Board Structures
Choosing and diversifying boards: At the urging of leading investors, many companies now are telling investors much more about why board nominees are qualified to join boards. The Boardroom Accountability Project led by successive New York City Comptrollers has helped to normalize this type of disclosure, which replaces what used to be a few opaque biographical sentences. The Comptroller’s office has yet to release information about its plans for 2023 but additional requests for “board matrix” reporting appear to be in the offing. Few are likely to go to votes, however, given a general shift to this practice. Adoption of this reporting has been normalized by the Nasdaq exchange’s new, comprehensive requirements.
Making it easier to nominate directors and having far more diverse boards has put directors on notice and their elections—a standing agenda item at many annual meetings—are less secure. Even though votes north of 90 percent remain the rule rather than the exception, some institutional investors are now voting against directors or specific nominees if there are no women or people of color on the board, or if companies do not act on environmental and social issues. Majority Action has become a prominent voice for this tactic, but it is not alone. The group’s current focus is on climate change, worker safety and racial justice. Proxy Impact was an early pioneer of this tactic and for over a decade has been voting against applicable board committee members when it opposes a board’s nomination, compensation or governance practices such as a lack of board diversity, excessive executive compensation, joint CEO/Chair positions, and poor ESG practices.
BOARD DIVERSITY DISCLOSURE IDENTIFIES LEADERS AND LAGGARDS
SUSAN M. ANGELE
Board Chair, The 30 Percent Coalition
Boards are becoming more diverse and detailed disclosure provides a critical window into progress. Boards that are both diverse and inclusive offer multiple ways to look at strategy and risk and a lower likelihood of groupthink. Their selection process extends beyond the board’s immediate network and diverse boards connect companies to communities that represent large swaths of its customers, employees and/or business locations. For investors and also for researchers, the more specific the company’s disclosures, the easier it is to assess board composition compared to the demographics of key stakeholders and society at large.
Board Oversight
No proposals in 2023 ask for specific types of board experts, but six do seek specific types of oversight. One from Jing Zhao to Amazon.com that it “establish a Public Policy Committee.” The company says at the SEC that this would micromanage subjects that it already oversees, but similar requests have been common for years and an omission on these grounds seems quite unlikely.
Animal welfare: Harrington Investments wants JPMorgan Chase to add board oversight of animal welfare risks in its lending decisions.
Climate change: Robeco, a large European investment manager, would like Berkshire Hathaway to report in the proxy statement “how climate-related risks are being governed by the company, including, but not limited to, the audit committee’s oversight of climate risks and disclosures.” It says the reporting should include:
- If and how the company is testing the impacts of climate-related risks on the business, including how assumptions from low-carbon scenarios would affect assumptions, costs, estimates, and valuations underlying its financial statements;
- The degree to which the company deems directors to be competent in climate-related risks and any internal or external training that the board receives on climate and ESG matters; and
- If and how climate and ESG attributes are considered in director elections and succession planning.
Staffing: The Illinois Treasurer this year would like more oversight from the hospital company HCA Healthcare about its human capital management approach. It notes that company staffing levels are 30 percent below the industry average and proposes that it “amend the charter of the Board’s Patient Safety and Quality of Care Committee…to provide that the Committee has the power and duty to review staffing levels and their impact on patient safety and the quality of patient care.” HCA is arguing at the SEC that this is an ordinary business issue but the commission has yet to respond.
“Public well-being”: SumOfUS and Harrington Investments want Alphabet and Meta Platforms to report on how each board oversees risks that have human rights aspects. In each case, the proposal asks for “an independent assessment of the role of its Audit and Compliance Committee in ensuring effective Board oversight, above and beyond legal compliance, of material risks to public well-being from company operations.” The supporting statements include a wide range of concerns about the companies’ social media platforms, primarily concerning human rights. A similar proposal at Meta earned 10.5 percent last year, while in 2020 a proposal for a board human rights committee at Alphabet earned 16.3 percent.