Without a doubt, 2020 will go down in history as one of the most infamous years in modern time. As the COVID-19 pandemic drastically affected the globe, the U.S. economy was ravaged by the virus, forcing corporations across America to adapt and shift operations on the fly, and the impacts continue a year since the onset of the pandemic. Of course, the nation is also in the midst of a movement centered on social equality, which has been a key topic of discussion at the corporate level. Given the many events of the past year and the current corporate landscape, companies certainly seek for a brighter outlook.
For its annual Corporate Governance Outlook 2021 report, published in conjunction with Donnelley Financial Solutions (DFIN) and Hogan Lovells, Equilar analyzed the proxy statements and shareholder voting results of the 500 largest U.S. companies by revenue (Equilar 500). This feature highlights key findings and commentary from the report, including the most critical topics board and executive management teams will face in 2021 as the world continues to fight the COVID-19 pandemic.
The COVID-19 pandemic has left a lasting impact on many aspects of life, with Corporate America hardly being left unscathed. At the onset of the pandemic corporate leaders were left scrambling for ways to not only keep their operations afloat, but also protect the most valuable asset they have to offer: employees.
Prior to the pandemic, Human Capital Management (HCM) issues were gaining tremendous traction as investors became more aware that a concrete and thorough HCM plan can help drive performance, and thus should be a greater part of overall business strategy. Of course, the COVID-19 pandemic reinforced this notion as the focus on employees became even more critical, particularly as companies sought to ensure the health and safety of their employees.
In February 2019, SEC Chairman Jay Clayton accelerated the HCM movement with his remarks to the SEC’s Investor Advisory Committee. “Today, human capital and intellectual property often represent an essential resource and driver of performance for many companies,” said Clayton. “This is a shift from human capital being viewed, at least from an income statement perspective, as a cost.”
Of course, HCM entails a wide range of topics including employee health and safety, talent development, pay equity, benefits and training, mental health and much more. Given the heightened attention around these hot-button topics in light of the pandemic, companies are making a concerted effort to not only adequately address issues related to HCM, but also disclose their policies.
“COVID-19 and corporate responses to this calamity shone a spotlight on employee health and safety, including the availability and practicability of remote work, and company flexibility and resiliency,” said Ron Schneider, Director, Corporate Governance Services at DFIN. “They also highlighted how company performance could be affected by an unforeseen event. As you formulate your story, think of how your workforce, and other stakeholder groups have been impacted by the pandemic. As with any new or additional disclosure, be sure to work closely with legal counsel to mitigate any potential risks from otherwise well-intended statements.”
While the COVID-19 pandemic has exacerbated the attention around HCM, companies must certainly prepare a plan to address these issues post-pandemic and beyond.
“COVID-19 and corporate responses to this calamity shone a spotlight on employee health and safety, including the availability and practicability of remote work, and company flexibility and resiliency.”
– Ron Schneider, Director, Corporate Governance Services at DFIN
Over the last few years, environmental, social and governance (ESG) topics have continuously found their way to the top of the radar for all public companies. The ESG momentum has only accelerated in the last year as evidenced by current events related to diversity, climate change and income equity. Therefore, for a corporation to stay ahead of investor interests related to ESG, executives and boards must keep these topics top of mind.
“In 2021, companies should be prepared to answer detailed questions about these important topics from investors, including how these topics are reported up to the board,” said John Beckman, Partner at Hogan Lovells. “Investors increasingly are asking companies about the board’s process for overseeing ESG and where that oversight appears in the company’s governance documents. Boards and executive teams should be prepared to answer these questions about board oversight of ESG and for 2021 to be another robust year of shareholder engagement on ESG in general.”
As ESG continues to thrive, it comes as no surprise that since 2016, the percentage of Equilar 100 companies disclosing or mentioning ESG-related policies in the proxy has increased significantly. In 2020, 56.1% of companies either mentioned or disclosed such policies, with nearly 34% doing the latter (Figure 1). 2019 marked the first year in the study in which the percentage of companies disclosing ESG-related policies was higher than the percentage of companies mentioning these policies—this trend continued, with the gap increasing between the two data points, in 2020. On the contrary, in 2016, just 2% of companies disclosed similar policies, and only 5.1% of companies mentioned them.
Perhaps one of the most talked-about ESG topics in 2020 was the issue of diversity. While the conversation around racial equality continues to surface across the nation at a macro level, companies have also sought to address the topic at a micro level within their organizations. In regard to governance-related issues, this tends to come in the form of diversity at the board and executive levels.
Several companies have elected to disclose diversity-related information in their board or director assessments and board composition policies. In 2020, 78% of Equilar 100 companies included board composition disclosures related to gender, while 65% of companies did so in relation to ethnicity or race (Figure 2). On the other hand, 81% of companies included gender as part of their board or director assessments, and similarly, 80% of companies included ethnicity or race as part of their assessments.
“Going into 2021, it appears likely that diversity will gather additional momentum, particularly around racial and ethnic diversity,” said Alex Bahn, Partner at Hogan Lovells. “The racial injustice and social inequalities movements of the past year have encouraged additional attention and focus on diversity in the boardroom and management, as well as the workforce overall. It is also clear from commentary and policies of large institutional investors and proxy advisory firms that they are anticipating heightened disclosure around diversity of the board and workforce, reflecting their views that companies should be taking proactive steps toward increasing diversity across their organizations.”
Investor pressure will continue to mount as the topic of diversity has picked up traction in 2020 through social movements and legislation passed in states like California. Diversity is a critical topic that must not be overlooked at companies that seek to perform at a high level.
While 2020 was an unusual year in many facets, one thing that has remained consistent is the need to engage with shareholders. Shareholders are keeping a close watch on how companies have addressed topics such as the COVID-19 pandemic and social justice, as well as how they have stayed ahead of common governance topics such as executive pay and board composition in light of the current landscape. Nevertheless, shareholder engagement remains an area of focus, and companies must be transparent about their governance policies and practices.
In 2020, 89% of Equilar 100 companies either mentioned or disclosed shareholder engagement-related policies in their proxy statements (Figure 3). This is a near 14 percentage point increase from 2016 when this figure stood at 74.5%. The prevalence of shareholder proposals also increased in 2020. In 2020, the Equilar 500 saw 360 shareholder proposals, an increase of 9.1% from 2019 when 330 shareholder proposals were filed.
With 2021 in full gear, the year will likely be highlighted by the distribution of a COVID-19 vaccine and the start of a new U.S. presidency. However, emergence of the trends uncovered in 2020 must be faced intelligently and in a timely manner. The spotlight will be on corporate leaders as they guide their organizations through the remainder of the pandemic and into more promising grounds.
Amit Batish is Editor-in-Chief of C-Suite and Director of Content at Equilar.