Board Structures
While board diversity is largely a thing of the past in proxy season, attention to who sits on the board and whether they are properly attending to business risks regarding social policy and the environment remains high on the agenda of many shareholder proponents. In the past, nominating dissident directors was more difficult and expensive but the SEC has new rules for a “universal proxy card” that make it easier for shareholders to proffer their own nominees to the board, offering one route to express their discontent, although this topic remains outside the scope of this report.
In addition to picking their own nominees, institutional investors now also are routinely using their votes for directors to signal concern about particular policies of a company as a whole—on diversity and about climate change, among other issues. The group Majority Action is a prominent voice for this tactic, asking shareholders to vote against directors if they do not have sufficient board oversight of climate change, have not set net-zero emissions reduction targets or not “fully realigned” their investment plans and public policy influence to meet Paris Climate Treaty goals. Last year the group targeted companies in four industries—electric power, oil and gas, banking and insurance—and produced Climate in the Boardroom about asset manager proxy voting on directors and climate change proposals. It recommends this year that managers should “generally vote against directors at companies that do not meet climate performance expectations,” while asset owners should press their managers to do so.
Shareholders are also seeking more board accountability through a mandatory director say-on-pay vote. These proposals are beyond the scope of this report, but it is worth noting the growing momentum for more responsible and responsive boards.
THE MANDATORY BOARD DIRECTOR SAY-ON-PAY BY LAW AMENDMENT
MICHAEL R. LEVIN
Independent activist investor and advisor
Shareholders have struggled to enforce corporate director accountability. Beyond contested board elections, shareholders today have little practical, direct impact on directors.
While the Affordable Care Act removed categorical exclusions of gender-related care, employers and their insurance carriers can still restrict some care for being “cosmetic” or “not medically necessary.” Such restrictions disproportionately affect transgender people. In addition, the provision of domestic partner benefits is still considered an important benefit for the LGBTQ+ community given the patchwork of non-discrimination policies in the U.S.
Board Oversight
Staffing and safety: Following recent and ongoing problems with railroad safety, the AFL-CIO has a new proposal asking for explicit board oversight in the railroad industry. It links lower staffing levels on trains to safety risks that contribute to accidents such as the February 2023 derailment in East Palestine, Ohio that caused a two-day fire which released toxic gas when hazardous materials burned, from a train operated by Norfolk Southern. The proposal asks Berkshire Hathaway (owner of Burlington Northern Santa Fe), CSX, Norfolk Southern and Union Pacific to amend the relevant board committee charter “to provide that the Committee has the power and duty to review staffing levels and their impact on safety, and to meet and confer on safety issues with relevant stakeholders such as customers, communities, employees, and labor unions.” All are pending.
AI: Proponents have another new proposal about AI oversight, backstopping other proposals on the issue. (See p. 63 for more on AI and additional proposals). Trillium wants Alphabet to amend its board Audit and Compliance Committee charter to make it clearly “responsible for overseeing Alphabet’s artificial intelligence activities and ensuring management’s comprehensive and complete implementation of its AI Principles.” At Amazon.com, the AFL-CIO wants a new committee altogether to oversee AI and
address human rights risks associated with the development and deployment of AI systems. The committee charter shall authorize the committee to meet with employees, customers, suppliers, and other relevant stakeholders at the discretion of the committee, and to retain independent consultants and experts as needed.
GOOD CORPORATE GOVERNANCE REQUIRES ACTIVE BOARD MONITORING OF ESG RISKS
MATTHEW PRESCOTT
President and COO, The Accountability Board
In today’s marketplace, companies are under increasing scrutiny regarding their public impacts—and their governance of these matters. This has serious material implications for all stakeholders.
In 2017, for example, Papa John’s faced major controversy over race-related comments from its then-Chairman and CEO. As Peter Saleh of the financial services firm BTIG told CNN in 2019, “This company has lost maybe 10% of its total sales number since it started struggling back during late 2017. Things started to fall off a cliff for them.”
Director indemnification removal for labor violations: SOC Investment Group withdrew a new binding bylaw amendment proposal that wanted director and officer indemnification protections to be removed in cases of formal labor law violation allegations, at Starbucks. The proponent argued the action is needed given the record of hundreds of unfair labor practices cases and many findings against the company. Starbucks countered at the SEC that the proposal was materially false and misleading and would require it to violate Washington state law and SOC withdrew before any SEC response. (A similar approach from anti-ESG proponents asks that director liability be waived at Dick’s Sporting Goods if companies take what critics see as overly “political action”—see p. 74.)