Investors Have Spoken: What Can We Learn About ESG from the 2021 Proxy Season?

The 2021 proxy season marked the apex of a tumultuous year in which companies tackled pandemic mitigation, work-from-home environments, and urgent conversations around racial inequity and the climate crisis—meaning environmental, social, and governance (ESG) issues reached heightened importance in every boardroom.

The corporate ESG focus culminated in the theater that took place at the Exxon Mobil Corp. annual meeting in late May. On that day, a small but impactful activist organization teamed up with three large institutional investors to take on what was once the most powerful company in the world. When the dust settled and the final votes were tallied, three of the board’s longstanding directors were unseated.

Changing attitudes around the role of enterprise in our society mean that board directors and executive leadership across the business world must engage on ESG. During the recent NACD Texas TriCities Chapter webinar “2021 Proxy Season & ESG: What Just Happened?” speakers Anne Sheehan and Kris Ramesh addressed the reasons for ESG’s elevated agenda position, the challenge of measurement, and the consequences of thinking of ESG as a blip that will go away.

Here are some key insights from the webinar, which was moderated by chapter board member Travis Wofford.

Having Deliberate Conversations

Commentary during the webinar emphasized one key point: although ESG is here to stay, how we measure both inputs and outputs has yet to be decided. Organizations such as the Value Reporting Foundation and the Task Force on Climate-related Financial Disclosures are attempting to create standardized reporting, but with multiple players in the game, the waters are muddy.

That being said, having deliberate conversations in our boardrooms is paramount. How we address ESG at the board level impacts not only a company’s license to operate—in many industries—but can also provide strategic clarity and competitive advantage. Two questions that all directors should consider: What inputs will result in measurable outcomes? What ESG metrics are critical and material to our company’s operations and strategy?

Looking individually at “E,” “S,” and “G,” directors should also consider the following questions:

• Environmental:
  • Based on greenhouse gas and carbon footprint measurements, how are we achieving carbon neutrality?
  • How are we measuring water use and waste?
  • On the topic of our environmental narrative (which everyone has seemed quick to develop), do we have metrics to back up our progress?
• Social:
  • How are we measuring the achievement of diversity in our organization?
  • How is management impacting the processes that result in those outcomes? Are they examining opportunities for promotions, especially into positions with profit and loss responsibility?
  • What is our impact on local communities?
  • Do those in our supply chain reflect the values of our organization?
• Governance:
  • Do we have transparency on how our board governs?
  • Have we set targets on board diversity?
  • Do we have the right set of skills in our boardroom to provide the best independent oversight of the organization and its strategic imperatives?
  • Is there transparency in and a performance orientation to the compensation structure for the CEO and executive leadership?
  • Are our compensation practices aligned with investor and stakeholder interests?

Companies’ Progress on ESG

Over the past year, increased investor, activist, and regulatory focus has resulted in significant progress by many boards relative to ESG. Of 456 new directors who joined S&P 500 boards in the past year, 72 percent are women or people of color. Meanwhile, major oil companies, for example, have shifted strategy relative to net-zero carbon emissions targets and investment in alternative energies.

Some of the largest car manufacturers have declared electric vehicle production goals. Many corporations—across numerous industries—have committed to significant investment in historically Black colleges and universities and community programs to serve underrepresented populations.

There is no doubt that the private sector is accepting a larger role in creating opportunity and equity across our society—particularly during a time when the pandemic has highlighted inequities of access.

Avoiding a Confrontation

For boards wishing to avoid an Exxon-type confrontation with investors, our panelists offered the following advice:

• Actively engage in conversations with shareholders. The days of keeping board directors away from shareholders are over. It is particularly important for compensation and nominating and governance committee chairs to engage with key investors in order to create a common understanding of various ESG concerns and to demonstrate transparency in the board’s oversight of strategy.
• Focus significant energy on the firm’s capital allocation. How much money is spent on maintaining legacy strategy, and is there an appropriate amount spent on innovation? A strong narrative around the capital allocation strategy can put investor concerns at ease if they believe the board is focused on the company’s future impact.
• Remember that having a good narrative is important—but not enough on its own. If the company wants to make a commitment, be sure that it’s backed up with facts and measures. Empty promises can easily be called out as greenwashing.
• Don’t underestimate the impact of passive index funds. They are entering the ESG conversation and can play a big role in shifting not only funds but also mind-set.

A decade from now, we will look back on the 2021 proxy season as a pivotal time in corporate history. Shareholders are now holding boards accountable for the wider environmental and social impact of enterprises—and they are willing to challenge any director they deem unfit for this new purpose.

Anna C. Catalano serves on the boards of Willis Towers Watson, Kraton Corp., HollyFrontier Corp., Frontdoor, Appvion, and the NACD Corporate Directors Institute. She is also president of the NACD Texas TriCities Chapter.