'THE DAILY 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) (more on) CEOs speaking up on social and political issues and dealing with employee activism/former American Express CEO on CEOs speaking up: With the CEOs of several major U.S. corporations having recently publicly condemned Georgia's new election law, and, as reported in this Washington Post article over the weekend, "more than 100 chief executives and corporate leaders gathered online Saturday to discuss taking new action to combat the controversial state voting bills being considered across the country, including the one recently signed into law in Georgia", the issue of corporations speaking up on social and political issues, generally through their CEOs and often at the urging of their workforce, has been very much in the news these days and generating much commentary. (Note that a number of recent items have discussed this, most recently item (ii) from April 6/21 with reference to this article in the Stanford Graduate School of Business "Closer Look" series , "Protests From Within: Engaging With Employee Activists", which inter alia notes that "employee activism has exploded onto the scene in recent years.")

          (a) The issue of CEOs speaking up on social issues and the related issue of employee activism are both discussed in this Fortune article on Sunday, "The latest partisan issue: Whether CEOs should speak up on social issues", as well as in this WSJ article on the weekend, "With Georgia Voting Law, the Business of Business Becomes Politics":

           "If America’s high-profile CEOs didn’t already realize they can’t win by taking public positions on controversial issues, they certainly realize it now. Trouble is, they also can’t win by declining to take positions. The corporate public relations crisis surrounding Georgia’s new election law is just the latest example of the quandary CEOs face......Two elements of this new reality are at its center. First, from a pure business perspective, this isn’t about boycotts, which almost never work; it’s all about employees. Second, if CEOs feel as if they just can’t win in these situations, they’re right. The world has changed.

           "Like most big changes, this one has been gradual, then rapid. A pivotal figure was and is Salesforce CEO Marc Benioff, and a pivotal year was 2015. That’s when corporate reputation strategist Leslie Gaines-Ross, then with the Weber Shandwick communications firm, identified a new phenomenon: CEO activism. “Before that, CEOs would never speak up about hot-button issues,” she recalls....Those (activist) CEOs knew they risked angering half their customers by taking stands on controversial issues. So why do it? Their employees were a major reason. Employees care about these issues and are more powerful than ever in an information- and service-based economy. Just as important, they know it. That’s why employee activism has grown into a significant force....

            "Combine those factors and it becomes clear why at least some CEOs feel they must declare a position on a state election law. “CEOs are being forced to speak up, sometimes only internally,” says Gaines-Ross. “But silence is no longer a good default. ”That’s the no-good-options reality for CEOs in this contentious era. Yes, speaking up will make some customers mad. Also some employees, suppliers, regulators, and investors. But failing to speak up will do the same. You can’t win. About all the solace that can be offered to CEOs is that it’s a complicated world, and they get paid a lot to deal with it." (From the Fortune article)

            "......Now ,business leaders are facing new pressures from progressive activists to prove that those commitments were more than just talk. As activists press companies to condemn new voting legislation, CEOs are again finding themselves walking a difficult line on emotional, political issues, risking blowback from all sides.CEOs “put themselves on this path” by engaging on social issues in response to their employees and partly as a form of marketing, says Harris Diamond, former chief executive of ad giant McCann World group. “Once you open up that door, you have to live by it.”......

             "You’re walking a very treacherous line when you get involved in highly charged, emotional, political issues,” said Ken Langone, the billionaire co-founder of Home Depot Inc......"Keep in mind: If America is about as evenly divided as it appears it is, you’re going to piss off one side or the other side with your customers, and they’re about equal,” Mr. Langone said.....

              "Bill George, former chairman and CEO of Medtronic PLC and now a senior fellow at Harvard Business School, said he coaches new CEOs in such sessions, running them through scenarios and questions in which they have to rattle off, point blank, their policies on such issues as combating climate change and promoting racial justice.“ It’s a new world, and you have to have a new type of CEO,” he said, adding that in the past, most CEOs just wanted to run a profitable business.“ If you look at the typical CEO’s preparation, there’s nothing in their background that prepares them for these types of activities.”.........

                "Another increasingly vocal constituency: companies’ employees. Mr. George said the position of employees at many companies with younger workforces is, “I’m not sure I want to work here unless you have a stance on this.” Some business leaders say they have avoided taking political stands because their workforces have diverse points of view.......As CEO Doug Parker and other executives at Fort Worth-based American Airlines Group Inc. watched the fallout mount in Georgia, they began to hear from employees about the issue, and considered what to do about proposed legislation in the Texas Senate, according to people familiar with the company’s deliberations. The airline’s leadership team expected that speaking out on voting restrictions in Texas could alienate many state officials and consumers, but felt it needed to speak given its large size and diverse workforce and customer base, the people said. Executives ran the final statement by an internal diversity and inclusion group for additional guidance, according to the people familiar with American’s deliberations....."

               Note also from this related WSJ article on the weekend, "CEOs Plan New Push on Voting Legislation":

                "Dozens of chief executives and other senior leaders gathered on Zoom this weekend to plot what several said big businesses should do next about new voting laws under way in Texas and other states.....(M)ore companies and their leaders have spoken out on the issue in recent weeks....Meanwhile, progressive activists and others who oppose the laws have said that the actions leaders are taking aren’t strong enough. Many CEOs now feel a duty, or pressure, to make their views explicitly known to employees and others, executive advisers said.

               "Plenty of companies remain wary of wading into politically charged areas. One executive from a Fortune 100 consumer-products company said board members, employees and vendors are pressing leaders to speak out, but doing so could put a bull’s-eye on the company. “It’s really a no-win situation from a corporate standpoint,” the executive said.........“There is no more difficult job in America today than leading a public company,” Mr. Walker (Ford Foundation President Darren Walker)said. “There are so many stakeholders who have a point of view about what ought to be the priority of your company, and have views that are sometimes diametrically opposed.”

         (b) Former American Express CEO Harvey Golub weighs in on the issue of CEOs speaking up on issues not directly related to the company's business in this WSJ op-ed yesterday, "Politics Is Risky Business for CEOs":

           "A few CEOs have expressed their point of view about the new Georgia voting law. They have issued statements indicating their opposition on the basis that the law will suppress voting......I believe they are wrong to take public positions on this law......But the reason I think CEOs should be silent on this issue isn’t because I disagree with their judgment on the merits. It’s because I think it is wrong for executives to take a company position on public-policy questions that don’t directly affect their business, for four reasons.

          "First, while these CEOs have the right to their own opinions, they can never speak merely as individuals; they always speak for and represent the companies they head. As CEOs they have the right, and perhaps the obligation, to speak out on matters affecting their organizations, but unless they have asked their boards for approval before speaking, they don’t have that right on unrelated matters.

          "Second, inevitably their announcements on purely political issues will alienate many of their employees and customers. Those positions will always lead to unintended consequences.....Third, these and other executives will be pressured in the future to comment, pro or con, on other states’ voting laws. That will lead to further charges of hypocrisy, more boycotts, more publicity, more ill will. At the end of the day corporations and the idea of capitalism will be in lower repute.

          "Fourth, and perhaps most important, there is no limiting principle to this problem. If business heads can be pressured to comment on issues unrelated to their businesses, they will be compelled to weigh in on more current events and issues and will have no basis for refusing to respond.....It will go on and on."

         For a more cynical view on major corporations speaking up on social and political issues, from this Business Insider article this morning, "Corporate America's response to Georgia's new voting laws isn't benevolence. It's about economics and profit, experts say.":

           "....As much as it may seem like benevolence, multiple business experts told Insider there was an economic strategy at play: keeping employees, customers, and shareholders happy. Increasingly, C-suite executives are realizing that employees, customers, and shareholders care about social justice, the environment, and ESG criteria, a type of socially responsible investing that tracks progress on environmental, social, and governance goals.....

          "It's about profit and longevity. Corporate America's outcry over Georgia's voting laws is the next phase in an evolution to serve those goals, experts said. "Business doesn't have a political party," The New York Times' Andrew Ross Sorkin recently wrote. "Its party is profit.". Robert Kazanjian, a business professor at Emory University in Atlanta, told Insider that corporate America's response to Georgia's voting laws came down to economics. "Companies are trying to figure out what does the stakeholder view encompass right now? It's an increasingly long list of issues, and it's harder for them to ignore them," Kazanjian said. 

         "The net effect is that business leaders are now focusing on what employees, customers, and communities value, too, he said. Prioritizing their needs is increasingly important to a company's long-term success. Matteo Tonello, the managing director of ESG research at the Conference Board, a research firm and organization of businesses, agreed with Kazanjian's view that America's leadership was responding to the economic trend of stakeholder capitalism. "Fundamentally, it's all about business," he said.

          "Leaders need to listen to their employees to be successful, Robert Strand, a lecturer at the Haas School of Business at the University of California, Berkeley, told Insider. "The most significant business case that I see is in the battle for talent," Strand said. 'Increasingly, employees of these companies expect their leaders to take a stand on matters of societal importance.'....."

        (ii) nuanced view on ESG by a veteran board member: A nuanced view on ESG in this interesting FT op-ed on Sunday, "Hasty, imperfect ESG is not the path for business", by Dambisa Moyo, global economist, author of the forthcoming book, "How Boards Work", current board member of Chevron Corporation and 3M Company, and previously on the boards of Barclays plc and Barrick Gold Corporation. Below are some excerpts:

          "Good environmental, social and governance practices take a company from financial shareholder maximisation to multiple stakeholder optimisation: society, community, employees. But if done poorly, not only does ESG miss its sustainability goals, it can make things worse and let down the very stakeholders it should help.

           "To be sure, the ESG agenda should be pursued with determination. But there are a number of reasons why it threatens to create bad outcomes. The agenda is putting companies on the defensive. From boardrooms, I have seen organisations worry about meeting the demands of environmental and social justice activists, leading to risk aversion in allocating capital. Yet innovation is the most important tool to address many of the challenges of climate change, inequality and social discord.

            "Pursued by $45tn of investments, using the broadest classification, ESG is weighed down by inconsistent, blurry metrics. Investors and lobbyists use different evaluation standards and goals, which focus on varied issues such as CO2 emissions and diversity. Metrics also depend on business models. Without a clear, unified compass, companies that measure themselves against today’s standards risk seeming off base once a more consistent regulator-led direction emerges(for example, from worker audits, the COP26 summit and the Paris Club lender nations). ESG is not without cost and the best hope for long-term success lies with business leaders’ ability to stay attuned to its impact and unintended consequences. For example, while the case for diversity is incontrovertible, efforts at inclusion should account for the possible casualties of positive discrimination.....

            "Business leaders must solve ESG concerns in ways that do not set corporations on a path to failure in the long term. They must have the boldness to adopt a flexible, measured and experimental agenda for lasting change. In this sense, they must push back against the politically led narrative that wants imperfect ESG changes at any cost."

       (iii) new interesting and useful joint London Business School/PwC report on linking executive pay to ESG metrics: Much has been written recently on the topic of tying executive pay to ESG targets, including some cautionary notes on the practice (such as this recent client memo by executive compensation consultants, Semler Brossy, "Moving Cautiously on ESG Incentives in Compensation": see item (i)(c) form April6/21). Add to the list this interesting and useful report just released jointly by The Centre for Corporate Governance at London Business School and PwC, "Paying well by paying for good", which is summarized in this Harvard Law School corporate governance blog post yesterday, "Executive Pay and ESG Performance", by two of the authors of the report. The report also strikes a certain cautionary note for companies and compensation committees that are deliberating over whether to tie ESG metrics to executive pay, and if so, which ones, as well as describing current market practices in linking pay to ESG at the FTSE 100 companies. Below are some excerpts:

           "....Anew report in partnership between The Centre for Corporate Governance at London Business School and PwC reviews what market practice and academic evidence have to say about linking executive pay to ESG. There is no single right answer, but we identify the underlying reasons why a company may (or may not) include ESG in executive pay and the consequences for measure selection. And we set out the principles and decisions required to design a good, effective and enduring ESG pay metric, if that is what a board decides to do.

          "Not so easy: The pressure to include ESG targets in pay is coming not just from special interest groups but from customers, employees, and, increasingly, investors and regulators.....But linking ESG and pay is not easy. By and large investors do not yet have a consistent or rigorous view about what ‘good’ ESG performance looks like—and so there is no clear guidance for companies on a ‘good’ ESG performance measure. One of the issues is the lack of a generally accepted set of ESG metrics. While ESG reporting standards now abound, such as the GRI or the new WEF/IBC standards, finding ones which are appropriate for incentives is much more challenging....Calibration can be even more challenging than choosing targets. Often companies find that the ESG measure which best aligns to their sustainability strategy is rather difficult to calibrate effectively with the fear of ever moving goalposts.

          "To link or not to link?:Despite these challenges the prevalence of ESG targets in executive pay is growing. Nearly half of all FTSE 100 companies now have an ESG metric in their bonus or LTIP. Yet some boards and investors question whether it is right to include ESG metrics in pay at all. If ESG is aligned with business strategy and long-term value, why does it need to be separately measured? If ESG defines a firm’s licence to operate then why is it rewarded rather than being table stakes for the executive to keep their job? If neither of these, then is it just virtue signalling? Can ESG be linked to executive pay in a way that avoids being overwhelmed by unintended consequences? Perhaps linking executive pay to ESG is an example of what the early 20th Century commentator H. L. Mencken was talking about when he claimed that “every complex problem has a solution which is simple, direct, plausible—and wrong”.

            "ESG as a core tenet of good business practice is here to stay. But does that mean we should link it to pay? Sometimes, but not always. And maybe less than we’d at first think. Companies and remuneration committees face a genuine challenge to navigate the right route through the competing demands placed upon them. We hope that our report will help them find an answer to this question that works for their circumstances.......

             "Key findings:

             Market practice in the FTSE 100 shows the changing nature of ESG targets in executive pay:

  ESG targets are increasingly prevalent in pay

• 45% of FTSE 100 companies have an ESG target in the annual bonus, the Long-term Incentive Plan (LTIP), or both
• 37% use ESG in annual bonus with an average weighting of 15%
• 19% of the FTSE 100 use ESG in LTIP with an average weighting of 16%
• The most common category of measure in the bonus is Social, including measures focusing on diversity, employee engagement, and health & safety
• The most common category of measure in the LTIP is Environmental, typically measures focusing on decarbonisation and the energy transition 

  The nature of ESG targets is changing, with increased use of Environment and Social targets, particularly in LTIPs

• ESG targets relating to long-standing social and governance metrics such as health & safety, risk, and employee engagement have appeared in bonuses for some time. 33% of FTSE 100 companies incorporate such ‘Old’ ESG measures, 31% in the bonus and 7% in the LTIP
• ‘New’ ESG targets relate to more recently emerging stakeholder concerns, particularly around climate change, sustainability and diversity. 28% of companies have such measures, 18% in the bonus and 15% in the LTIP

  A slight majority of ESG measures are output rather than input measures, with only a minority operating as an underpin

• 55% of ESG measures in bonus, and 50% in LTIP, are output measures with a quantifiable goal—for example scope 1 and 2 emissions reductions in tonnes against baseline numbers
• 31% of ESG measures in bonus, and 27% in LTIP, are input measures relating to specific activities a company undertakes—such as making investments in green energy sources
• Only 14% of ESG measures in bonus, and 22% in LTIP, operate as an underpin, despite this approach being popular with some shareholders

  Nearly half of current ESG metrics are not linked to material ESG factors

• Over half (55%) of ESG targets are based on ESG dimensions categorised as material to the company under the SASB Materiality Map. But equally, nearly half are not
• Of the 45% of targets not deemed material in the SASB framework, nearly half (45%) relate to employee engagement or diversity & inclusion—whether this should be deemed immaterial will be a matter of debate. Diversity metrics commonly appear in financial services incentives, following the Women in Finance Initiative in the UK......

              Putting ESG targets in pay raises significant difficulties:

Even where there’s a case to introduce ESG targets into executive pay, the potential implementation challenges are significant and may outweigh the benefits.

• Even if quantitative measures are available, it may not be clear which to use
• Specific ESG targets can be hit while the wider ESG goal is missed
• ESG targets can distort incentives and crowd out intrinsic motivation
• ESG targets are difficult to calibrate and assess
• Executive pay is complicated enough already without adding further targets......"

          For more on the difficulties of coming up with useful and appropriate ESG metrics, note this Columbia Law School corporate governance blog post yesterday, "Making ESG Metrics Trustworthy", based on this publication by the authors of the post, "Measuring Corporate Virtue—And Vice":

          "....Current ESG metrics run the gamut from the highly precise to the very inexact. At one end of the range are greenhouse gas emissions, for which there is a widely accepted reporting methodology. At the other end lie issues of diversity and inclusion which, however important, do not lend themselves to either precise definitions or reliable determinations. In any event, there are a number of different entities in this area working to establish criteria across the spectrum......

          "These difficulties illustrate the tremendous improvements that must be made to companies’ reporting systems for ESG data to be reported accurately at a reasonable cost. In the financial context, companies rely on internal controls and reporting systems to generate output in accordance with accounting standards and on auditing and regulatory enforcement mechanisms to verify and correct the reports. In the ESG context, these types of systems range from weak to nonexistent. Internal controls are processes that provide reasonable assurance that the reported numbers are correct. 

          "The majority of financial restatements are due to internal errors rather than fraud, and there is strong evidence that internal controls improve the quality of reported information. Indeed, in the financial context, they are so important that large public companies must provide a separate audit attestation regarding the quality of their internal controls. While audits can improve the quality of reported information, they require reliable internal data to establish a reliable audit trail. The current lack of quality internal information contributes to the high frequency of “limited assurance” audits in publicly available ESG reports......"

       (iv) Johnson & Johnson's response to ISS and Glass Lewis recommending voting against the 'say-on-pay' vote/SEC filing of the day: So far during this year's proxy season, the 'say-on-pay' vote has been defeated at two major U.S. companies: Walgreen Boots Alliance in January (see item (iv)(a) from Jan. 25/21); and Starbucks last month (see item (i) from March 18/21). A third one, at Johnson & Johnson's upcoming AGM on April 22, is now possible, with thetwo major proxy advisors, ISS and Glass Lewis, having recommended that shareholders vote against the company's CEO pay package, as reported in this Reuters article over the weekend, "[https://ISS joins Glass Lewis in recommending vote against J&J CEO's pay package]ISS joins Glass Lewis in recommending vote against J&J CEO's pay package":

           "Proxy advisory firm Institutional Shareholder Services (ISS) has joined Glass Lewis in recommending investors reject a proposed pay package of nearly $30 million for Johnson & Johnson Chief Executive Officer Alex Gorsky. J&J is attracting investor scrutiny because it partially shields Gorsky from some $9 billion in costs over two years that have arisen from lawsuits claiming the healthcare company fueled the U.S. opioid crisis and allegations of asbestos in its talc baby powder.

        "Last week, Glass Lewis based its recommendation on the argument that the healthcare company was shielding its top executives from the legal cost of poor business decisions. A J&J spokeswoman on Saturday reiterated the company’s stance saying it was its policy to not include such non-recurring gains and expenses as litigation-related items in the “income performance measures” of the compensation plans for executives. Litigation items are included in company’s total shareholder return and free cash flow, which determine other aspects of the executive pay, she said, adding this was “well within industry benchmark practices.”

         Yesterday, Johnson & Johnson filed with the SEC this supplemental proxy statement in response to the recommendations of the two proxy advisors, stating in part as follows in the form of a letter to shareholders by the Chairman of the  Compensation & Benefits Committee:

          " As Chairman of the Compensation & Benefits Committee of the Board of Directors of Johnson & Johnson I am writing to you today to ask for your support by voting in accordance with the recommendations of our Board on all proposals included in our Proxy Statement for our April 22, 2021 Annual Meeting of Shareholders. Specifically, I am asking for you to vote “FOR” our Advisory Vote to Approve Named Executive Officer Compensation (“Say on Pay”) (Item 2). I also encourage you to read our Compensation Discussion and Analysis beginning on page 48 of the Proxy Statement.

         "The Company’s executive compensation is intended to promote long-term, sustainable value creation and, thereby, align the Company’s executive compensation programs with the interests of shareholders. As evidenced by the changes we made in 2020, which incorporated shareholder input, we are committed to refining the program to further these goals based on feedback from our extensive and continuing shareholder engagements. These changes included: 

        ? eliminating the three 1-year sales goals from our performance share units (PSUs), 

? adding more structure to our annual incentive plan, 

? capping the value of our executive car and driver benefit, and 

? doubling our stock ownership guidelines for our senior executives. 

          " To assist you in evaluating our Say on Pay proposal, I would like to provide you with additional context and information concerning our treatment of litigation expenses in earnings per share (EPS) for our annual incentives and PSUs. The adjusted EPS we use in our incentive plans are based on the same measures used in the earnings guidance furnished to our shareholders and the investment community. While we acknowledge that litigation outcomes have an impact on our business and shareholders, we do not believe including extraordinary, non-recurring gains and expenses, such as certain litigation-related items, in the EPS goals and results creates an effective incentive-based compensation structure that is in the best interests of the Company or its shareholders. We do not exclude from our non-GAAP measures ordinary, recurring legal fees (including both internal and external counsel). I have summarized below several additional points regarding our treatment of litigation outcomes in our performance targets and results for your consideration: ........"

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