The biggest category of sustainability resolutions concerns those that seek to link sustainability issues to executive incentive pay—continuing a trend that became apparent last year. Six address the risk of drug price increases and five more the legal costs of the opioid crisis; three are on senior executive diversity, four ask generally about ESG pay links; and there is one proposal each on student loan debt, community impact metrics and cybersecurity.
Drug pricing: Investors will be voting for the third year in a row on the idea of linking metrics about expensive pharmaceutical drug prices to long-term risks to companies posed by high prices. In 2019 and 2018, votes were in the 20-percent range. The resolution this year expresses concerns about specific drugs but make the same request in the resolved clause. At Amgen, Biogen, Eli Lilly and Pfizer it asks for an annual report “assessing the feasibility of incorporating public concern over high drug prices into the senior executive compensation arrangements.” Added at Merck (where it earned 28.7 percent in 2019) and Vertex Pharmaceuticals (22.8 percent) is guidance that 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.
No companies have filed SEC challenges to date; last year commission staff rejected corporate assertions that the proposals related to ordinary business by dint of micromanagement and/or were moot.
Opioid legal costs: Five resolutions reprise proposals from last year about legal costs. The proposal is pending (and challenged) at Amgen, Bristol-Myers Squibb and Johnson & Johnson as well as at two other companies not yet public. It asks that each
adopt a policy that when a financial performance metric is adjusted to exclude legal or compliance costs when evaluating performance for purposes of determining the amount or vesting of any senior executive compensation award, it provide an explanation of why the precise exclusion is warranted and a breakdown of the litigation costs. “Legal or compliance costs” are expenses or charges associated with any investigation, litigation or enforcement action related to drug 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. “Incentive Compensation” is compensation paid pursuant to short-term and long-term incentive compensation plans and programs. The policy should be implemented in a way that does not violate any existing contractual obligation of the Company or the terms of any compensation or benefit plan.
The proponents want the companies to include litigation and compliance costs in future performance metrics for pay because of myriad lawsuits about opioids, while the companies say that excluding non-recurring or one-time events is a more accurate picture of performance. Each company is contending that the proposal relates to ordinary business and Amgen also says it is moot. Last year, AbbVie and Johnson & Johnson persuaded the SEC this resolution dealt with ordinary business and a similar exclusion seems possible this year.
Executive diversity: Proposals from Zevin Asset Management seeking reports on integrating senior executive diversity metrics into incentive pay are in their third year. The proposals ask 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.
It is a resubmission at Alphabet, where it is co-filed by Warren Wilson College and earned 9.7 percent last year, and at Amazon.com (19.1 percent)—and newly filed at Walmart. Amazon is contending at the SEC that the company’s current compensation arrangements make the proposal moot, although those do not mention diversity as requested in the proposal.
General ESG considerations: Three pending proposals ask more generally for reports on ESG pay links to executive incentive pay, at Apple and United Continental and one more firm not yet public. The vote at Apple was 12 percent. The proposal says the report should explore “the feasibility of integrating sustainability metrics into performance measures, performance goals or vesting conditions that may apply to senior executives under the Company’s compensation incentive plans. Sustainability is defined as how environmental and social considerations, and related financial impacts, are integrated into corporate strategy over the long term.” At Stryker a fourth request is shorter: a report “assessing the feasibility of integrating specific sustainability metrics into Stryker’s executive compensation program.”
Student loans: At Navient, the Rhode Island Pension Fund makes the same report request as the one on opioids, but the body of the resolution makes clear the concern is student loans. Navient is contending at the SEC that the proposal is ordinary business; a proposal from Rhode Island on this topic earned 42.8 percent in 2018.
Privacy: At Verizon Communications, Trillium Asset Management is back for a third year, with a slightly different request for a report “assessing the feasibility of integrating user privacy protections into the Verizon executive compensation program which it describes in its annual proxy materials.” A similar resolution specially asking about cyber security earned 11.6 percent in 2018 and 12.5 percent last year. It notes this time that the proposal “does not seek greater disclosure or information regarding cybersecurity (the criminal or unauthorized actions), but rather is focused on legally permissible and permitted uses of data.”
CORPORATIONS REDEFINE THEMSELVES AFTER 50 YEARS OF SHAREHOLDER-PRIMACY
ANDREW BEHAR
CEO, As You Sow
In a 1970 New York Times Magazine article, economist Milton Friedman said corporations exist solely to serve their shareholders and must maximize shareholder financial returns to the exclusion of all else. Moreover, he maintained, companies that did adopt “responsible” attitudes would be faced with more binding constraints than companies that did not, rendering them less competitive. This has been the dominant interpretation of capitalism for nearly 50 years.