its approach from the typical approach to ESG, which, TSC contends, addresses important systemic issues like climate change and racial injustice largely “through the lens of increasing shareholder value at individual companies by promoting efficiency and innovation, enhancing reputation and, frankly, staving off regulation. While we can all celebrate the ability of corporations to ‘do well by doing good,’ it will not be nearly enough to address the systemic risks we face. Shareholders must also use their governance rights to ensure that companies stop ‘doing better by doing bad.’ But investors continue to resist asking individual companies to sacrifice long-term financial return for the good of the economy overall.” (See this PubCo post.)

This year, in particular, the group has helped with submission of a number of shareholder proposals that address issues in its sweet spot—influencing corporate behavior regarding social and environmental systems that affect the economy as a whole. One of those issues has been conversion of traditional corporations to PBCs. In a 2014 article In the Harvard Business Law Review, then-Chief Justice Leo Strine of the Delaware Supreme Court argued forcefully that, notwithstanding the allure of “stakeholder capitalism,” current corporate accountability structures make it difficult for directors to “do the right thing.” However, he contended, there is a way to effectively shift the power balance to create incentives for good corporate citizenship: the public benefit corporation. By articulating new corporate purposes and mandates, in Strine’s view, the PBC tweaks the normal corporate accountability and incentive structure that traditionally has made corporate managers accountable to only one constituency—shareholders. (See this PubCo post.) 

What is a PBC? A “public benefit corporation,” according to the Delaware General Corporation Law, “is a for-profit corporation…that is intended to produce a public benefit…and to operate in a responsible and sustainable manner.  To that end, a public benefit corporation shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation.”  To put it another way, as described in this article in the Institutional Investor, a PBC is a corporation that is “legally permitted to consider its impact on people and planet to be equally important as its impact on shareholders’ wallets….” The PBC legislation was signed into law in 2013, but has not achieved quite the anticipated level of enthusiasm, especially among public companies.  In the last few years, however, we have witnessed intensifying investor focus on sustainability as a strategy (see, for example, this PubCo post), as well as swelling numbers of companies declaring their commitments to all stakeholders, as reflected, for example, in the Business Roundtable’s adoption of a  Statement on the Purpose of a Corporation  and the World Economic Forum’s Stakeholder Principles in the COVID Era (see this PubCo post). What’s more, new legislation  adopted in Delaware in July 2020 will make it easier to slip in and out of PBC status. To date, only one public company, Veeva Systems, has converted to a PBC—and by an overwhelming favorable vote, suggesting that there may be more public shareholder support for PBCs than was previously thought. (See this PubCo post.) Whether these trends toward sustainability and stakeholder capitalism, together with the new Delaware legislation and the current round of shareholder proposals will fuel a renewed movement toward PBCs for public companies and expecting-to-become public companies remains to be seen. (See this PubCo post.)

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Large institutional investors have, for the most part, shied away from political spending disclosure proposals, at least historically. In some ways, that seems to be a bit paradoxical in light of the Big 4’s expressed concern with sustainability, given that corporate political spending could well be devoted to purposes inconsistent with that goal. For example, in its 2019 voting guidelines, asset manager BlackRock made clear that the bar for support of political spending proposals at that time was relatively high, taking the position that, when

This reluctance of institutional shareholders to step up with regard to political spending proposals has come under fire from none other than former Delaware Chief Justice Leo Strine. The title of this 2018 paper, “Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent the Illegitimate Use of Working Americans’ Savings for Corporate Political Spending,” communicates the bottom line pretty clearly. While Strine congratulates the “Big 4” institutional investors, BlackRock, Vanguard, State Street and Fidelity, for recognizing “that unless public companies act in a manner that is environmentally, ethically, and legally responsible, they are unlikely to be successful in the long run,” he chastises them for continuing “to have a fiduciary blind spot: they let corporate management spend the Worker Investors’ entrusted capital for political purposes without constraint.” (In the paper, “Worker Investors” are American workers that, through 401(k) and 529 plans, must invest largely in mutual funds to save for retirement and college and whose capital is effectively “trapped” until their retirement.) (See this PubCo post.)

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The nonpartisan Center for Political Accountability reported in its June newsletter that support for shareholder proposals in favor of political spending disclosure hit record highs this past proxy season. For proposals using the CPA model resolution submitted to shareholder votes at 22 companies, the average vote in favor was 41.9%, up from an average of 36.4% last year.  What’s more, the proposal received majority votes in favor at four companies plus one tie (50%) vote, and over 30% of the vote at 18 companies. (See this PubCo post.)

Notably, in questioning by the Senate Committee on Banking, Housing and Urban Affairs, nominee for SEC Chair, Gary Gensler, was asked by both sides about political spending disclosure. Gensler replied that his position on the issue would be grounded in economic analysis and the courts’ views of materiality as the information reasonable investors want to see as part of the total mix of information. Gensler added that he considered the 80 shareholder proposals submitted last year on the topic and the 40% vote in favor as a strong indicator.  In light of that level of investor interest, political spending disclosure was something he thought the SEC should consider.

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After January 6, The Conference Board conducted a survey to find out the extent to which companies suspended PAC activity. It turns out that the public announcements reflected only a slice of the actions taken by corporate PACs. The survey, conducted between January 25 and February 2, found that, among respondents, about 55% suspended their PAC contributions, split almost evenly between those that stopped contributions to all members of Congress (28%) and those that stopped contributions only to lawmakers who voted against election certification (27%)—and only 3% of those were permanent decisions; and 45% took no action, including some that did not have a PAC, some that were still undecided about what action to take and some (19%) that had decided against any response. Only 28% announced the actions they were taking regarding PAC contributions both internally and externally, while 25% announced actions only internally; almost half (46%) made no announcement. With respect to those intending to resume contributions in the future, over 50% were unsure or did not indicate what steps they were planning to take prior to resuming contributions; 37% said that they needed to gather more information on potential recipients; 21% planned to revise the criteria for contributions “to address supporting democratic processes”; 16% intended to change the approval process; and 8% planned to revise the criteria to address supporting violence.

Surprisingly, most corporate boards seem to have played little role in these decisions:  only 4% of respondents indicated that the company’s board of directors made the decision and only 2% of boards initiated the discussion; 27% of PACs just “informed” their boards of the decision; only 11% consulted with their boards and 7% informed their boards beforehand; and 30% responded “other,” with many noting that the board was not involved or that its involvement was not applicable.  (See this PubCo post.)

In light of these PAC suspensions, Senators Chris Van Hollen and Robert Menendez have reintroduced the Shareholder Protection Act of 2021 to mandate not only political spending disclosure, but also shareholder votes to authorize corporate political spending. According to the press release, “[s]ome public companies’ decision to suspend or reevaluate further political donations is an acknowledgment that political donations can significantly affect a company’s reputation and financial health. Without public disclosure of political contributions, shareholders are left in the dark about decisions that may affect a company’s bottom-line, and in the case of the January 6th insurrection, decisions to support organizations and campaigns that may have advocated stopping the certification of a free and fair election.”

The bill would amend the Exchange Act to add a requirement that proxy statements contain a description of any expenditure for political activities (as defined) proposed to be made in the coming fiscal year that has not been authorized by a vote of the shareholders, including the proposed total amount, and provide for a separate vote of the shareholders to authorize these expenditures. Companies would be prohibited from making any political expenditures that have not been authorized by a vote of the holders of the majority of the outstanding shares.