Sustainability Oversight and Disclosure - ESG Pay Links

Six different proposals at 18 companies ask for reports on specific types of executive pay links to specific kinds of environmental and social issues. Nine of the companies with these resolutions have lodged challenges to the resolutions at the SEC to which the commission has yet to respond. Only three of the resolutions have been withdrawn, one with a clear agreement—suggesting that companies are not enamored of these resolutions, even though investors in general seem to be interested in adding this corporate governance approach to their suggested toolbox of corporate solutions to ESG management.

Drug pricing:
Picking up the thread of other resolutions on rising prices (see here), at AbbVie, Amgen, Biogen, Bristol-Myers Squibb and Eli Lilly, the resolution from ICCR members requests an annual report “on the extent to which risks related to public concern over drug pricing strategies are integrated into [the company’s] incentive compensation policies, plans and programs…for senior executives.” It says the report

should include, but need not be limited to, discussion of whether incentive compensation arrangements reward, or not penalize, senior executives for (i) adopting pricing strategies, or making and honoring commitments about pricing, that incorporate public concern regarding the level or rate of increase in prescription drug prices; and (ii) considering risks related to drug pricing when allocating capital.

SEC action—All five companies have lodged SEC challenges. Each says it relates to ordinary business. Biogen and Bristol-Myers Squibb also say it is moot—because existing oversight by the board compensation committee takes into account reputational risks. Eli Lilly says it is moot because it already has increased disclosure on its drug pricing and efforts to expand access to its medicines, and already rewards executives for leadership on pricing strategy.

Executive diversity:
Another request, from Zevin Asset Management, asks tech companies Alphabet, Amazon.com, Apple, Citrix Systems and eBay about executive diversity. It wants a report

assessing the feasibility of integrating sustainability metrics, including metrics regarding diversity among senior executives, into the performance measures of the CEO under the Company’s compensation incentive plans. For the purposes of this proposal, “sustainability” is defined as how environmental and social considerations, and related financial impacts, are integrated into long-term corporate strategy, and “diversity” refers to gender, racial, and ethnic diversity.

Another proposal is more detailed, at TJX, but with the same goal. It requests a report by November, to be issued annually,

assessing the feasibility of integrating sustainability metrics into the performance-based component of the Chief Executive Officer’s (“CEO”) compensation. It should document whether sustainability metrics are currently integrated into performance-based CEO compensation, assess the feasibility of structuring specific sustainability metrics into future pay, and describe any appropriate next steps toward implementation.

The proponent recommends that to assess feasibility, the Committee should consider and report on, at a minimum, whether:

TJX currently measures or monitors sustainability metrics appropriate for linkage to CEO compensation;
It is feasible or appropriate to weigh metrics differently based on their relevance to TJX’s short or long-term performance; and
There are additional sustainability metrics that TJX does not yet track that could be more suited to executive compensation considerations.

SEC action and withdrawal—Amazon.com challenged the resolution at the SEC on the grounds it was too vague as well as false and misleading, primarily because CEO Jeff Bezos does not receive incentive compensation. Zevin withdrew before the SEC responded. Apple successfully challenged the proposal; the SEC staff agreed with its contention that it was substantially similar to a 2017 proposal on linking pay to diversity metrics, which did not earn enough to qualify for resubmission.

History suggest an agreement could come at Citrix, where shareholder proponents in 2015 and 2016 withdrew resolutions on LGBT rights, board diversity and EEO and affirmative action after agreements. eBay is contending the resolution is moot since the company already holistically considers diversity in compensation decisions.

Cyber risk:
At Verizon Communications, the issue is privacy and cyber security. The resolution from NYSCRF wants a report “assessing the feasibility of integrating cyber security and data privacy metrics into the performance measures of senior executives under the company’s compensation incentive plans.” The company is contending at the SEC that it concerns ordinary business since it deals with implementation of the company’s cybersecurity program and data protection.

General ESG links:
Another proposal is about general ESG executive pay links, asking five companies—AT&T, DowDupont, Expeditors International of Washington, United Parcel Service and Walgreens Boots Alliance—to “prepare a report assessing the feasibility of integrating sustainability metrics into the performance measures of senior executives under the Company’s compensation incentive plans. Sustainability is defined as how environmental and social considerations, and related financial impacts, are integrated into corporate strategy” over the long term. It is new to all but Walgreens, where it earned 23.1 percent in 2017 and 5.7 percent in 2015.

A closely related resolution from The Heartland Initiative, which advocates for human rights, asks RE/MAX to take action, not just report. It says the company should “include sustainability as one of the performance measures for senior executives under the Company’s incentive plans.” It uses the same definition of sustainability included in the other proposal.

Withdrawal and SEC action—Zevin Asset Management withdrew at AT&T after the company agreed to disclose key sustainability goals and performance in its proxy statement, while Clean Yield withdrew at Walgreens.

TJX contends its proposal can be excluded because a previous similar proposal did not earn enough support for resubmission. It notes that a proposal seeking a link between CEO compensation and diversity performance earned 4.9 percent in 2016 and 4.7 percent in 2017, not the 6 percent it needed to be resubmitted as a second-year proposal.

Fossil fuel reserves:
As You Sow has resubmitted a resolution from last year about a fossil fuel linkage at Devon Energy. It earned 6.9 percent in 2017 and 3.8 in 2016 and this year must surpass 10 percent to qualify for resubmission. The resolution asks for a report “that assesses, in light of global concerns about climate-change and the resultant pressures to transition to a low carbon economy, the benefits and risks of continuing to use oil and gas reserve additions as a metric in named executives’ compensation.”

Risky business: NYSCRF has a resolution before Wells Fargo that the company has challenged on grounds that it duplicates another from the Sisters of St. Francis of Philadelphia about ethics, which it intends to include in the proxy statement. The SEC has yet to respond. The detailed resolution seeks a report on:

whether the Company has identified employees or positions, individually or as part of a group, who are eligible to receive incentive-based compensation that is tied to metrics that could have the ability to expose Wells Fargo to possible material losses, as determined in accordance with generally accepted accounting principles;
if the Company has not made such an identification, an explanation of why it has not done so; and
if the Company has made such an identification, the:
a. methodology and criteria used to make such identification;
b. number of those employees/positions, broken down by division;
c. aggregate percentage of compensation, broken down by division, paid to those employees/positions that constitutes incentive-based compensation; and
d. aggregate percentage of such incentive-based compensation that is dependent on (i) short-term, and (ii) long-term performance metrics, in each case as may be defined by Wells Fargo and with an explanation of such metrics.

The requested report would provide shareholders with important information concerning incentive-based compensation that could lead employees to take inappropriate risks that could result in material financial loss to our company.

Advocacy Position: Focus On Climate Proxy Votes by Major Investors