Corporate Governance

Shearman & Sterling LLP The Climate Changes for ESG | 7 Look to Shareholders An increasing number of shareholders have viewpoints on ESG issues. Nearly all of the largest institutional shareholders (and not just the public pension funds) have publicly communicated the importance of ESG to them (and their clients) and, in many cases, have prioritized certain key issues. Many institutional investors are producing detailed reports that outline their ESG investing priorities. These reports are important sources on the issues that institutional investors care about, but, more importantly, they provide an important perspective on how institutional investors think about these issues and what level of engagement they expect. As with many other mainstream issues that boards, general counsels and corporate secretaries have had to address, many ESG issues start from a kernel planted by an issue advocate that grows over time. Keeping a close eye on what is developing in the shareholder proposal cycle, watching how shareholder voting is changing and keeping abreast of the issues that advocates are speaking about will help prepare companies for the issues that may be next on the board's agenda. Look to the Community ESG covers a broad cross-section of issues. The ones that are global in nature, like reducing greenhouse gas emissions, water management plans and workers' rights, have widespread coverage by institutional investors and issue advocates and will be the ones employees read about in the media. It is also important to understand that some ESG issues are local. How does a company impact the communities in which it operates and where its employees live? These include living wage issues, support for public education, decisions related to property and physical plant and community-based activities. It is important to understand the role the company can play in the important issues affecting its communities and not to lose sight of local issues when evaluating its global strategy. Look to Employees We are in an era where the actions of employees can have a significant impact on decisions made in the boardroom. Employees not only care about issues that relate to the employee-employer relationship, such as the absolute levels of pay, gender pay equity, employment conditions and terms and policies regarding paid leave, but also care about the "corporate citizen" they work for. Employees are increasingly selective about where they work because they want the company they work for to, in some degree, share their values. And we see this in some of the recent "employee activism" when a company's actions appear to veer from what the company's employees believe are their shared values. Whether it is employees challenging their company's unwillingness to adopt a policy that can promote board diversity or decisions to continue commercial relationships with the federal government that are viewed as indirectly supporting controversial programs, employee activism is on the rise. And it is getting more powerful. Value or mission statements do not seem to be enough for employees unless there is something behind them. Ignoring the perspective of employees could be short-sighted in the current environment. It can impact recruitment and retention and employees can often serve as a good barometer for public sentiment. Seeking the input of employees and, better still, involving employees in the company's ESG efforts can only strengthen the company's efforts.

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