'THE DAILY CORPORATE GOVERNANCE DIGEST’ (for public company boards, the C-suite and GCs)
Please see the items below with the related links (NOTE: access to link content may be metered, require a no-charge registration or require a paid digital subscription)
(i) compliance heads at TikTok and Waste Management on the state of and trends in compliance: Catherine Razzano is head of legal compliance at TikTok, and Charles Schwager is chief compliance and ethics officer at Waste Management. Both were panelists on a leadership panel at Compliance Week's recent National Conference in Washington, D.C., and are quoted in this Compliance Week blog post last Tuesday, "Compliance leadership panel: Current state, future trends, more":
"Compliance’s evolution over the last 20 years has been far from linear. Programs take different forms for each company, and practitioners often find themselves confronting unique situations based on their business’s circumstances and profile. Consider the following titles for four officials Compliance Week assembled to form a leadership panel at its National Conference in Washington, D.C. as an indication of how varied the role of the compliance officer has become:
-- Pilar Caballero, chief compliance officer and chief privacy officer at Ryder
-- Catherine Razzano, head of legal compliance at TikTok
-- Charles Schwager, chief compliance and ethics officer at Waste Management
-- Mary Shirley, head of culture of integrity and compliance education at Fresenius Medical Care
"The one size does not fit all is something I don’t think is going to change in the future,” said Schwager. “Everyone needs to appreciate what their scope of responsibility is and what their mandate is. It all has to be tailored to the business.”.......Compliance is still about following the rules, but growing emphasis on values cannot be understated. “There are the legal provisions, and then there is the ‘what should we do?’” said Razzano, noting the current sanctions landscape as an area where sending the right message is being considered with equal importance to meeting the government’s requirements. “… The regulatory compliance and the ethics and integrity of what’s right are coming together. They have to be served together and not looked at as two separate boxes.”......
"I think ESG highlights the importance of compliance, ethics, and integrity, but it’s not the sole thing,” said Schwager. “If you look at it, it really is this holistic approach companies are taking to be more purpose-driven.” The panelists generally agreed compliance officers should play a key role in determining ESG strategy at their companies, but input from multiple areas of the business is essential to success. Whether the chief compliance officer should be the one tasked with leading initiatives depends on the people around him or her as much as the organization’s structure......Importantly, Razzano stressed compliance officers should not feel as if they have taken on the role of chief reputation officer at the company. “That’s why we have tone from the top,” she said. “Our leaders should be defining what our culture and reputation wants to be.”
"How do you get things done?” moderator Steve Naughton asked the panelists. Razzano stressed relationships: “Whether they know it or not, they need me and I need them,” she said.....Schwager emphasized the need to align compliance with the goals of the business......"
(ii) Best Buy's Senior Director of Global Compliance and Ethics and its GC on the company's whistleblower hotline and social media policies/ the Navex 2022 Ethics Hotline Benchmark Report:
(a) At Compliance Week’s National Conference in Washington, D.C. last week, Best Buy's General Counsel and Chief Risk Officer, Todd Hartman, and its Senior Director of Global Compliance and Ethics, Bill Underwood, discussed the company's DEI goals, and are quoted in this Compliance Week blog post last Thursday, "Real talk: How Best Buy manages challenges of DEI goals", inter alia on the company's whistleblower hotline and social media policy (in the section, "Legal challenges, whistleblower hotline, social media"):
".....Underwood oversees the 24-hour anonymous hotline, where employees can speak up candidly without fear of repercussion, often with ideas that can be seen as contrary to the company’s DEI policies.“Upon receipt of these reports, the first question is: Does it contain an actionable allegation? … If the facts, if taken as true, would represent a violation of policy, we would treat it in one way. But in many instances, it is just an example of the reporter simply providing feedback,” Underwood said.
"Underwood’s team makes a judgment call as to whether to forward any anonymous report to relevant leaders. “Is there something constructive in here to share with the leader, or am I just simply sharing hate and anger?” Underwood explained. He admitted some reports “do not deserve to see the light of day, but some of them do.” In the latter scenario, the learnings emerge when the reporter feels heard and the leader gets a line of sight into the impact of their words or behavior.
"Best Buy also revised its social media policy in January 2021. No longer did posts have to relate to Best Buy to be potentially flagged; they needed only have an impact on the company, its employees, customers, or even its vendors. "This was a big change. … It’s not just about writing something; it’s ‘liking’ something or retweeting something—media, pictures, memes, or videos—discriminatory or harassing on the basis of race or any other status,” Underwood said.
“It was easy in the past to just say, ‘Hey, that’s your off-the-clock life, and we aren’t concerned at all.’ But when we’ve got a flood of employees saying, ‘I will not work for this person because of what they’re doing on social media,’ or ‘I will not work with this person because they threatened violent action against people of my background and race,’ then we can’t ignore it,” Hartman added."
(b) Navex, provider of risk and compliance management software and services, released last week its "2022 Risk & Compliance Hotline & Incident Management Benchmark Report", based on a "study of more than 1.37 million reports made in 2021 at organizations large and small, around the world." As noted in the Executive Summary, the study "identified five major themes that frame this year’s report." Below are excerpts from three of those themes:
"1. Whistleblowers are becoming more emboldened: Across numerous metrics, a picture is emerging of employees more prepared to report misconduct, clearly and directly.......:
-- More actual allegations of misconduct, rather than inquiries about policies or possible misconduct.
Ninety percent of all reports in 2021 were allegations of misconduct, up from 86 percent last year and hitting an all-time high since our first benchmark report more than ten years ago.......
-- Fewer reports are submitted anonymously. The median anonymous reporting rate fell in 2021 to an all-time low of 50 percent. .....
-- More employees are reporting concerns directly to managers or functional groups.
-- Substantiation rates continue to edge upward. Overall substantiation rates rose from 42 percent in 2020 to 43 percent in 2021, and up from 36 percent a decade ago.......
"2. Reports about retaliation, harassment and discrimination jumped – especially retaliation: In 2021, reports of retaliation nearly doubled. Reports about whistleblower retaliation have always been a small portion of the total, but they shot up from 0.9 percent in 2020 to 1.7 percent in 2021. Of these reports, 24 percent were substantiated, well below the overall substantiation rate of 43 percent. Reports about harassment also rose (to 5.6 percent, an all- time high) as did reports about discrimination (to 4.7 percent).......
"5. The telephone endures: Internal reporting programs should always embrace new technology and use intake methods that reflect employees’ communication habits. That said, the telephone remains a crucial part of the internal reporting toolkit; plenty of employees simply want to raise their concerns with another person. This past year, the percentage of organizations with a majority of reports arriving via the hotline rose, to nearly pre-pandemic levels. In 2019 and years prior, at least one-third of all organizations received a majority of their reports via the hotline. That figure dropped to only 20 percent in 2020, and then back up to 30 percent in 2021...."
(iii) roundup on the 'ESG' acronym:
(a) (more) on the 'G' in ESG: This recent Fortune commentary, "Putting ESG in action starts with the G", by Jamie Gamble, a managing director at PwC, took the following view on the 'G' in ESG: "E and S are goals. The G is how you get there"; another view on the 'G' in ESG in this recent WSJ piece "The Case for Taking the ‘G’ Out of ESG" (see item (iv) from May 5/22). Note that the importance of the 'G' in ESG is once more discussed in today's Columbia Law School blog on corporations and capital markets, "Don’t Forget the “G” in ESG: The SEC and Corporate Governance Disclosure", with reference to this paper of the same name by the author of the post.
From the blog post:
"In my recent article, I address the largely overlooked relationship between governance, on the one hand, and environmental and social risks, on the other. Good corporate governance practices are necessary to ensure that public companies appropriately manage their environmental and social risks. In fact, the group of investment banks and institutional investors credited with creating the term “ESG” recognized this, noting that:
[s]ound corporate governance and risk management systems are crucial pre-requisites to successfully implementing policies and measures to address environmental and social challenges. That is why we have chosen to use the term “environmental, social and governance issues” throughout this report, as a way of highlighting the fact that these three areas are closely inter-linked
The connection between corporate governance and environmental and social risks can be easily demonstrated. For example, the board is responsible for managing company risks, including environmental and social risks. To manage these risks, the company needs to follow good corporate governance practices and ensure that the board has the appropriate mix of experience and skills. A board that does not have sufficient knowledge of environmental and social risks will not be able to successfully oversee the “E” and the “S.”........"
(b) (more on)taking the 'E' out of ESG and disentangling its components: There have been "rumblings" recently that perhaps it's time to take the 'E' out of ESG or otherwise disentangle the ESG components. This recent HBR post, for example, "It’s Time to Give Companies Standalone Climate Ratings", makes the case for having a separate, standalone "C" for "climate" rating (see item (i) from last Tuesday). More on this in this WSJ article last Wednesday, "Time to Take the ‘E’ Out of ESG Investing":
"......ESG is a slippery concept, without widely accepted definitions, criteria and metrics. Infamously, a single company’s ESG rating can vary widely between credible credit-rating firms. That variance isn’t unreasonable. There are many ways to combine the three criteria into one score, and for any single one there can be honest disagreement about what good or bad actually looks like. For example, some might rank Shell highly on “E” because it has a plan to decarbonize its business, or poorly because it sells oil and plans to sell natural gas for years.
"However, the scope for variance in environmental ratings is starting to narrow. European officials have set new rules for different categories of sustainable investments and are working on definitions of what is and isn’t green. The SEC is also working on its own set of rules.......(T)he tighter rules around what qualifies as environmentally friendly, even as social and governance criteria remain less well-defined, could mean it is time to take the “E” out of ESG investing—if not retire the grouping altogether. It never helped investors, and now it isn’t much use for fund managers either."
As for disentangling the ESG components, this from last Thursday's Fortune CEO Daily Newsletter:
"......Readers of this newsletter know I’m bullish on businesses paying more attention to social goals. But ESG investing is tricky, for three reasons.
-- First, we don’t yet have agreed-upon metrics for measuring ESG. It took centuries to build the financial infrastructure to reliably measure returns to shareholders. But we are just at the beginning of measuring returns to other stakeholders. There’s still too much of a “pick your metric” mentality.
-- Second, lumping E, S and G together into one framework creates confusion. There may be companies that are doing bang up work on the S but neglecting the E, or vice versa. And no one I talk with has a clear idea of what the G contributes to the equation......."
And this from this FT article last Friday, "ESG exposed in a world of changing priorities":
"......Russia’s invasion has also highlighted another point: the problems of reconciling “E” with “S” and “G” in a unified way. Some Russian companies, such as En+, which were previously welcomed by ESG activists because they were trying to embrace green technologies, are now being shunned because most ethical investors will no longer buy anything linked to the Russian establishment. The lens of ESG, in other words, has changed.
"And similar tensions exist around other entities that have nothing to do with the war. Elon Musk’s Tesla group, say, is often lauded for its high “E” credentials because it created three-quarters of new electric cars in the US last year. However, the minerals used to make these cars sometimes come from dirty mines, with poor labour conditions, and the company has been criticised for racial discrimination and bad working conditions in its factories. Tesla rejects the claims. It scores so badly on “S” that the S&P 500 ratings group recently removed Tesla from its ESG bucket, causing its stock price to fall 6 per cent — and Musk to complain that ESG has now become “weaponised by phoney social justice warriors”, and is thus “a scam”.....
"So does this mean that the impetus behind ESG is dead, or dying? Probably not......One key point is to recognise that pursuing ESG strategies is never simple but always requires trade-offs between different “E”, “S” and “G” goals; so much so that, in the future, those three letters are increasingly likely to be separated......"
And finally, from John Authers' Bloomberg "Points off Return" column last Friday,"ESG Is Alive and Well. Just Call It Protectionism":
".......None of this means that the concept of investing based on environmental, social and governance principles is over, and none of it is particularly new. The S (Social) and the G (Governance) have long been ambiguous and the efforts of different ratings companies to distill them into simple measures that can be used for indexes have been almost comically contradictory. The same company can have a top rating with one and a bottom rating with another....."
(c) feature FT article on the state of the 'ESG' acronym: On Monday, this lengthy feature article on ESG appeared, "How ESG investing came to a reckoning", and below are some excerpts:
"The term ESG is less than two decades old, but it may already be coming to the end of its useful life. The acronym dates back to 2004, when a report commissioned by the UN called for “better inclusion of environmental, social and corporate governance (ESG) factors in investment decisions”. In the wake of corporate scandals such as Enron and WorldCom, and the Exxon Valdez oil spill, financial institutions eagerly signed on to the “global compact”.
"It took a while to catch on. Between May 2005 and May 2018, ESG was mentioned in fewer than 1 per cent of earnings calls, according to analysis by asset manager Pimco. But once ESG became mainstream, it quickly became ubiquitous in the corporate landscape. By May 2021 it was mentioned in almost a fifth of earnings calls, after a surge in prominence over the pandemic.......
"On top of the allegations of greenwashing at the industry’s highest levels, there is the impact of Russia’s invasion of Ukraine, which is forcing companies, investors and governments to wrestle with developments that at times appear to pit the E, the S and the G against one another.....Some people wonder whether the term still has any meaning at all. “The acronym ESG is a bit of a confused compact because it muddies at least two things,” says Ian Simm, founder and chief executive of ￡37bn asset manager Impax Asset Management, a pioneer in sustainable development. “One is an objective assessment, around risk and opportunity. And the other is around values or ethics. And so people get themselves tied in knots because they’re not really clear about what exactly ESG investing is about.”
"Simm is among those investors who believe that while there have been huge benefits that have arisen from bundling together ESG — notably waking up the world to thinking about issues as varied as climate change, gender diversity and the impact of corporations on communities — the term has, in effect, come to mean all things to all people, and might be nearing retirement. “I think we should dial down or even stop using the phrase ESG,” says Simm. 'We should push very hard for people to be clear about what they want when they use it. And in an ideal world, ESG would disappear as an acronym . . . and we would find a better way of labelling the conversation.'........"
(iv) prominent activist hedge fund Elliott Management's settlement agreement with Western Digital/press release and precedent of the day (settlement agreement with activist hedge fund Elliott Management):
Computer hard drive manufacturer Western Digital Corporation announced yesterday in this press release that it had entered into a settlement agreement with prominent activist hedge fund Elliott Management (holding a 6% stake in the company), inter alia agreeing that it would consider strategic alternatives including a separation into two businesses, as follows:
"Western Digital Corporation, today announced that it is reviewing potential strategic alternatives aimed at further optimizing long-term value for its shareholders. The Executive Committee of the Western Digital Board, chaired by Western Digital CEO, David Goeckeler, will oversee the assessment process and fully evaluate a comprehensive range of alternatives, including options for separating its market-leading Flash and HDD franchises. Following constructive dialogue with many of Western Digital’s shareholders, including one of the company’s largest investors, Elliott Investment Management L.P., this review builds on Western Digital’s ongoing efforts to drive innovation-led growth and create shareholder value.....
"Elliott Managing Partner Jesse Cohn and Senior Portfolio Manager Jason Genrich said, ".....We’re encouraged by the positive direction of our discussions so far, and by Western Digital’s openness to considering a full separation of its Flash business. We are pleased that Western Digital’s Board is conducting this review, and Elliott is prepared to provide strategic resources and additional capital to help the company realize the full value of both of its businesses."
"In conjunction with the strategic review process, Western Digital and Elliott have signed a customary non-disclosure agreement and a letter agreement; such letter agreement will be filed on a Form 8-K with the Securities and Exchange Commission....."
"This is the Settlement Agreement referred to above, as summarized in the related Form 8-K filed with the SEC; and,
(v) (other) press releases of the day:
(a) Bank of Montreal announced today in this press release a Chief Risk Officer transition, as follows:
"Bank of Montreal today announced the upcoming retirement of its Chief Risk Officer, Patrick Cronin, and the appointment of Piyush Agrawal into the role. Mr. Agrawal will join the bank as Deputy Chief Risk Officer on July 1 and, after a transition period with Mr. Cronin, become Chief Risk Officer on November 1. Mr. Agrawal, a seasoned executive with global risk experience, joins BMO from Citigroup, where he held the role of Chief Risk Officer for Citibank, N.A. and Global Head of Climate Risk since 2021.........";
(b) Krispy Kreme, Inc. announced yesterday in this press release the promotion of its CFO and COO to the position of Global President and COO, as follows:
"Krispy Kreme, Inc. today announced that Josh Charlesworth has been promoted to Global President and Chief Operating Officer. The Company has engaged a leading search firm to identify Krispy Kreme’s next Chief Financial Officer and Mr. Charlesworth will remain in the role until a successor is hired. Mr. Charlesworth will continue to report to Mike Tattersfield, President and Chief Executive Officer.
"As Global President, Mr. Charlesworth will have responsibility for all of Krispy Kreme’s core equity markets, including the U.S., U.K., Ireland, Australia, New Zealand and Mexico, and its IT and Supply Chain teams. This newly created role will oversee the expansion of the Company’s global footprint and growth strategy. Mr. Charlesworth has served as Krispy Kreme’s Chief Financial Officer since April 2017 and Chief Operating Officer since May 2019. He served as Corporate Secretary from July 2018 to August 2020......"
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