Corporate Governance

Shearman & Sterling LLP Governance Amid Crisis – How 2020 Changed the Boardroom | 5 for companies to publish a disclosure in line with industry-specific Sustainability Accounting Standards Board (SASB) guidelines by the end of 2020 and disclose climate-related risks in accordance with the Task Force on Climate-related Financial Disclosures' (TCFD) recommendations. State Street, in its annual letter to board members, stated that it now views ESG considerations as essential, not optional, for long-term strategy, noting that "shareholder value is increasingly being driven by issues such as climate change, labor practices and consumer product safety." The letter was forceful in pointing out that despite growing recognition among board members Statement diminishes shareholder rights without proposing new mechanisms for board and management accountability to any other stakeholder group. As noted above, it is the sense of confidence in the ability to directly influence corporate strategy through direct engagement or, when necessary, votes that has enabled investors like BlackRock and State Street to speak out strongly in favor of stakeholder governance. The CII response reflects the more traditional view of its BlackRock Chairman and CEO Larry Fink's 2020 annual letter to CEOs, which was published early in 2020 before the COVID-19 pandemic set in in the United States, built on the theme of past letters and the Business Roundtable statement, noting that "a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply with customers and adjust to the changing demands of society… purpose is the engine of long-term profitability." The emphasis of the BlackRock letter was strong on climate change and sustainability with a focus on improving and standardizing sustainability disclosures. Fink's letter called Shortly after the Business Roundtable statement was issued, the Council of Institutional Investors (CII) issued their own statement that was firmly in opposition. While conceding that boards and managers need to sustain a focus on long-term shareholder value, the CII argued that achieving that objective requires respecting stakeholders but retaining clear accountability to company owners. In CII's view, the Business Roundtable of the importance of ESG issues, fewer than 25% of the companies it evaluated have meaningfully identified, incorporated and disclosed material ESG issues in their strategies. State Street therefore announced its plan to use its recently created "R-Factor" ESG scoring system (which is based on SASB standards) to take voting action against directors, commencing with the 2020 proxy season, at companies that are laggards based on their R-Factor scores and who cannot articulate how they plan to improve their scores. broader investor constituents who are not as convinced that shareholders will continue to be respected as owners. It also reflects traditional arguments against stakeholder governance that corporations are not well equipped to effect public policy and that accountability to everyone is accountability to no one. Statements from BlackRock and State Street CII Response to Business Roundtable Statement

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