Shearman & Sterling LLP ESG and Incentive Compensation Plans: Are Investors Satisfied? | 28
ESG and Incentive
Compensation Plans:
Are Investors Satisfied?
Matthew H. Behrens and Giulia La Scala
Insights
The "stakeholder" view of corporate
governance, which argues that
corporate decision-makers have
a responsibility to consider the
impact of corporate activities not
only on shareholders but on society
as a whole, has long been debated,
with some scholars even finding
arguments in the writings of Adam
Smith that companies may weigh
competing stakeholder claims.
1
Recent
years, however, have witnessed the
"stakeholder" view no longer confined
to the ivory halls of academia,
but present in the wood-paneled
board rooms of institutional investors
and the fluorescent-light-drenched
offices of government regulators.
For those that would argue that
issuers are embracing this view,
the continuing growth of ESG metrics
in incentive compensation plans
has become a primary piece
of evidence. For example, this year
our survey data shows that 60 of the
Top 100 Companies disclose that they
incorporate ESG metrics into their
incentive compensation programs,
which is a 19% increase from last year.
Notwithstanding their seeming
embrace of the "stakeholder" view,
U.S. issuers are facing increasing
pressure to prove that their claims
of stakeholder focus are grounded
in fact and evidenced by action.
To that end, disclosures around
ESG metrics in incentive plans are
increasingly being challenged as
vague or lacking the transparency
necessary for outsiders to gain
a true understanding of the issuer's
ESG goals and management's
performance against those goals.
2
Notwithstanding this desire for more
detailed compensation-related ESG
disclosure, issuers face the ongoing
challenge of how to define meaningful
and objective metrics. Further, as
work continues on the establishment
of a global set of standards for ESG
reporting similar to financial reporting
(particularly with respect to climate
reporting), questions remain as to
whether such a standard would in
fact be beneficial.
This article summarizes the current
status of incentive compensation
disclosures and the challenges
to those disclosures, as well as
focusing on the work being done to
establish a more transparent reporting
regime. Finally, the article offers
considerations for issuers looking
to provide more meaningful disclosure
around the use of ESG metrics
or considerations in their incentive
compensation programs.
1
See J.A. Brown & W.R. Forster, "CSR and
Stakeholder Theory: A Tale of Adam Smith,"
Journal of Business Ethics, at 112, 301–312,
https://link.springer.com/article/10.1007/s10551-
012-1251-4 (2013).
2
See L A. Bebchuk, & R. Tallarita, "The Perils
and Questionable Promise of ESG-Based
Compensation," Forthcoming, Journal
of Corporation Law (2022) Harvard Law
School Program on Corporate Governance
Working Paper 2022–3, https://ssrn.com/
abstract=4048003 or http://dx.doi.org/10.2139/
ssrn.4048003 (March 4, 2022).
20 YEARS
