Amending Board Committee Charters To Prevent Director No Votes

Directors play a significant role as fiduciaries in overseeing ESG risk, and investors are increasingly interested in understanding how companies define this responsibility through Board structures and committee charters. Many large institutional investors gave issuers notice this year that from 2021 and forward companies without proper Board oversight of ESG will risk a smooth Board election process.

As direct shareholder engagement on ESG matters continues to amplify, proxy statement disclosures will continue to illuminate specific Board and committee responsibilities for ESG oversight. In 2020 thus far, there has been an 80% uptick in proxy statement references to “ESG” compared to proxy statements filed in 2019 by U.S. corporate issuers.

Investor stewardship guidelines are increasingly seeking to ascertain whether companies are properly managing and overseeing ESG risks. According to BlackRock’s Investment Stewardship guidelines, directors should be held accountable when a company is not effectively addressing a material issue. StateStreet urges directors to adopt a focus of financial materiality when it comes to overseeing and responding to ESG issues. Vanguard emphasizes the importance of the Board’s role in sustainability and how good governance can enhance and protect the along-term value for shareholders.

E&S Committees and Rating Agency Methodology

Riveron reviewed 172 committee charters from public companies with generally top-rated MSCI ESG Ratings that cited board-level oversight of ESG. Of these companies, 36% disclosed the existence of a dedicated Environment, Corporate Social Responsibility, Health and Safety, or Sustainability Board Committee accountable for the sustainability strategy and performance of the business. 33% mandated ESG oversight through the Nominating and Governance Committee, and 18% disclosed the existence of a combined Governance and Sustainability Committee.

Below is breakdown of ESG rating agency methodology for evaluating E&S Board oversight of specific policy areas.

Governance Committees

Companies are frequently designating ESG oversight to the Governance Committee. For companies that oversee E&S risks through the Governance Committee, committee responsibilities generally include:

• Evaluate the emergent environmental, social, and governance-related risks and the Company’s social and environmental goals, including the policies and programs instrumental in achieving short- and long-term targets, a review of which management shall prepare and present to the Committee periodically
• Review and assess shareholder proposals submitted to the Company for inclusion in the Company’s proxy statement, including an assessment of the relevance and significance of the proposal
• Oversee the Company’s corporate governance practices and reputation, including, as appropriate, the legal standards, industry practices, investor views, and potential benefits and risks associated with such governance practices and reputation
• Review a report by management, to be prepared at least annually, that summarizes management’s corporate social responsibility activities, including diversity and inclusion efforts, and sustainability
• Assess sustainability risks and corporate policies including environmental, human rights, occupational health and safety, vendor code of conduct, political contribution, and address frameworks such as SASB, TCFD, UNGC, OECD, providing reports to NCG committee on identification, evaluation, management, and mitigation of sustainability risks
• Review and make recommendations about the Company’s sustainability strategy, policies and procedures to encourage long-term sustainable performance, and effective communication of sustainability initiatives to stakeholders.
• Review and discuss with management, environmental, social and governance efforts that management has implemented to monitor and address the Company’s impact on environmental and social issues
• Oversee engagement efforts with stakeholders, including ESG ratings agencies
• Review and advise management regarding social, community, and sustainability initiatives of the Company including the charitable giving strategy of the Company, its subsidiaries, and affiliates

Examples:

Small-Cap

• Orion Engineered Carbons (Market Cap: $750.6M)
  • Industry: Commodity Chemicals
  • Committee name: Nominating, Sustainability and Governance Committee
  • Meeting frequency: At least 2x/year
  • Committee charter ESG highlights: Review strategies, activities, and policies regarding sustainability and other environmental, social, and governance related matters and make recommendations to the Board.
• US Steel (Market Cap: $1.7B)
  • Industry: Steel
  • Committee name: Corporate Governance & Public Sustainability Committee
  • Meeting frequency: Unspecified
  • Committee charter ESG highlights: Oversee corporate responsibility and sustainability initiatives, performance, and CSR. Review matters and risks relating to legislative, regulatory, and public policy issues affecting businesses and operations. Review public policy issues likely to be of interest to various stakeholders. Review efforts to affect identified public policy issues through research, analysis, lobbying, and participation in business and government programs.

Mid-Cap

• Levi Strauss & Co (Market Cap: $5.0B)
  • Industry: Apparel, Accessories & Luxury Goods
  • Committee name: Nominating, Governance and Corporate Citizenship Committee
  • Meeting frequency: At least 2x/year
  • Committee charter ESG highlights: Broken down by sections focused on corporate citizenship and sustainability matters along with a corporate governance section. Responsibilities listed include reviewing targets, emerging trends, legislation, impact of operations, company policies, and sourcing, and noting how operations and business practices are impacted. Review policies and the Company’s stance on key public issues.
• Caesars Entertainment Corporation (Market Cap: $7.19B)
  • Industry: Casinos & Gaming
  • Committee name: Governance and Corporate Responsibility Committee
  • Meeting frequency: At least 2x/year
  • Committee charter ESG highlights: Evaluate emerging ESG-related risks and environmental and social goals including policies and programs for achieving short-term and long-term targets.

Large-Cap

• The Clorox Company (Market Cap: $28.1B)
  • Industry: Household & Personal Products
  • Committee name: Nominating, Governance and Corporate Responsibility Committee
  • Meeting frequency: At least 3x/year
  • Committee charter ESG highlights: Oversee the Code of Conduct and the Company’s programs related to corporate responsibility and sustainability.
• L3Harris (Market Cap: $39.4B)
  • Industry: Aerospace & Defense
  • Committee name: Nominating and Governance Committee
  • Meeting frequency: At least 3x/year
  • Committee charter ESG highlights: Oversee ethics and business conduct. Consults with independent counsel over matters related to ethics and business conduct and environmental, health, and safety programs. Oversee programs and recommend actions relating to environmental, health, safety matters, charitable, civic, educational, and philanthropic activities. Monitors current/emerging strategic issues and trends relating to corporate responsibility, including social and political trends and public policy issues that may have an impact on the Company’s operations, financial performance, or public image.

Sustainability Committee

The second most common committee charters capturing ESG responsibilities were in the form of a sustainability focused committee, more deeply rooted in environmental and social topics. For companies that oversee E&S risks through a dedicated Sustainability Committee, committee responsibility generally includes:

• Oversee/provide guidance on EH&S, climate change, social, and public programs, policies, practices, partnerships, activities, and goals to ensure compliance, consistency, and impact on strategy
• Oversee progress on key environmental sustainability targets and relative initiatives, and provide advice on how to improve performance
• Maintain oversight of communications on sustainability matters
• Consider and bring attention to management regarding current and emerging sustainability matters
• Advise management on stockholder proposals and shareholder concerns related to sustainability
• Review sustainability strategy, policies, practices, and disclosures for consistency
• Review sustainable development strategies, policies and practices, compliance related to HSE incidents/laws, current/pending legal actions against company, emerging issues, inspection audits, and corrective actions reports

Examples:

Small-Cap

• Century Aluminum Company (Market Cap: $821.9.M)
  • Industry: Metals and Mining – Non-Precious Metals
  • Committee name: Health, Safety and Sustainability Committee
  • Meeting frequency: At least 2x/year
  • Committee charter ESG highlights: Review the Company’s goals, policies, programs, and performance on health, safety, and sustainability. Additionally, review laws and risks related to the matters.
• SJW Group (Market Cap: $1.8B)
  • Industry: Utilities
  • Committee name: Sustainability Committee
  • Meeting frequency: Unspecified; At least 2x/year
  • Committee charter ESG highlights: Review and monitor plans, programs, and activities related to health and safety of employees, customers, business partners, and the public, and related to environmental stewardship and sustainability, water supply and conservation, water quality, climate change, and operational efficiency. Review and monitor water supply policies and projects.

Mid-Cap

• Hillenbrand (Market Cap: $2.4B)
  • Industry: Industrial Machinery
  • Committee name: Sustainability Steering Committee
  • Meeting frequency: At least 4x/year
  • Committee charter ESG highlights: Oversight of corporate responsibility and sustainability initiatives, performance, and CSR. Strong wording around policy issues and the Company’s stance on relevant issues.
• Thor Industries, Inc. (Market Cap: $5.8B)
  • Industry: Automobiles
  • Committee name: Sustainability Committee
  • Meeting frequency: At least 4x/year
  • Committee charter ESG highlights: Heavily focused on stakeholder communications. Evaluate emerging sustainability trends or issues as it may pertain to the Company’s policies, practices, and disclosures. Take an advisory role to management if a stockholder proposal is related to sustainability matters.

Large-Cap

• Marathon Petroleum (Market Cap: $23.9B)
  • Industry: Oil & Gas
  • Committee name: Sustainability Committee
  • Meeting frequency: At least 2x/year
  • Committee charter ESG highlights: Review policies, effectiveness, and communication methods of the Company’s health, environmental, safety, and security (HES&S). Review HES&S in financial reports and with respect to legal matters and regulations that may impact the Company’s results or operations. Review IT controls. Review climate report, citizenship report, and stakeholder engagement for HES&S.
• Lowe’s Companies, Inc. (Market Cap: $124.4B)
  • Industry: Retail – Consumer Discretionary
  • Committee name: Sustainability Committee
  • Meeting frequency: At least 2x/year
  • Committee charter ESG highlights: Evaluates and reviews policies and practices related to ESG issues and impacts to supporting the sustainable growth of the Company. Continually monitors domestic and foreign issues, concerns and risks, and trends which could affect the Company’s business activities and performance. Improve corporate sustainability strategies which create value for the long-term preservation and enhancement of shareholder value. Monitor performance against relevant external sustainability indices along with the CSR. Review stockholder proposals encompassing matters related to the Sustainability Committee.

Audit Committee

For companies that oversee E&S risks through the Audit Committee, committee responsibility generally includes:

• Review internal and independent auditors’ assessment of emerging and principal risks related to the Company’s tax and finance compliance activities, technology and information security, and sustainability
• Review major risk exposures and steps taken to monitor and control exposures
• Review compliance with the Company’s Financial Code of Ethics
• Review the Company’s policies and procedures designed to promote and monitor legal and regulatory compliance and sustainability
• Review the Company’s management of financial risks including risks related to cybersecurity, insurance, natural disasters, and environmental matters

Examples:

Small-Cap

• Gentherm Inc. (Market Cap: $1.5B)
  • Industry: Auto Components
  • Committee name: Audit Committee
  • Meeting frequency: Unspecified
  • Committee charter ESG highlights: Review control and enterprise risk management processes to monitor financial, environmental, insurance, legal, and other risk exposures. Review management’s Special Disclosure for Conflict Minerals annually.

Mid-Cap

• Molson Coors (Market Cap: $8.3B)
  • Industry: Beverages
  • Committee name: Audit Committee
  • Meeting frequency: At least 4x/year
  • Committee charter ESG highlights: Broken down into categories. Risk oversight includes reviewing the Company’s policies and procedures for assessing and managing emerging and principal risks facing the Company related to tax and finance compliance, technology and information security, and sustainability, and steps taken to mitigate risk exposure. Within ethics and legal compliance, the committee to review/affirm ethics and compliance program charter and the Company’s Code. In other responsibilities, mentions review regular reports regarding corporate responsibility and sustainability efforts.

Large-Cap

• Emerson Electric Co. (Market Cap: $46.5B)
  • Industry: Electrical Equipment
  • Committee Name: Audit Committee
  • Meeting frequency: Unspecified
  • Committee charter ESG highlights: Review policies and practices on risk assessment and management, including major financial risk exposures and steps taken to monitor, mitigate, and control exposures. Review the Company’s litigation activities from the year. Annually review a summary of anticipated environmental audits and expenditures for the next fiscal year.

Overall, companies of all sizes are increasingly expanding ESG-related responsibilities within existing and new committee charters. Evolving investor expectations are trending towards the inclusion of further transparency around environmental, social, and governance matters, particularly in a mid-pandemic world. Depending on the industry, expectations may vary. However, it is clear Board oversight of significant industry-specific ESG matters is becoming the norm, and that trend is not dissipating anytime soon.

*Market capitalization as of 2pm CST on 8/24/20

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