Latest Insights & Industry Trends

As we hit the midpoint of the 2022 proxy season, shareholders and investors continue to shift focus towards untraditional topics compared to the prior year’s proxy seasons. At the forefront of these conversations sits ESG (environmental, social, and governance) and human capital management (HCM) matters. Boards are now establishing committees specific to such issues as human rights/diversification, sustainability and environmental as a means of concentrating on these growing areas of focus.

ESG and HCM topics grew in disclosures and conversations in 2021 and continue to grow in importance in 2022. To connect management’s goals to those of the company shareholders, many companies are considering reevaluating internal goals and metrics within executive compensation practices to bridge the gap between these two parties.

Human Capital Management

A corporation’s social voice is a new concern for shareholders and investors, becoming an increasingly large part of the “S” in ESG within the corporate governance landscape. HCM covers a wide array of employee-related issues including compensation, training, retention, health and safety, pay equity, diversity and inclusion, and corporate culture. Shareholders expect to see a strong focus and direction on HCM topics with detailed proxy disclosures to match. Companies must evaluate the workforce they currently have and generate a plan to reach the workforce they will need in coming years.

Organizations are discussing adopting policies to increase the number of minority groups on executive boards, highlight board diversity and skills, and draw focus to unadjusted pay gaps within their proxy statements. The targeted focus is resting on clear disclosures of where the company is positioned on these issues. Companies need more than a goal to work towards. There is a need for prioritization along with time to recruit and onboard both, a board and workforce with diversity in background and experience.

Independent racial and gender equity audits are an effective method to compare internal hierarchy and current standards within the organization. However, internal governance guidelines may not keep pace compared with good external practices within industries. As such, there will likely come a time when companies are not only encouraged to simply change their own practices but may be influenced to keep pace with newly disclosed industry standards. Communication on HCM matters should be present across an organization, board, shareholder engagement, and company documents.

ESG Matters

ESG proposals experienced monumental success last year and are expected to continue into this year at higher rates. Such proposals continue to see more approval driven by an increasing willingness and incentive to promote across investors. Directors are expected to demonstrate knowledge of a company’s ESG measures along with how they compare to their peers.

Quantitative and projected disclosures of a company’s strategies towards ESG are expected to be clear and targeted. Linking executive incentive metrics with ESG-related matters is an alternative to encourage management to share the same interests as their shareholders as well as review ESG voting policies.

A focus on environmental sustainability is experiencing a growing focus around reducing a company’s level of waste and pollution for producers and users and agricultural practices. Across all industries, organizations are reporting on plastic pollution, chemical footprints, and packaging. For agricultural practices, food manufacturers are addressing the treatment of animals and pesticide risks within the supply chain. Companies are expected to report on any risks surrounding financial and public risks towards climate change initiatives.

In no industry has ESG seen more traction than energy. Viewed by many as a poor environmental and male-dominated industry, there is a heightened focus on emissions reductions, spill reduction, water usage, and diversity. Energy companies have largely heeded the call, with unprecedented tracking and disclosures of all aspects of ESG. As external tracking systems become better and disclosures more consistent, greater transparency will continue to emerge. With it, an ability to compare.

Takeaways

A growing number of shareholder proposals in the areas mentioned above means boards should plan on a busy close to this year’s proxy season. ESG-related filings have already increased by 20% compared to last year and will remain front and center. Social issues, human rights, and DE&I initiatives will continue to be of high interest as they become a growing presence in the social voice of corporations. There is much to consider but given this viewpoint, corporate directors can be better equipped to plan for what may come.

See Also

ESG & Executive Compensation: A Deeper Look Inside the Growing Trend »
SEC’s New Rule On Human Capital Disclosures »