Tag: Human capital

How Boards Can Get Human Capital Management Right in Five (Not So) Easy Steps

Posted by Paul Washington and Rebecca Ray, The Conference Board, on
Monday, April 19, 2021
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Paul Washington is Executive Director, ESG Center, and Rebecca L. Ray is Executive Vice President, Human Capital, at The Conference Board. This post is based on their Conference Board memorandum. Related research from the Program on Corporate Governance includes For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

At the outset of the pandemic, employees were the top priority of boards, second only to continued liquidity. That focus intensified during the social unrest following the death of George Floyd. Now, the SEC’s new disclosure rules on human capital management (HCM) could further reinforce the focus on workers—at least temporarily.

Boards will soon face a choice, however, when it comes to their role in HCM. They can ensure that the company satisfies the new SEC reporting requirements but return to the traditional approach of providing general oversight and being deeply engaged on workforce issues on a periodic basis—as they did in response to the #MeToo movement or company-specific events such as mergers and scandals that highlighted weaknesses in corporate culture. Or they can view recent events as a catalyst to make the workforce a sustained strategic focus of the board.

Boards are struggling with how deeply to be involved in HCM, and there are risks in overstepping into a managerial role. But if companies achieve the appropriate level of board engagement and disclosure on HCM (focusing on strategy and key drivers, rather than day-to-day activity), they will not only drive long-term value, but also provide a template for how boards can tackle other ESG areas.

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Anticipating Harassment: #MeToo and the Changing Norms of Executive Contracts

Posted by Rachel Arnow-Richman (University of Florida), James Hicks (UC Berkeley), and Steven Davidoff Solomon (UC Berkeley), on
Monday, April 19, 2021
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Rachel Arnow-Richman is Rosenthal Chair of Labor and Employment Law at the University of Florida Levin College of Law; James Hicks is an Academic Fellow at the University of California Berkeley School of Law; and Steven Davidoff Solomon is Professor of Law at the University of California Berkeley School of Law. This post is based on their recent paper.

Two years ago, the #MeToo movement exposed the problem of sex-based misconduct by powerful employees, particularly CEOs. It also revealed, in some companies, an organizational culture seemingly permissive of such wrongdoing. In many instances, the misconduct went on for extended periods, involved numerous victims, and was an open secret among corporate officers and directors. Companies typically responded slowly and imposed few consequences on alleged perpetrators, preferring to cover up the problem with confidential settlements and cushioned exits rather than hold the accused accountable. This phenomenon, which we refer to as the ”MeToo accountability problem,” provokes serious questions. Why did companies tolerate such behavior? Why did they choose to protect rather than penalize CEOs? Most importantly, has the MeToo movement changed this culture?

In Anticipating Harassment: #MeToo and the Changing Norms of Executive Contracts, we examine these questions through an empirical study of CEO employment agreements. Unlike ordinary employees, CEOs are protected by written contracts that not only reject the default rule of employment at-will, but contain bespoke provisions that limit the companies’ ability to terminate CEOs without paying significant severance pay. These provisions typically contain a handful of narrowly drafted grounds on which a company can fire a CEO “for cause” (thereby avoiding financial liability), which rarely contemplate sex-based misconduct. Furthermore, existing law generally interprets these provisions in favor of CEOs, making it financially risky for companies to remove CEOs for behavior that—while wrongful—may turn out to fall short of the contractual or legal standard.

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Moving Cautiously on ESG Incentives in Compensation

Posted by Deborah Beckmann, Blair Jones, and Avi Sheldon, Semler Brossy Consulting Group LLC, on
Thursday, April 15, 2021
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Deborah Beckmann and Blair Jones are Managing Directors and Avi Sheldon is a Consultant at Semler Brossy Consulting Group LLC. This post is based on their Semler Brossy memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Since the Business Roundtable’s 2019 call for greater attention to all stakeholders, corporate boards have been elevating environmental, social, and governance issues in their discussions. Last summer’s widespread protests over racial injustice put extra attention to diversity, equity, and inclusion (DE&I) issues. Boards have begun the difficult work of determining which ESG goals are especially important for their company, and how to translate those goals into incentives for executive compensation where appropriate.

General Reflections

ESG has not yet become a mainstream issue for executive compensation. But the level of inquiry from our clients (predominately corporate boards) has increased dramatically. Those clients say they in turn are getting questions from investors. Often these are about ESG-oriented initiatives generally, but they frequently circle back to executive compensation.

One financial services client, for example, met with large institutional investors recently and spent almost a full hour on ESG. A consumer products client had a similar experience. The investors asked some pointed questions:

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A Living Wage: The Latest ESG Challenge For Corporate Governance

Posted by Michael W. Peregrine, McDermott Will & Emery LLP, on
Tuesday, April 13, 2021
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Michael Peregrine is partner at McDermott Will & Emery LLP. This post is based on his recent article, originally published in Forbes. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Proposals and pressures associated with payment of a “living wage” to employees may present themselves on the boardroom agenda much sooner than corporate leaders expect.

Long considered controversial from economic and shareholder perspectives, living wage concepts are receiving more attention in the context of economic policy, social responsibility and ESG investing. As progressive perspectives concerning income equality, and executive and employee compensation, are becoming more mainstream, corporate leaders should prepare for greater engagement in this important conversation.

The concept of a living wage isn’t a new concept; it’s not something that just popped up from the 2020 election cycle. It’s been around for a while, dating back in some respects to the Great Depression, and in other respects dating back to social and labor issues arising from the days of the Industrial Revolution.

There’s no specific, “one-size-fits-all” definition of a living wage. It most frequently refers to that level of income sufficient for a worker to afford the basic needs of life, such as food, housing, clothing and transportation—with a small margin to address unforeseen events. The expectation is that a living wage is a baseline for an income level that allows a worker to achieve an acceptable standard of living through employment, without reliance on government assistance programs. The formula for determining a living wage is constantly evolving based on multiple factors, including family size, location and age.

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Gender Diversity in the Silicon Valley

Posted by David A. Bell, Dawn Belt, and Ron C. Llewellyn, Fenwick & West LLP, on
Sunday, April 11, 2021
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David A. Bell and Dawn Belt are partners and Ron C. Llewellyn is counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

Fenwick has released its updated study about gender diversity on boards and executive management teams of the technology and life science companies included in the Silicon Valley 150 Index and very large public companies included in the Standard & Poor’s 100 Index. [1] The Fenwick Gender Diversity Survey uses 25 years of data to provide a better picture of women’s participation at the most senior levels of public companies in Silicon Valley.

The report reviews public filings from 1996 through 2020 to analyze the gender makeup of boards, board leadership, board committees and executive management teams in the two groups, with special comparisons showing how the Top 15 largest companies in the SV 150 fare, as they are the peers of the large public companies included in the S&P 100. [2]

Executive Summary

Gender diversity in corporate leadership—and diversity in the business world more broadly—continues to drive vigorous discussion across the country, with Silicon Valley and the tech industry often at the center of heightened scrutiny. In recent years, some aspects of gender diversity saw significant gains. The S&P 500 reached a milestone of no longer having any all-male boards. In politics, the United States elected its first woman vice president, California’s own Kamala Harris, on the heels of a 2018 midterm election that ushered in a record number of women to serve in Congress. California became the first state in the U.S. to require public companies to include women and people from underrepresented communities on their corporate boards—moving the needle toward gender equity. Finally, in December 2020 Nasdaq proposed rules that would require companies listed on its exchanges to generally have at least two “diverse” directors, including at least one woman director—or explain to stockholders why they do not. Public pressure to move from the status quo continues to be spurred on by institutional investors, regulators, lawmakers, employees, customers and other stakeholders. All of these discussions are taking place amid a national focus on issues of racial and ethnic diversity.

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2020 in Hindsight: Key Considerations for Directors in 2021

Posted by Teresa L. Johnson and Ben Fackler, Arnold & Porter Kaye Scholer LLP, on
Wednesday, April 7, 2021
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Teresa L. Johnson and Ben Fackler are partners at Arnold & Porter Kaye Scholer LLP. This post is based on an Arnold & Porter memorandum by Ms. Johnson, Mr. Fackler, Nicholas O’Keefe, Ronald R. Levine II, and Edward A. Deibert.

As the stewards of American enterprise, Boards of Directors are rightly focused on helping their companies navigate through the challenges and opportunities the United States and the world face today. While vaccines offer the promise of normality, the pandemic continues to rage on. The political environment remains volatile and deeply divided. And we continue to struggle with fundamental racial, gender and economic equality and inclusion, as well as the path to a sustainable future. Crisis management often seems to be the order of the day. But directors must of course look beyond the current turmoil and ensure the company is well positioned to survive and thrive in the coming months and years. This Advisory elaborates on several key focus areas for Boards in the current environment.

Understanding the responsibilities that a seat on the Board bestows on you in the current context is critical. It is perhaps somewhat reassuring that, from a purely legal perspective, your fundamental fiduciary duties as directors remain largely unchanged. Your decisions as directors will be protected so long as made on an informed basis, in good faith, and in the honest belief that the decision was in the best interest of the company. That is not to say that directors needn’t be concerned. While legal precepts haven’t evolved significantly, the world in which your company operates, and mostly likely the way in which your company operates, have changed fundamentally in the past year. These changes require a rethinking of risk management, corporate strategy and the mission of the company. For example, under the Caremark line of cases, directors are responsible for ensuring that the company has in place information and reporting systems reasonably designed to provide the Board and senior management with timely, accurate information sufficient to support informed judgments about the risks facing the company. The tectonic shifts in the world over the past year—political, social and economic—have made it imperative for the Board to reassess the kind and degree of risks that the company’s business faces presently and in the coming months and years, understand how those risks are being addressed at the company and ensure that appropriate, updated systems are in place to effectively monitor those current and emerging risks.

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Creating Long-Term Value With ESG Metrics

Posted by Erin Lehr, Equilar, Inc., on
Thursday, April 1, 2021
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Erin Lehr is a Research Specialist at Equilar. This post is based on her Equilar memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).

During the last few years, ESG has transformed from a buzzword into a priority in the corporate world. More recently, a plethora of events has accelerated this demand for corporate change and accountability—COVID-19, the resurgence of racial justice movements and climate change. Additionally, there is mounting pressure from institutional investors on this front. ESG measures, while in the past viewed as costly to the bottom line, are increasingly viewed as key for ensuring long-term success and sustainability. Corporations may also avoid additional costs related to turnover and lawsuits through ESG practices. One way in which companies demonstrate to their shareholders that they value ESG matters is through executive compensation. In order to understand the connection between ESG and executive incentives, Equilar performed an analysis of ESG compensation metrics disclosed by Fortune 100 companies over the last year.

Among the Fortune 100, 38 companies disclosed compensation metrics that were tied to ESG goals. Out of these companies, three referenced forward-looking practices only, while the rest applied to the past year. There were 53 metrics disclosed in total, most of which corresponded to annual incentive plans. Only one company incorporated an ESG metric into their long-term incentive plan. While it’s clear that ESG is on the mind of compensation committees, the category of ESG is rather broad in itself. The actual metrics companies are using vary widely. For the purpose of this study, Equilar broke down ESG metrics into seven categories: general ESG, human capital, safety, environmental, culture, diversity and other.

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Trends to Watch: An Early Look at CEO Pay and the Impact of COVID-19 on Employee Compensation

Posted by Dan Marcec, Equilar, Inc., on
Wednesday, March 31, 2021
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Dan Marcec is a Senior Editor at Equilar, Inc. This post is based on his Equilar memorandum. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here); and Golden Parachutes and the Wealth of Shareholders by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here).

Proxy season 2021 is rapidly progressing, and with that, critical perspectives with respect to COVID-19’s impact on Corporate America are taking shape. Most notably: How did the pandemic affect executive compensation, and what can we expect to see as we enter the recovery period in 2021 and into 2022?

Because executive pay is so closely tied to company performance, compensation packages reported in proxy filings provide a window into how companies reacted to the pandemic, and of course, how they expect the past year’s events to affect future company objectives. For example, many CEOs took cuts to their salaries and adjustments to their bonus payouts in light of COVID-19.

At the same time, very few companies made changes to their long-term incentive plans (LTIPs). An Equilar and Stanford study on compensation disclosures through the first half of 2020 found that over 500 companies disclosed changes to executive pay in that time frame. Of those, just 33 made changes to long-term incentive programs, and only nine reduced the target value of those incentive plans. These trends will continue to be on watch as the incentive plans designed in 2020 come to light through the filings currently being reported.

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Inclusion of ESG Metrics in Incentive Plans: Evolution or Revolution?

Posted by John Ellerman, Mike Kesner, and Lane Ringlee, Pay Governance LLC, on
Tuesday, March 30, 2021
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John Ellerman and Mike Kesner are partners, and Lane Ringlee is managing partner at Pay Governance LLC. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Environmental, Social, and Governance (ESG) issues are some of the most prominent facing Corporate America: shareholders and other stakeholders have significantly increased the focus on a corporation’s social responsibilities, including promoting a fair and diverse workplace, providing employees with a living wage, and improving the environment. Large institutional investors are demanding enhanced disclosure of employee demographics and diversity efforts as well as a full discussion of the near- and long-term steps that will be taken to attain net-zero emission goals.

Given the intense focus on ESG, Pay Governance LLC conducted a survey of companies in January 2021 to document how companies have been responding to the focus on ESG and whether it is resulting in a change in the design of incentive compensation plans. We had several goals in mind in conducting the survey.

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Integrating ESG Into Corporate Culture: Not Elsewhere, but Everywhere

Posted by David A. Katz and Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz, on
Monday, March 29, 2021
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David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

A prominent securities regulator recently observed that “ESG no longer needs to be explained.” ESG is firmly ensconced in the mainstream of corporate America, a frequent topic in boardrooms, C-suites, investor meetings, and regulators’ remarks. Perhaps less obvious is that ESG has yet to be mainstreamed, as it were, in internal corporate governance and operations at the individual company level. In order to be a meaningful factor in effectuating corporate purpose, ESG—or, more accurately, EESG (including Employees as well as Environmental, Social, and Governance)—must be integrated throughout corporate affairs, not just in the boardroom.

The internal mainstreaming of EESG is the next step in its remarkable journey from activist wishlists to board and regulatory agendas. The good news is that this should not be difficult for most organizations to accomplish, so long as corporate leaders recognize that engaging with EESG considerations is not something that happens “elsewhere,” but “everywhere.” When EESG is integral to the culture and values of a company, it will naturally be incorporated in the work that is done throughout governance and operations, including strategic planning, risk management, compensation, communications, and disclosure. This approach to EESG is beneficial in a number of important ways: It is conducive to long-term value creation and responsive to investor interests; it improves efficiency and transparency while demonstrating commitment to EESG goals; and it can help forestall legal liability and reputational harm.

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