Directors' Cut Library

Society mid-cap and large-cap members across industries responding to the Society/Deloitte Board Practices Quarterly Survey: “Back to basics: Board committees” provided insights on whether and how board committee composition and practices have changed to keep pace with ever-evolving board oversight expectations. Access the survey results by company size here.

“ESG Oversight and Governance” from the Audit Committee Leadership Network (ACLN) shares recent insights from leading company audit committee chairs about ESG oversight and governance. Among the key takeaways: (i) ACLN members believe the audit committee is the logical place structurally for ESG reporting oversight; (ii) A standalone cross-functional ESG disclosure committee that operates in tandem with the SOX disclosure committee can be beneficial to ensure proper focus and diverse perspectives in relation to ESG disclosures; (iii) A cross-functional management-level ESG committee that doesn’t just focus on disclosure can be beneficial to address the myriad of issues that are important to the company and its stakeholders, but that fall outside the realm of public reporting; and (iv) ACLN members were aligned on the need for SOX-like controls and testing at some level for purposes of data integrity.

Wachtell Lipton’s “Audit Committee Guide” provides information for audit committees and their advisors on regulatory requirements, leading practices and trends, and core committee roles and responsibilities, and practical guidance on how to best discharge them. Model exhibits include charters for NYSE and Nasdaq companies, a responsibilities checklist, a Financial Expertise & Independence Questionnaire, an auditor services pre-approval policy, policies and procedures for related person transactions, whistleblower procedures, and a self-evaluation checklist.

Semler Brossy’s “Four Principles to the Application of Board Discretion” suggests ground rules for discretionary adjustments to executive compensation payouts relative to plan. Adherence to these principles, accompanied by adequate proxy disclosure, should go a long way toward mitigating any negative implications associated with the compensation committee’s exercise of discretion, which may be particularly justified during times of extreme market volatility prompted by external business disruptors.

Pearl Meyer’s report summarizing the results of its recent poll of 187 companies across sizes and industries on their equity grant practices indicates a trend toward broadening the scope of employees receiving equity as part of their compensation package.

Skadden's "Compensation Committee Handbook" provides information for listed company compensation committees and their advisors about core committee duties and responsibilities—including instructive primers on the use of outside advisors, equity compensation, IRC §162(m) and other tax provisions, Section 16, committee composition, and director compensation, and practical guidance on how to best discharge them. The appendix includes a sample calendar of committee meetings and responsibilities and a glossary of commonly used terms.

WTW’s “Debunking misconceptions about ESG metrics in incentives” identifies pros and cons associated with ESG pay metrics; compares and contrasts challenges and considerations associated with establishing ESG metrics to those associated with financial and operational metrics; and offers tips to increase the likelihood that incorporation of ESG metrics in incentive plans will yield the desired pay-for-performance alignment.

Wachtell Lipton's “Nominating and Corporate Governance Committee Guide” provides an overview of the key rules/regulations, exchange standards, and proxy advisor and institutional investor policies applicable to listed company Nominating/Governance committees, and key topics and suggested practices that committees should consider. In addition to a comparison of NYSE and Nasdaq corporate governance standards, the appendix includes a sample director resignation policy, advance notice bylaw provision, D&O Questionnaire, and committee charter.

BDO’s “Nominating and Governance Committee Priorities for 2022” homes in on five areas of committee oversight and includes links to recent benchmarking and other relevant resources.

Of those boards represented by the 150 directors participating in a Pearl Meyer webcast and that have formal board gender goals or diversity goals (56% and 40%, respectively), most reportedly are fully aligned or expect to be fully aligned with those goals within two years.

“Age Should Be Nothing but a Number for Qualified Board Members” from Directors & Boards makes a case for eliminating arbitrary age limits for board service. In addition to furthering board diversification and tapping industry or management expertise, the post observes that the traditional career trajectory and retirement look markedly different today than years ago when many of the current age restrictions were imposed. As a result, older directors who are still fit to serve may be positioned to make unique and beneficial contributions to the board that can’t be attained elsewhere.

“Board Composition: Diversity, Experience, and Effectiveness” from The Conference Board, in collaboration with others, provides benchmarking data and trends, and associated insights, on various board composition attributes, including director qualifications and skills; gender, racial/ethnic, and sexual orientation diversity; and board size, as well as director education practices, across S&P 500 and Russell 3000 companies.

Corporate Secretary’s ”Succession planning: Preparations for the inevitable” reveals the results of a recent survey of corporate governance professionals at public companies worldwide (58% North America) about board succession planning practices and scope.

Society mid-cap and large-cap members across industries responding to the Society/Deloitte Board Practices Quarterly Survey: “Back to basics: Board committees” provided insights on whether and how board committee composition and practices have changed to keep pace with ever-evolving board oversight expectations. Access the survey results by company size here.

According to Equilar’s “Ethnicity Tracker,” as of the end of 2021, 44.6% of the Equilar 500 (largest listed companies) board seats, and 36.1% of Russell 3000 board seats, were filled with females and ethnically diverse directors combined. Ethnically diverse directors (i.e., just ethnically diverse directors, excluding non-ethnically diverse females) comprised 21.9% and 15.1% of the Equilar 500 and Russell 3000 board seats, respectively.

In “How Big Is Too Big?” from Directors & Boards, seasoned directors discussed considerations relative to optimal board size with a healthy appreciation for the many company-specific factors (which evolve over time) that should be factored into this decision.

Wachtell Lipton’s board diversity-focused “Solving the Board Composition Puzzle” provides an overview of the regulatory, investor, and practical considerations that boards should consider in evaluating and evolving their composition, and big picture guidance about how to navigate the various composition-related requirements and expectations without compromising board collaboration or effectiveness.

Among the many noteworthy board diversity statistics revealed in the “Q1 2022 Key Findings” from 50/50 Women on Boards are that 88% of the seats filled by women in the first quarter were additive, i.e., the boards increased in size to accommodate the new directors.

The Society and other organizations have long maintained listings of reputable, established director/board education program offerings. The latest Society listing, which was most recently updated in May, is here. See also Gibson Dunn: “Director Education Opportunities” (July 2022) and Woodruff Sawyer:”2022 Board Education Resource Guide” (December 2021).

Private Company Director’s “How to Onboard New Directors” offers sound guidance for private, public, and non-profit organizations on how to develop an effective director onboarding program. The post outlines the critical components of a plan; identifies the types of governance and other documents to include in an onboarding packet and which positions in corporate leadership and management should participate in “meet and greet” meetings; and suggests other ways to bring new directors into the fold, including assignment of a “board buddy.”

In the context of economic and other significant disruptions associated with the pandemic, social/political controversies, and geopolitical events, which have contributed to more than two years of change and instability, KPMG’s “The 2022 private company board agenda” encourages private companies to refresh their agendas from a new perspective. Suggested board agenda items are accompanied by the firm’s observations of private company board practices and guidance, along with links to additional relevant resources.

Goodwin advised post-IPO companies that have not yet held their annual meetings to be aware of Glass Lewis’s more stringent-than-historical approach to what it perceives to be problematic post-IPO governance practices that may elicit its recommended withhold or against vote against directors.

PwC’s “Conducting effective board assessments” addresses the key components of the board evaluation process, including scope, content, facilitation, alternative formats/approaches, and follow-up. In addition to big picture insights and guidance, the guide includes suggested evaluation topics; advantages and disadvantages associated with different assessment approaches; and a sample board assessment questionnaire.

Bank Director’s “2022 Governance Best Practices Survey" includes a plethora of benchmarking data on core governance practices among banks under $100 billion in assets based on a recent survey of 234 independent directors, board chairs, and CEOs. Coverage includes board culture, board evaluations, board education, director onboarding, board committee structure and oversight, ESG oversight, and board diversity.

While public company directors participating in Corporate Board Member’s recent Director Confidence Index reportedly did not register significant concerns about the SEC’s proposed cybersecurity incident reporting and disclosure proposal, nearly one-third said their board is looking to upskill current directors and executives on cybersecurity oversight and management in response to the proposal, while 25% said they plan to bring in outside consultants to assist the company’s compliance with the proposed requirements.

“Building Board Culture: The Critical Role of the Board Chair in Driving Board Performance” from Russell Reynolds Associates uses benchmarking data to demonstrate the positive impacts on board effectiveness associated with particular board chair practices and behaviors.

According to Spencer Stuart’s review of 2021 CEO successions, a significant 63% of CEOs (compared to just 38% in 2020) remained in the board chair role upon stepping down from the CEO position. The firm notes that outgoing CEOs are more likely to stay on as board chair if their successor is internally promoted and as a result of a planned succession process. A substantial majority of CEO successors were promoted from within.

Alliance Advisors' "2022 Proxy Season Preview" includes a summary of proxy advisor and select institutional investor policy updates on board gender and racial/ethnic diversity. Investor coverage includes BlackRock, State Street, Goldman Sachs, LGIM, Wellington Management, AllianceBernstein, and the NYS Common Retirement Fund.

Cooley released a tabular summary of director overboarding policies of numerous institutional investors, as well as ISS and Glass Lewis, accompanied by endnotes quoting the relevant policy provisions with links to the underlying sources.

Compensation Advisory Partners provided a summary of proxy voting guideline updates issued by BlackRock, Vanguard, and State Street, across the topics of executive compensation, compensation committee accountability, human capital management, board racial/ethnic and gender diversity, and director overboarding.

“A Summary of Certain Proxy Advisory Firm and Institutional Investor Board Diversity Policies” from Bass Berry & Sims provides a summary of select institutional investor and proxy advisor policies, perspectives, and expectations on board diversity-related proxy voting and engagement as of May 2, 2022.

85% of respondents to Georgeson’s survey of institutional investors represented that they generally will not vote against companies based on their Scope 3 emissions disclosure or reduction targets (or the lack thereof, as the case may be). However, respondents reportedly expect alignment with the TCFD framework, at a minimum, for companies in carbon-intensive sectors, such as Oil & Gas.

BlackRock attributed an increase in overly prescriptive climate-related shareholder proposals this proxy season to the SEC’s November 2021 policy shift, which rescinded the longstanding company-specific approach to Rule 14a-8’s “ordinary business” exclusion and replaced it with a “broad societal impact” approach. BlackRock noted that such proposals would be less likely to garner its support based on its view that such proposals are not consistent with its clients’ long-term financial interests.

State Street’s “Environmental Management Insights: Addressing Deforestation Risk in Supply Chains” shares insights from its targeted engagements in 2021 with companies directly exposed to supply chain deforestation about land degradation and deforestation risk management and disclosure. The learnings from these engagements reportedly will serve as a precursor to State Street’s ongoing and stepped-up engagement and guidance on this topic.

State Street Global Advisors may request to engage with portfolio companies that have exposure to international conflict-affected areas and may hold directors accountable for what it deems to be insufficient geopolitical risk oversight. To reduce the likelihood of votes against directors, companies must demonstrate and disclose effective management and mitigation of risks and robust board risk oversight.

GreenFin’s interview with State Street’s chief financial officer and global head of ESG initiatives addresses—among other things—the status of the investor’s board and workforce diversity campaigns, and recaps its 2022 stewardship priorities.

State Street’s “Climate Stewardship” reiterates its intent to vote against S&P 500 independent directors of companies that fail to meet its climate-related disclosure expectations and the launch of its climate transition plan disclosure engagement campaign geared toward carbon-intensive sector companies (with associated voting implications beginning in 2023).

State Street's annual (2021) stewardship report summarizes its global voting and engagement activity with noteworthy statistics and insights concerning its views on climate change risk and say-on-climate proposals, its proprietary ESG rating system, and more.

ESG Clarity’s interview with Vanguard’s global head of investment stewardship and global head of ESG strategy, reaffirms the investor’s commitment to financial returns for its investors in lieu of an ESG-first approach. Although ESG considerations may play into its voting decisions, it reportedly does not view achievement of ESG objectives as a goal in itself; rather, ESG issues, along with other risk factors, may be taken into account as a function of optimal shareholder returns. Consistent with that approach, Vanguard also does not view itself as properly, indirectly regulating societal problems like climate change through its size and influence.

PJT Camberview’s “Engaging with Vanguard” reveals insights for companies about Vanguard’s recent updates to its proxy voting policy; its consideration of, and voting approach on, environmental and social shareholder proposals; and its approach to stewardship and engagement generally. Notably in the context of a current SEC rulemaking proposal that calls for disclosure about board cybersecurity expertise (which the Society opposed), Vanguard does not believe every board needs a cyber expert.

Vanguard generally discourages management-proposed Say-on-Climate proposals due to the absence of consensus and still-developing standards and practices surrounding the actual vote as well as the substance of the proposals, in addition to the potential unintended consequences and motivations associated with such votes. Where climate-related risks are low, Vanguard may question the costs to the company relative to the purported benefits associated with such a vote. The piece nevertheless provides guidance to companies that plan to proceed with such a vote, as well as reiterates Vanguard’s expectations concerning board oversight of material climate-related risks and climate-related disclosure.

Further to its Diversity Disclosure Initiative, the New York City Comptroller’s Office announced agreements with 11 companies on the annual disclosure of their consolidated EEO-1 reports. As of September 2021, the Office attributed to its campaign (which has included targeted shareholder proposals) the disclosure of, or commitments to disclose, this workforce diversity data by 67 S&P 100 companies.

According to its updated Proxy Voting Guidelines, the New York State Common Retirement Fund will withhold support for: (i) incumbent directors on boards that failed to implement a shareholder proposal that received majority support at a company’s most recent annual meeting, and (ii) incumbent Nom/Gov Committee members on boards that failed to implement a shareholder proposal that received majority support at any time over the last three years. The Comptroller’s release also notes heightened expectations of companies’ climate performance and associated voting implications.

The New York City Comptroller’s Office and public pension fund trustees announced agreements with certain companies to publicly disclose each director/nominee’s self-identified gender and race/ethnicity in a matrix format.

CalSTRS announced that it would begin voting against directors for failure to meet its board diversity and climate expectations. Board diversity - CalSTRS will vote against: (i) the entire board in the absence of at least one woman director; (ii) nominating committees of boards lacking at least 30% women directors; and (iii) nominating committees of Russell 3000 companies that don’t disclose their directors’ skills and diversity characteristics. Climate - CalSTRS will vote against: (i) directors of the largest global 1,900 companies that have not published a TCFD-aligned report; (ii) directors of companies that have not disclosed Scope 1 and 2 emissions; and (iii) directors of the highest global emitters if they have not published a TCFD-aligned report, disclosed Scope 1 and 2 emissions, and set appropriate emissions reduction targets.

Consistent with CalSTRS’ position (see our Q1 report: “CalSTRS Opposes…”), CalPERS reportedly approved a recommendation at its April meeting to oppose a California Senate Bill that would prohibit it and CalSTRS from investing in fossil fuel companies and require them to divest from existing investments by July 1, 2027.

CalSTRS’ newsletter summarizes its May 5 report to the Teachers Retirement Board on its progress in achieving its net zero emissions pledge by 2050. Notably in the context of the SEC’s climate disclosure proposal (which suggests that many companies would be subject to the proposed rule’s Scope 3 emissions disclosure requirements), the report indicates that portfolio companies’ Scope 3 emissions data is currently not decision-useful to most investors (including CalSTRS itself) due to the unreliability of the data and evolving and unsettled accounting methodologies.

Further to our Q1 report (“TX Funds…”), Responsible Investor (subscription required) reported that the Texas Comptroller sent a second round of letters to an 100 additional asset managers to determine whether their policies and activities vis-à-vis fossil fuel industry companies may trigger the state’s divestment of their assets in conformance with the provisions of Texas Senate Bill 13, which generally requires state governmental entities to divest themselves of assets that boycott energy companies.

Among the takeaways from Legal & General Investment Management's 2021 active ownership report: In the U.S., LGIM voted against 240 directors with a combined chair/CEO role and supported 34 shareholder proposals to appoint an independent chair in furtherance of its position that the roles should be split. Negative votes against directors in North America based on board gender diversity concerns increased from 31 directors in 2020 to 102 directors in 2021. LGIM also supported 94% of social, workplace, and political lobbying shareholder proposals across its portfolio, with the US comprising the “vast majority” of such proposals.

According to its “2021 ESG Investing Annual Report,” on a worldwide basis, T. Rowe Price supported 20% of social shareholder proposals, 34% of environmental shareholder proposals, and 32% of political spending & lobbying proposals. In the Americas specifically, which is where the majority of its proxy voting activity was focused, T. Rowe supported 32% of the 185 total environmental, social, and/or political shareholder proposals.

Comptroller’s recent letter campaign aimed at understanding its portfolio asset managers’ fossil fuel industry policies and activities so as to be in a position to enforce the provisions of Texas Senate Bill 13, Responsible Investor (subscription required) reported that nearly all recipients of the letter denied undertaking the types of activities that would warrant their divestment.

MyLogIQ’s analysis of S&P 500 proxy statements (as of March 17, 2022) revealed that of the 95% of companies that disclosed their board cybersecurity oversight structure, two-thirds allocate primary oversight to the audit committee and 15% retain primary oversight at the full board level. Just over 10% of directors were disclosed as having cyber skill/expertise.

KPMG’s Directors Quarterly identifies key issues boards should proactively evaluate in relation to the implications of the Russia-Ukraine conflict, including human capital, public positioning, cybersecurity, risk disclosure, economic turbulence, supply chain disruptions, and the company’s geopolitical risk/profile. The issue also includes suggested action items to reduce supply chain risks.

For those companies dedicating significant resources to, or whose strategy is meaningfully influenced or shaped by, artificial intelligence, Debevoise & Plimpton’s “AI Oversight Is Becoming a Board Issue” shares considerations for boards to effect their AI risk oversight responsibilities.

Deloitte’s “Amid Geopolitical Complexity Uncertainty Persists” discusses how companies can employ scenario planning and cognitive risk sensing strategies to facilitate better risk mitigation, planning, and decision-making. The report explains the terminology and provides examples of how these tools may be implemented in the field.

Sidley’s “Legal Considerations For Oversight of Climate-Related Risks” provides guidance to boards on their climate-related risk oversight responsibilities in the context of directors’ longstanding fiduciary duties and federal securities law requirements. As with other risks the board is charged with overseeing, effecting that responsibility encompasses monitoring management’s performance and material risks; ensuring the board is equipped in the aggregate with the proper skill sets to provide effective oversight; and regular review by the board of key risks and the company’s enterprise risk management system.

PwC's "ESG oversight: The corporate director’s guide" addresses the ‘what’, ‘why,’ and ‘how’ of ESG oversight, including ESG terminology; ESG reporting; investor, regulator, and other stakeholder interests; ratings/rating agencies; widely consulted disclosure frameworks and standards; disclosure vehicles; and board oversight considerations. The guide also includes a suggested division of ESG oversight responsibilities across the board and its key committees.

KPMG’s “Boardroom climate competence: Organizing for oversight” suggests how companies can integrate climate change oversight at the full board level as well as into the key committees by identifying specific considerations appropriately within the purview of the board and each committee. The paper also includes examples of how companies have incorporated climate into their corporate governance guidelines and committee charters to illustrate a range of approaches companies may consider with respect to their oversight structure and associated documentation.

Mintz’ “Who Should Be In Charge of Board ESG Responsibilities?” reiterates the sound one-size-fits-one approach to structuring the board’s oversight of ESG matters.

Spencer Stuart and Diligent revealed the results of their recent survey of nearly 600 directors at companies worldwide (72% U.S.) about their boards’ ESG oversight practices. Among the US-specific takeaways: Boards most commonly look to outside consultants (41%), education/training (35%), and ESG-specific board effectiveness reviews (32%), to increase and maintain their ESG knowledge/expertise.

FCLTGlobal’s “Decarbonizing Long-Term Portfolios” generally advises long-term institutional investors to stay invested in and engaged with carbon-intensive assets or industries as such companies journey toward decarbonization over time in lieu of divesting or excluding such assets or industries from their portfolios. The paper outlines the many potential drawbacks of a divestment or exclusion approach.

“Best Way to Navigate the Climate Disclosures Movement? Listen to the Institutional Investors Driving the Conversation” offers big picture best practices to companies seeking to navigate the varying climate-related practice and disclosure expectations articulated by or on behalf of select influential institutional investors or groups. The piece summarizes the posture/positioning on this topic articulated by BlackRock, Vanguard, State Street, CII, As You Sow, Climate Action 100+, ISS, and Glass Lewis.