The field of resolutions seeking links between sustainability issues and executive compensation continues to be broad, but is dominated by drug pricing. This year, nine proposals address the risk of drug price increases and another the opioid crisis; three address senior executive diversity and two are about cybersecurity; further issues, with one proposal each, are risky banking practices, greenhouse gas emissions goals and human rights. Last year, six different proposals sought links to several specific environmental or social issues, as well.
THE LINK BETWEEN HIGHER DRUG PRICES AND EXECUTIVE PAY
Director Of Socially Responsible Investing, Trinity Health
Prescription drug expenditures make up nearly 20 percent of all health care costs, and spending for prescription drugs is growing faster than any other part of the health care dollar. A Kaiser Health Tracking Poll in early 2018 found that one out of four patients have a difficult time affording their medicines. December 2018 POLITICO poll showed the public’s top priority for the 116th Congress is taking action to lower prescription drug prices.
Drug pricing: Proponents are doubling down on an approach they tried last year to address concerns about expensive pharmaceutical drug prices and the long-term risks high prices may pose to companies. Last year, investors gave these resolutions fairly strong support, with most votes in the 20-percent range. The resolution has the same resolved clause at each company, with supporting statements articulating concerns about specific drugs; it asks for an annual report
on the extent to which risks related to public concern over drug pricing strategies are integrated into [the company’s] incentive compensation policies, plans and programs...for senior executives. The report should include, but need not be limited to, discussion of whether incentive compensation arrangements reward, or not penalize, senior executives for (i) adopting pricing strategies, or making and honoring commitments about pricing, that incorporate public concern regarding the level or rate of increase in prescription drug prices; and (ii) considering risks related to drug pricing when setting financial targets for incentive compensation.
Last year the resolution was close to this wording, but the final point was “considering risks related to drug pricing when allocating capital.” It is a resubmission at four companies—AbbVie (21.8 percent in 2018), Biogen (28.2 percent), Bristol-Myers Squibb (22.7 percent) and Eli Lilly (17.8 percent), and new to five more—Celgene, Johnson & Johnson, Merck, Pfizer and Vertex Pharmaceuticals.
SEC action—Two companies have lodged SEC challenges. Bristol-Myers Squibb contends it relates to ordinary business by dint of micromanagement, invoking the 2018 SEC legal bulletin. Last year, SEC staff disagreed that a similar proposal was ordinary business and also did not think it was moot, as the company argued. Pfizer is making another try at the ordinary business rule, as well, saying it raises executive compensation issues that are applicable to the general workforce, which would make the proposal ordinary business; it also says the resolution seeks to micromanage compensation arrangements.
Executive diversity: Last year, Zevin Asset Management asked several tech companies to report about how they might integrate senior executive diversity metrics into CEO incentive pay. There were three withdrawals after agreements and two omissions; the highest vote was 13.3 percent at United Parcel Service.
This year, Zevin is back with a similar request at Alphabet, where it earned 8.8 percent last year, Amazon.com (last year it withdrew after the company noted its CEO receives no incentives) and Anthem, a new target. The tech company proposal asks for a report
assessing the feasibility of integrating sustainability metrics, including metrics regarding diversity among senior executives, into performance measures or vesting conditions that may apply to senior executives under the Company’s compensation plans or arrangements. For the purposes of this proposal, “sustainability” is defined as how environmental and social considerations, and related financial impacts, are integrated into long-term corporate strategy, and “diversity” refers to gender, racial, and ethnic diversity.
At Anthem, the request is shorter and asks only for a report by October “assessing the feasibility of integrating sustainability metrics into the performance quotas of senior executives of Anthem Inc. compensation plans.”
SEC action—Anthem has told the SEC the resolution should be omitted because Zevin has not provided proof of its stock ownership.
Cybersecurity: At Verizon Communications, Trillium Asset Management asks for a report “assessing the feasibility of integrating cyber security and data privacy performance measures into the Verizon executive compensation program.” This resolution earned 11.6 percent support in 2018, after an unsuccessful company challenge—in which the SEC rejected the company’s contention that this concerned ordinary business. In 2019, the company again makes this argument, reasoning that the compensation program referenced, in the proxy statement, extends to non-executive employees and therefore is a matter of ordinary business.
This resolution, filed by James McRitchie, goes to a vote on March 8 at Walt Disney.
Climate goals: As You Sow has withdrawn a proposal that asked Pinnacle West Capital for a report on the “feasibility of linking executive compensation metrics to the accomplishment of Paris-aligned greenhouse gas emission reduction objectives.” As You Sow withdrew after the company agreed to report. The proposal said the company’s carbon intensity GHG target is inconsistent with its financing of natural gas infrastructure and “artificial caps on renewables” in bidding. It also raised concerns about the company’s spending “to block renewable energy policy in Arizona.” The proposal was new in 2019.
Sustainability metrics: SustainInvest wants Dunkin’ Brands to report by October, “assessing the feasibility of integrating sustainability metrics into the performance quotas of senior executives of Dunkin Brands Group Inc. compensation plans.” The proposal suggests metrics such as workplace and executive level diversity, greenhouse gas reduction goals or “using recycled and/or compostable supply chain inputs.”
SEC action—The company has lodged an SEC challenge, arguing the proposal is moot since Dunkin’ already links the replacement of foam cups to compensation for some executives and increasing diversity for others, and concerns ordinary business since it addresses matters applicable to the workforce as a whole, not just executive compensation.
Risky banking: NYSCRF has resubmitted a resolution to Wells Fargo that earned 21.9 percent last year. The text for this year’s resolution is not yet available but last year it sought a report on:
whether the Company has identified employees or positions, individually or as part of a group, who are eligible to receive incentive- based compensation that is tied to metrics that could have the ability to expose Wells Fargo to possible material losses, as determined in accordance with generally accepted accounting principles;
if the Company has not made such an identification, an explanation of why it has not done so; and
if the Company has made such an identification, the:
methodology and criteria used to make such identification;
number of those employees/positions, broken down by division;
aggregate percentage of compensation, broken down by division, paid to those employees/positions that constitutes incentive-based compensation; and
aggregate percentage of such incentive-based compensation that is dependent on (i) short-term, and (ii) long-term performance metrics, in each case as may be defined by Wells Fargo and with an explanation of such metrics.
The requested report would provide shareholders with important information concerning incentive-based compensation that could lead employees to take inappropriate risks that could result in material financial loss to our company.
Opioid legal costs: The Philadelphia Public Employees’ Retirement System has a proposal that earned 11.1 percent at AmerisourceBergen on March 1. It also has been filed at AbbVie and asks that each
adopt a policy that no financial performance metric shall be adjusted to exclude Legal or Compliance Costs when evaluating performance for purposes of determining the amount or vesting of any senior executive Incentive Compensation award. “Legal or Compliance Costs” are expenses or charges associated with any investigation, litigation or enforcement action related to drug manufacturing, sales, marketing or distribution, including legal fees; amounts paid in fines, penalties or damages; and amounts paid in connection with monitoring required by any settlement or judgment of claims of the kind described above....
The proponents want the company not to exclude litigation and compliance costs from future performance metrics for executive incentive compensation because of the company’s exposure to a myriad of lawsuits from multiple jurisdictions. The company contends it needs flexibility and discretion to design and administer its compensation programs. It also believes that the exclusion of non-recurring or one-time events provide a more accurate picture of company performance.
Human rights: The SEIU Master Trust is taking up human rights and wants CoreCivic “to incorporate respect for inmate and detainee human rights into incentive compensation arrangements for senior executives.” The proposal expresses concern about lawsuits filed against the company regarding human rights violation allegations, involving both inmates and immigrant detainees—and argues this risk should be addressed in executive compensation arrangements.