Corporate Governance

2020_Corporate Governance and Executive Compensation

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Shearman & Sterling LLP 12 | Governance Amid Crisis – How 2020 Changed the Boardroom • Who are the company's suppliers and service providers? Beyond questions of diversity and human rights, are they perceived as good corporate citizens? • Are the company's products and services, or the way its products and services are being used, consistent with the overall message the company wants to convey to its stakeholders, and do they reflect how its stakeholders expect the company to be operating as part of society? Does the company need to take action to mitigate or prevent actual or perceived social harm? Among other things, companies should be considering the following: • What are the key ESG risks, and what impact do these risks have on the business and shareholder value? • How do policies and the actions of the board and executive management in addressing human capital issues and engagement with customers, suppliers and the community relate to, or even conflict with, the exercise by directors of their fiduciary duties and their legal obligations to shareholders? • What industry and advocacy groups does the company participate in or support? Do the objectives of these organizations align with how the company wants to be perceived, the sentiments of its customers and employees and with public views more broadly? • How does the company manage its political contributions and lobbying efforts? Are they consistent with its messaging on corporate purpose? CONCLUSION The trend we have seen over the last several years towards a deeper corporate focus on ESG issues has not abated. Governance has always been a priority for shareholders, and environmental issues have gained focus over the last few years as climate change issues took on greater meaning, representing a global sustainability challenge that demands broad-based corporate action. More recently, calls for stakeholder governance from both corporate leaders and shareholders and the unexpected but powerful impacts of the COVID-19 pandemic and the social justice movement have intensified the focus on the social aspects of the ESG debate. Company boards must engage on these issues. This heightened emphasis will force a deeper consideration of issues related to the company's human capital. Diversity has moved well past the boardroom and the executive suite, as it is clear that increasing diversity in the top roles in corporate America will not come with a Rooney Rule alone, but with increasing diversity in those roles and opportunities that are considered the early stepping stones for the top jobs. We are also seeing more and more companies demanding that those that do business with them, including key suppliers and service providers, meet baseline levels of diversity. Companies will have to make changes in recruitment, hiring, training, mentoring and promotion to reflect the expectations that have developed, as calls for greater diversity and fairer pay will no doubt escalate in the wake of the COVID-19 pandemic and social justice protests. Compensation issues will also take on even greater significance with companies needing to put executive compensation in context in a year where the economy has suffered, company revenue streams have been decimated and unemployment rates have dramatically increased. Political polarization and the politicization of what should be non- political areas of business have forced companies and boards to react to current events and introduced new risks around public perceptions. It is becoming harder for companies to "stick to their knitting" and stay out of the political and social debate. Increasingly, companies and their boards are called on to comment on or make statements about current events that have broad public impact and therefore matter to their employees and customers, such as the Black Lives Matter movement. These forces may bring renewed attention to corporate political activities and lobbying policies and disclosures, and a company's efforts in those areas will need to support its broader efforts at establishing a coherent public image. Separately, with stakeholder governance taking shape, companies will face new challenges in navigating a consistent course of conduct and messaging on complicated social issues where there will always be critics. In addition, boards of U.S. companies will need to assess the interests of customers, employees, communities and other stakeholders, reconcile them with the interests of shareholders and communicate a convincing strategy for producing long- term shareholder value. This will put more emphasis on skillful shareholder engagement. Fortunately, major institutional investors seem not only willing, but eager to engage.

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