'THE DAILY CORPORATE GOVERNANCE REPORT’ (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) HBR post on ESG board governance: This HBR post last Thursday, "Research: Boards Still Have an ESG Expertise Gap — But They’re Improving", is by the director of the NYU Stern Center for Sustainable Business,?and inter alia discusses five steps to improve board ESG governance. Below are excerpts, including three of those steps:

? ? ? ? ? ? ? ? ? ?".......Having ESG expertise on boards is becoming increasingly imperative.?New regulations in Europe, North America, and elsewhere are requiring more robust ESG reporting and disclosure for boards.......In 2018, our review of environmental, social, or governance-related credentials of all 1,188 board members on the Fortune 100 identified 29% of directors with one or more relevant ESG credentials. In 2023....we found that number jumped to 43% of the 1,161 board members now sitting on Fortune 100 boards.?The growth came in environmental credentials, which nearly doubled, and governance credentials, which nearly tripled.?Social credentials, which was by far the best represented category in 2018, remained close to flat in 2023 (at 253 members), while maintaining its place as the area with the most board experience. One hundred and eighty members had governance credentials and 153 had environmental credentials in 2023. Many more boards have installed ESG/sustainability committees, accelerating from 22 committees in 2018 to 89 in 2023.......

? ? ? ? ? ? ? ? ? ?"Steps to Improve ESG Governance: ......(T)here is a growing consensus on what constitutes robust sustainability governance at the board level,?summarized as follows: ......

? ? ? ? ? ? ? ? ? ? "The board should understand upside opportunities and downside risks.?Often, board member sustainability engagement is confined to reviewing the annual ESG report and downside risks. However, board members should also understand the upside opportunities related to sustainability and what the risks and costs are with maintaining a “business as usual” approach.

? ? ? ? ? ? ? ? ? ? "The board must have a sustainability/ESG committee. Creating a stand-alone sustainability/ESG committee will provide?the board with the time and focus needed to provide oversight of business strategy issues and capital allocation related to sustainability.

? ? ? ? ? ? ? ? ? ? "Nominating, audit/risk, and compensation committees should include relevant ESG topics. The other committees on boards are not off the hook. Nominating committees can work on recruiting board members with relevant ESG credentials as well as organize training for current members. The compensation committee can include sustainability targets in compensation — some 75% of Fortune 500 companies are doing so today. Audit/risk should review the quality of ESG reporting data and ensure appropriate assurance......."

? ? ? ? ? ? ? (ii) some experts on how best to tie executive pay to climate-related goals: Some suggestions from a number of experts on tying executive pay to climate-related goals in this WSJ article last Wednesday, "How to Make Climate Progress: Tie It to CEO Pay":

? ? ? ? ? ? ? ? ?"Should corporate executives’ pay be tied to climate-related goals??More company boards think so, as awareness grows that climate change could have an impact on corporate bottom lines. Some 54% of S&P 500 companies incorporated climate-related metrics into their executives’ compensation plans in 2023—more than double the figure from two years earlier, according to?a January report from the Conference Board and ESGauge, a data analytics firm. But?experts say how?a company ties pay to climate is crucial, with some methods more effective than others. Here’s a look at some of those approaches. ? ?

? ? ? ? ? ? ? ? "For starters, climate-related goals have to be firmly rooted in science, says?David Larcker, a professor and director of the Corporate Governance Research Initiative at the Stanford Graduate School of Business.?Companies that are serious about rewarding for climate goals should also break down their long-term targets into smaller, clearly achievable and measurable goals, says Larcker, who is also a distinguished visiting fellow at the Hoover Institution, a public-policy think tank. Companies should be sure to audit reported metrics for accuracy, he adds.

? ? ? ? ? ? ? ? ?"The metrics will differ by company, depending on where the biggest impact can be made, says?John McCalla-Leacy, head of global ESG at KPMG?International.?He has clients, for instance, that focus heavily on reducing emissions within their supply chain, while others focus more on reducing?emissions within their own operations.?“We believe that the best metrics for sustainability initiatives have a clear tie to the underlying business model and strategy,” says?John Borneman, managing director of compensation consulting firm Semler Brossy.......

? ? ? ? ? ? ? ?"Once goals are set, compensation should be tied directly to them, not to some vague broader aspiration beyond the metrics, compensation experts and climate advocates say. Offering incentive pay for goals like “adhering to the company’s climate plan” can risk rewarding executives who don’t take any action......

? ? ? ? ? ? ? ?"It’s more common?for companies to build incentives into executives’ annual compensation plans rather than their long-term plans. About 86% of companies?in the?Russell 3000 index?that incorporated ESG performance metrics in incentives used annual incentives in 2023, according to data from the Conference Board and ESGauge. Only about 8% put ESG measures in their executives’ long-term plan last year, and about 5% did both.?Some critics say annual incentives aren’t enough, since long-term incentive programs typically represent the majority of CEOs’ variable pay.?Climate incentives should be a significant part of long-term compensation, they say.......

? ? ? ? ? ? ? ? "Even companies that are moving toward their climate targets can have setbacks due to reasons beyond their control, so there needs to be some flexibility built into compensation plans, says Paul Washington, executive director of the Conference Board ESG Center.....Companies can....be flexible by giving executives partial rewards for efforts that fall short of the established goals. For instance, a compensation plan could call for an equity bonus of 100,000 shares for a 10% reduction in the company’s carbon footprint but fewer shares for a smaller reduction, Larcker says....."

? ? ? ? ? ? ? (iii) early report on 2023 CEO pay at the 100 largest U.S. companies/WSJ analysis of metrics used by the S&P 500 companies to determine equity awards:?

? ? ? ? ? ? ? ? ? ? (a) As reported in this Barron's article yesterday, "CEO Pay Jumped to a Record $23.7 Million. But That’s Not the Whole Story", pay consulting group?Equilar posted on its website last Thursday this "early glance" at CEO pay at the "Equilar 100" (i.e., companies with revenues of more than $1 billion) based on an analysis of the 2024 proxy circulars filed by March 31, that date being "considered the 'half-way' point in the annual proxy season.?This is the Equilar report, and this is the related interactive chart?"that allows you to sort by total compensation, compensation actually paid (CAP) values, revenue and other company measurements" of the CEOs at each of the Equilar 100 companies. Below is from the Barron's article discussing the Equilar report:

? ? ? ? ? ? ? ? ? ? ? ? ?".....(M)edian pay for America’s top chief executive officers rose again, climbing 11.4% in 2023 to a record $23.7 million, according to a new study by pay consulting group Equilar-- though beneath those headline numbers lie some intriguing trends......Equilar’s list includes the largest CEO pay packages at companies with revenue of at least $1 billion that filed their proxies to the Securities and Exchange Commission by March 31. The data reflect 2023 figures........

? ? ? ? ? ? ? ? ? ? ?? ? ? "Topping Equilar’s list is Broadcom CEO Hock Tan, with total compensation of $161.8 million last year—$160.5 million of which came in the form of the year’s biggest stock grant. The median stock award for these CEOs came in at $15.3 million, or 64.6% of their total compensation......“Stock awards are now the bread and butter of CEO comp,” says Amit Batish, Equilar’s senior director of content, who notes that the median value of stock awards is up 20% from a year earlier. “This year we had three nine-figure award packages; last year we had only one. So we will probably see more.” ......

? ? ? ? ? ? ? ? ? ? ? ? "Before anyone feels compelled to storm the barricades, it’s worth noting that the 11.4% gain in CEO pay is less than the 13.8% total return to shareholders produced by these companies last year. In fact, CEO pay for top companies climbed 8.77% on average annually over the past six years, while the total annual average return for these companies was 12.02%. It’s possible, therefore, to argue that some shareholders are getting their CEOs on the cheap......"

? ? ? ? ? ? ? ? ?(b) This WSJ article last Friday discussing in particular the 2023 pay to Warner Bros. Discovery's CEO, David Zaslav, valued at some $49.7 million, "Warner Bros. Discovery Lost Money Last Year. Its CEO Got a $50 Million Payday.", is of particular interest in also discussing the principal metric used by Warner Bros. to determine the CEO's equity award (cash flow) compared to the metrics more typically used by the S&P 500 companies (earnings, shareholder returns, margins). Below are excerpts:

? ? ? ? ? ? ? ? ? ? ? ".......Last year, (Warner Bros. Discovery) CEO?David Zaslav?received pay valued at $49.7 million, a 27% increase from 2022....The company.....posted a smaller net loss—but also narrower revenue—last year. But Zaslav’s stock award was tied to another metric: free cash flow, which nearly doubled to $6.16 billion last year as the company moved aggressively to pay down debt.....Overall, Zaslav’s compensation included?a $3 million salary,?$23 million in stock awards tied to cash flow?and a guaranteed $22 million cash bonus.....

? ? ? ? ? ? ? ? ? ? ? ?"Free cash flow reflects funds available to a company after operating expenses and capital investment, and is one measure investors use to gauge a company’s health......In 2022, Zaslav’s equity award was tied to multiple performance metrics, including measures of company revenue and subscriber volume, as well as cash flow.....By emphasizing cash flow so heavily, Warner Bros. Discovery shifted Zaslav’s pay away from the mainstream for the biggest U.S. public companies, data from ISS-Corporate, a unit of Rockville, Md.-based Institutional Shareholder Services, show.

? ? ? ? ? ? ? ? ? ? ? ??"Over the past five years, the share of companies using sales or stock-market metrics has grown somewhat, while other measures have stayed fairly flat. Companies can use multiple performance measures when setting pay.?Of S&P 500 companies reporting 2023 pay details so far, about 70% used earnings to help set executive pay, and about the same share relied at least in part on stock-price performance or shareholder returns, ISS-Corporate found. Around half took sales into consideration, and just under half relied on other returns or margins. Only about 29% used a measure of cash flow."

? ? ? ? ? ? ? (iv) some data on the annual incentive plans at 120 of the largest U.S. public companies: In March, executive compensation consulting firm Compensation Advisory Partners CAP)?posted on its website this report analyzing?the annual incentive plans at 120 of the largest U.S. public companies (median revenues of $43 billion), "Annual Incentive Plans – Payouts and Performance Alignment." Below is an excerpt:

? ? ? ? ? ? ? ? ?"Performance Metrics: Nearly three-quarters of the companies in our study use three or more metrics?to determine bonus funding, an increase compared to the findings of our 2020 report....The most prevalent financial metrics used in annual incentive plans were Revenue, EPS, and Operating Income (including EBIT, EBITDA, and Pre-tax Income). 57 percent of companies in our current study use strategic or nonfinancial goals, an increase from 38 percent in 2020. These metrics incentivize behaviors that contribute to long-term success but may not be captured by short-term financial performance results. Specific strategic or nonfinancial metrics vary by industry and company......60 percent of the companies include Environmental, Social, and Governance (ESG) goals as part of their annual incentive award determination. ESG metrics are typically evaluated on a qualitative basis, and less commonly on a quantitative basis....."

? ? ? ? ? ? ? (v) press release of the day: NYSE-listed, home security company ADT Inc. announced yesterday in this press release?the promotion of the interim CFO to the position of permanent CFO, as follows:

? ? ? ? ? ? ? ? ? ?"ADT Inc. the most trusted brand in smart home and small business security, announced today that Jeff Likosar has been named Chief Financial Officer.?In addition to his duties as President, Corporate Development and Chief Transformation Officer, which he will retain, Likosar had been serving as interim CFO since December 2023.?He previously served as the company’s CFO from 2017 to 2022. Along with customary CFO responsibilities, Likosar will remain responsible for corporate development, strategy, and transformation execution.

? ? ? ? ? ? ? ? ? ?"Following a deep assessment of our needs and a robust search process including the evaluation of a number of highly talented candidates, the Board and I are pleased that Jeff will continue to serve as ADT’s Chief Financial Officer. ......” said Jim DeVries, ADT?Chairman, President and CEO."

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