July 20, 2020

What a “Stakeholder” Board Could Look Like

This blog from Doug Chia is getting a lot of traction. In it, he argues that calls for a focus on long-term “corporate purpose” – along with this year’s pandemic, market volatility and social unrest – are signs that it’s time to realign board committees in a stakeholder-driven way. Here’s an excerpt:

For the past 18 years, the committee structure for public company boards has been dictated by the Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated thereunder. Those rules and regulations essentially mandated all public company boards to have the “big three” committees: audit, compensation, and nominating. Some boards also created (or already had) other specific committees for oversight of finance, risk, public affairs, technology, and sustainability, just to name a few.

However, the big three committees largely address matters that directly relate to the interests of the company’s shareholders with the other three stakeholders being indirect beneficiaries. This required structure was appropriately coming out of the corporate failures of the early 2000s and fitting when maximizing shareholder value was still seen as the end-all, be-all. However, it may not be well-suited to a new era when boards are committing to place firm value in the context of a broader set of constituencies.

In an ideal world (where the current big three committees are not required), rethinking a board’s committees would start with a blank slate. The board would write down each of its annual agenda items, both those discussed by the full board and those covered in committee. It would then map each item to one or more of the four key stakeholders. Based on that exercise, the board would assign each item to one or more of four new stakeholder-focused committees and/or the full board, and it would adopt charters for each reflecting the end result. One of the many outcomes of creating committees this way would look like this:

Customers Committee: Focus on sales of products and services, go-to-market strategy, customer satisfaction, product safety, R&D, and innovation.

Employees Committee: Focus on the company’s overall workforce, health and benefits, compensation, labor relations, diversity and inclusion, talent development, recruitment and retention, training, employee engagement, and corporate culture.

Communities Committee: Focus on regulation, legal, compliance, tax, government affairs, public policy, sustainability, corporate social responsibility, philanthropy, community relations, and corporate reputation.

Shareholders Committee: Focus on financial and non-financial reporting, ESG disclosure, corporate finance, M&A, capital allocation, enterprise risk management, corporate governance, board composition, investor relations, and shareholder engagement.

Doug points out that this isn’t a completely new concept, as companies often establish and dissolve committees based on their current circumstances. As I’ve blogged on, there also have been growing calls to broaden the mandate of compensation committees to cover employee issues. Re-examining the board’s structure would require close attention to board composition and committee charters – which some view as an additional benefit and an opportunity to more closely align the board with strategy & culture.

ESG: GAO Sums Up Disclosure Dilemmas

The Government Accountability Office has issued a 62-page report on ESG disclosures – why investors want them, what public companies are doing, and the advantages & disadvantage of voluntary vs. mandatory disclosure regimes. The report itself doesn’t give much info that people in this space don’t already know – investors want ESG info, companies are working hard to provide it, there are gaps & inconsistencies in company disclosures due to the lack of standardized and prescriptive disclosure rules, and competing disclosure regimes pose important trade-offs.

One interesting tidbit – which may become relevant as investors & companies increase their focus on equity and resiliency going forward – is that companies seem to have come around to at least providing narrative cybersecurity information after the SEC’s emphasis on that issue for many years, but data about human rights and health & safety is harder to come by:

As shown in figure 2, we identified disclosures on six or more of the eight ESG factors for 30 of the 32 companies in our sample and identified 19 companies that disclosed information on all eight factors. All selected companies disclosed at least some information on factors related to board accountability and resource management. In contrast, we identified the fewest companies disclosing on human rights and occupational health and safety factors.

With regard to the 33 more-specific ESG topic disclosures we examined, 23 of 32 companies disclosed on more than half of them. The topics companies disclosed most frequently were related to governance of the board of directors and addressing data security risks. Conversely, based on disclosures we identified, we found that companies less frequently reported information on topics related to the number of self-identified human rights violations and the number of data security incidents.

In addition, we found that companies most frequently disclosed information on narrative topics and less frequently disclosed information on quantitative topics. There are several reasons why a company may not have disclosed information on a specific ESG topic, including that the topic is not relevant to its business operations or material.

Senator Mark Warner (D-VA), who had requested this report back in 2018, is now calling on the SEC to establish an ESG task force to consider requiring disclosure of “quantifiable and comparable” metrics. He seized on the GAO’s finding that even quantifiable metrics like carbon dioxide emissions are reported differently from company to company. As Lynn blogged last week – and as noted in this Wachtell Lipton memo – some standard-setters are starting to collaborate, which may help clarify reporting frameworks for companies & investors alike.

Quick Poll: Are “Stakeholder Committees” the Next Big Thing?

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Liz Dunshee