Starbucks Shareholders Reject CEO Pay Proposal (Newsletter 3/19)

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Investor Updates

2021 Investment Stewardship Updates

Dimensional Fund Advisors added significant new information to its proxy voting guidelines around the following items –

  • Political and Lobbying Activities – expects boards to adopt and disclose policies and procedures to oversee political and lobbying expenditures, including policies and procedures governing spending and ensuring company’s publicly stated positions are aligned with related activities and spending.
  • Human Capital Management – expects board oversight of human capital management issues and disclosure of sufficient information for shareholders to understand HC policies, procedures, and personnel, including company’s human capital management goals in key areas, such as compensation, employee health and wellness, employee training and development, and workforce composition, as well as metrics for assessing performance against goals.
  • Climate Change – expects companies to disclose information on how they are handling climate change risks that may have material impact on the company. Disclosures include potential impact those risks could have on the company’s business, operations, or strategy, which individuals responsible for managing risks, and the metrics used to assess handling of risks.

Putnam Funds updated its proxy voting guidelines related to diversity, stating it will withhold votes from the Chair of Nominating Committee if a board with 7+ members (up from 10+ previously) has fewer than two women serving the board, and if the board lacks apparent racial or ethnic diversity and has not disclosed plans to improve diversity. It will also vote for shareholder proposals seeking disclosure related to directors’ skills, promoting board diversity, and workforce diversity data.

Similar to Putnam Funds, Calvert Research Management will now oppose directors on the nominating committee if the board lacks two women, which it has a record of voting against board without women representation, at least two people of color, and if the board is not 40% diverse collectively (up from one person of color and 30% diverse previously).

Company Spotlight

Social Gets More Airtime During Earnings Calls

Social topics received more attention than ever this earning season, likely sparked by the SEC’s recent revisions to the Reg S-K calling for enhanced disclosure around human capital in the 10-K. From our vantage point, investors are not pressuring for this information to be included in earnings calls. But ESG stewardship teams are looking for more proof that the S pillar is being integrated into daily operations. Executives are obliging, leveraging the fresh language in their new 10-Ks to share the details of their companies’ social efforts. Some companies spoke to Diversity, Equity, and Inclusion (DEI). Others tied their social dialogue to COVID-19. Some even shared how social issues are now linked to executive compensation. No matter how companies chose to address the topic, it is clear that S is now on par with E and G when it comes to effective financial reporting and investor communications. CEO Alex Vetter took a victory lap for diversity at his company, announcing that executive compensation is now partially tied to DEI goals.

“We are proud to have one of the most diverse executive teams and companies in our industry, with 46% of Cars’ employees identifying as female and 23% identifying as racially or ethnically diverse… In 2021, we will continue to focus on DEI, reflecting the important role these actions play in maintaining Cars’ strong corporate culture and ensuring we retain the industry’s best and brightest talent. Additionally, each of our executive team members’ compensation will now be linked to DEI.”

The Home Depot Chairman and CEO Craig Menear addressed enhanced compensation for associates during the COVID-19 crisis.

“At the end of the day, it is our people and culture that make us unique. As a result, investing in our associates during this time was one of the easier decisions we made this year. During fiscal 2020, in addition to record-success sharing payouts, we invested a total of approximately $2 billion on enhanced compensation and benefits for our associates.”

Ingersoll Rand Chairman and CEO Mike Lamach highlights broad-based employee ownership as a key differentiator at his company.

“Our 2020 accomplishments, especially in the area of human capital management, are a differentiator. We see a broad-based employee ownership as a game-changer. It takes performance to a new level. We’re thinking and acting like no other. That’s one of our core values. It changes the mindset from this is a company I work for to this is my company. It’s a massive shift. Employees are highly engaged and active participants in our journey to create long-term value.”

To see more examples of what companies said this past earnings season, continue reading here.

Featured CSR: Valmont Industries

Valmont Industries released its 2021 Sustainability Report alongside a GRI G4 Sustainability Report, Sustainability Metrics Annex, and a Sustainability Whitepaper. Towards the beginning of the sustainability report, page 7 is dedicated to governance and grants easy access via links to all committee charters and critical policies, including human rights, conflict minerals, and the code of conduct. Valmont shares health and safety details on page 10, such as lost time incident rate (LTIR) and total recordable incident rate (TRIR) reductions since 2015. On page 18, the company outlines it’s 2025 environmental goals, 2021 environmental strategic initiatives, and a stair-stepping timeline broken down by year for how it will achieve the stated goals. Later in the presentation, baseline and annual metrics are given.

Ratings & Frameworks

Glass Lewis Acquired

This week, Glass Lewis was acquired by private equity firm Peloton Capital Management and a private investor. Remember, they were previously owned by Ontario Teachers’ Pension Board and Alberta Investment Management Corporation. According to Institutional Investor, Peloton stated proxy voting on ESG topics as a key driver for the purchase along with Glass Lewis’ recent investments in its research capabilities.

ISS Publishes 2021 Proxy Season Trend Forecast

ISS released its Top Governance & Stewardship Issues report for 2021. The highlights from the report are as follows –

  • Board Diversity: With about 40% of boards in the Russell 3000 lacking racial or ethnic diversity, companies will continue to face pressure to increase diversity on the board. In particular, the new California legislation, NASDAQ’s proposed ruling, and many asset managers who have announced changes to voting guidelines to include racial and ethnic diversity are urging companies to expand representation at the board-level. Companies will also be encouraged to expand their search to candidates that have experience with specific environmental and social criteria.
  • Climate Proposals: Three growing trends within climate related proposals are –
    • “Say-on-Climate” proposals, which typically ask companies to disclose climate action plans and progress and put them to a shareholder vote, and information related to climate lobbying, understanding a company’s ESG stance;
    • Requests to disclose transition plans in alignment with the Paris Agreement, limiting global warming to 2 degrees Celsius; and,
    • Transparency on companies’ funding of climate lobbying, specifically if their stances are in line with the industry and the Paris Agreement.
  • Activism: While activism slumped during the pandemic, recent moves, such as Engine No. 1 pushing 4 new board members on Exxon’s 10-member board, point to a resurgence. Additionally, deal activism is set up for a boost, especially for companies trading below pre-pandemic levels.
  • Executive Compensation: Following the pandemic-ridden year of 2020, investors will be watching changes made to executive compensation. As for incentive programs, investors are open to mid-year changes to short-term programs if the company is fully transparent on the rationale. However, one-time awards are not viewed as favorably with investors preferring it is done on a multi-year basis and tied to performance targets. For starters, this week Starbucks shareholders rejected the CEO’s pay proposal. ISS and Glass Lewis both advised shareholders to vote against the proposal granting the CEO a one-time bonus of $1.86 million and the three-year retention payment of up to $50 million based on stock performance targets, which was initiated in 2019. The Board noted it will engage with investors in the coming months to better understand their perspectives on the matter. 

Regulatory News

SEC on Track to Give in to Investor ESG Requests

The SEC’s Allison Herren Lee gave a speech highlighting the need for a broad ESG disclosure framework that goes beyond just climate change and asked for public input on climate change disclosures. She specifically pointed to the importance of offering guidance on human capital and political spending disclosures, as well as improvements to the shareholder proposal process. Lee also discussed the potential for a dedicated ESG standard setter (similar to FASB) with SEC oversight to develop an ESG reporting framework to complement the financial reporting framework.

News Bites