Tracking the “G” in ESG: Why It Matters and How Technology Can Help

Ross Pounds

It’s easy to overlook the “G” in ESG these days. A multi-page COO succession plan can feel less immediately impactful — and frankly a bit less exciting — than more pressing items on the agenda. Rules around board classification, proxy access, voting thresholds and how shareholders call a special meeting can seem arcane to the uninitiated.

But investors overlook governance at their peril.

Governance represents the structure, oversight, code, values, transparency and reporting of a company’s operations at the highest level. At the same time, many of the activities that fall under governance have immediate, urgent implications. Missing real-time alerts on activist campaigns, voting results, poison pills and short-selling efforts can have big bottom-line implications.

Fortunately, knowledge is power, and there are measures boards can take to stay in the know and ahead of change and procedural activism. Read on for an overview of what’s shaping the landscape and how technology can help. 

Shifting Balances of Power for Shareholder Proposals and Poison Pills

Regulators and advisory firms have been intensifying their governance rules and guidance — and the impact is showing in annual meeting agendas, board composition and even corporate ownership.

Insightia, a Diligent brand, has noticed a divergence in recent annual governance meetings. Several proposals related to governance received below-average support (see Vertex Energy or Universal Health Services) while others swung in the opposite direction (see Goodyear or Tesla.)

Some proposals have become harder to fight. At the end of last year, the SEC made a move that SP Global notes “emboldens shareholder activists.” It rescinded three years of restrictions that made it harder to challenge corporate strategies in areas like climate change, diversity and lobbying. At Costco’s annual meeting in January, a majority (69.9%) of shareholders voted in favor of activist Green Century’s proposal to set science-based targets to reduce greenhouse gas emissions — a proposal Costco had challenged up until the SEC ruling.

In terms of takeovers and buyouts, even amid high-profile examples like Twitter’s evolving situation, some boards have been able to strengthen their resistance. Glass Lewis expressed support for “poison pills that meet certain conditions” such as closing an important merger, managing a clear and present hostile takeover threat, or other contextual factors like a severe drop in stock price due to a widespread industry or market downturn. In June, for instance, cancer therapy developer Zymeworks thwarted a hostile takeover attempt by All Blue Capital on “valuation grounds.”

Procedural Activism Moves to the Board Itself

In addition to making proposals, many activists also want a say in who’ll be voting on these proposals and how.

In September, Elliot Management got four new board candidates onto the ballot at Cardinal Health. The healthcare giant also agreed to a board expansion and a “business review committee to support a comprehensive review of its strategy, portfolio, capital allocation framework and operations.”

Activist investor Dan Loeb, whose hedge fund Third Point owns a nearly $1 billion stake in Disney, recently declared that the company’s board needed a “refresh” of new members. In Geneva, activist investor Bluebell Capital continues its ongoing fight at luxury goods giant Richemont to get shareholders to elect a rival executive to the board and make what fashion trade publication WWD calls “sweeping changes to corporate governance.”

In a move that opens the door to even more activist input on board composition, Tesla’s board recently approved a proposal allowing investors to nominate directors. Imagine the potential impact on board skillsets as well as on experience, discussions, decisions and votes — not to mention the introduction of universal proxy cards in corporate board elections.

People are watching who’s on which boards, and why and what it might mean for corporate value. In late August, fast-food giant McDonald’s made headlines for something other than burgers and fries. A longtime board member would be replaced by not one but three new directors from the tech, hospitality and pharmaceutical sectors.

“Companies constantly make changes to their boards, but the timing of McDonald’s board reshuffle seems peculiar, as does the ouster of a veteran director,” Fortune reporter Lila McClelland observed, noting the “lack of outward-facing clarity as to what prompted these changes.”

Meanwhile, investors like Vanguard are keeping a keen eye on committee structures, and investor advisory firms like Glass Lewis are tracking which boards link executive compensation to ESG metrics. Boards need to see what they’re seeing, so they can react accordingly.

Staying Ahead of Procedural Activism

As activists increasingly seek a say in the details of governance, investors and advisors need to keep abreast of what’s going on. How are investors and proposals seeking to shape board rules and operations? Even more importantly, where can they find opportunities to enact positive changes of their own?

Until recently, much governance data was difficult to track, such as overboarding and open board roles. Sometimes the data’s out there, but it requires hours, if not days, of staff time manually searching public records, shareholder data, media outlets and third-party systems that often require expensive subscriptions. Other information is not in the public domain at all or requires complex calculations beyond staff bandwidth, resources or expertise.

Today’s governance technology makes it easier than ever to uncover data on how a company measures up. Equipped with data, sophisticated analytics and innovations like AI, boards can unearth:

  • A company’s “health score” for vulnerabilities and risk
  • Snapshots of media exposure and reputational risk across a variety of issues
  • How the company compares with others in areas like executive compensation and governance benchmarks
  • Specialized market intelligence for reporting and forecasts

In today’s world of shareholder proposals, universal proxy ballots, procedural activism and takeover bids, poor governance can lead to poor decisions — and this is something investors as well as corporate boards need to watch. Modern governance tools both streamline and sharpen the intelligence-gathering process, and help investors treat governance as the core component of ESG that it’s always been.

Learn more about modern governance solutions from Diligent.

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Ross Pounds
Ross Pounds, a Senior Manager at Diligent and expert in ESG, also has deep experience in governance, risk, audit and compliance. Ross has done extensive work on how organizations can prepare for climate accounting regulations and best achieve sustainability and diversity goals.