September 2023

Chris Clark conducts interviews with leading corporate directors and subject matter experts for Stuart Levine & Associates, a global consulting and leadership development company. The Planet Governance™ interview series features the views of corporate directors, chief executives, and governance experts on timely issues from succession planning to stakeholder activism to cyber resiliency.

This well-known and well-respected advisor views ESG as either risk mitigation, identification, or preservation of stakeholder rights…

Robert McCormick is presently a Senior Advisor at Third Economy and an Advisory Council Member at PJT Camberview. Prior, Bob oversaw policy development of Glass Lewis’ proxy voting guidelines and the analysis of 20,000 Proxy Paper research reports on shareholder meetings of public companies in over 100 countries.

Before joining Glass Lewis, Bob was Director of Investment Proxy Research at Fidelity Investments, where he managed the proxy voting of 700 mutual funds and accounts, holding 5,000 securities worth $1 trillion. Of note, Bob frequently speaks at industry conferences and has appeared on NPR, CNBC, Fox Business News, Business News Network, BBC, Board Member’s This Week in the Boardroom, Swiss TV, and Bloomberg television. Bob was named one of the 100 most influential people on corporate governance by Directorship magazine in 2015, and from 2008-2012. Bob serves on the Advisory Board of the Weinberg Center on Corporate Governance at the University of Delaware and the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School.

Robert McCormick

Robert McCormick

Chris: Bob, welcome to the wonderful world of Planet Governance. To quote my CEO Stuart R. Levine, let’s cut to the chase.

I gleaned something from Bloomberg in a recent article that was skewed to the banking community. The gist of the story — bankers hate saying ESG, but they’re hardwiring it into their work. The two most telling points from the survey showed only 18% of respondents view backlash as an obstacle, also fairly surprising, they found the overwhelming majority of bankers want politicians to stop interfering in the ESG issue.

On a broader note, companies are wavering on ESG (Environmental, Social, and Corporate Governance), but Fortune 500 CEOs still think fighting climate change is good business.

That said, is the ESG backlash sustainable?

Bob: I think both comments go to one of the challenges in this space:  what does ESG mean? ESG discussions sometimes devolve into semantics about each topic and it’s easy to pigeonhole issues if you put them in a certain bucket. Generally, ESG is either risk mitigation, identification, and management, usually relating to “E&S” factors or the creation and preservation of shareholder rights via the “G”. When you look at the many factors that managers evaluate at potential companies to invest in, they are of course going to analyze environmental risks. In addition, when it comes to the “S”, i.e., social issues, you’re looking at a range of issues such as risks that may stem from the company’s operations in another country with weaker labor laws than in the United States.

Many of the issues investors consider may not have traditionally been called ESG or SRI (“Socially Responsible Investing”) but of course, these are often ultimately enterprise risks that I think were always being examined at least in part. Further, portfolio managers are being encouraged and pushed to look at ESG issues more closely, so they can report on such efforts accordingly as signatories of the UNPRI.

Chris: Would you define that, Bob, because not everybody’s familiar with that acronym?

Bob: It’s the United Nations Principles for Responsible Investment (a.k.a. “UNPRI”). Itestablishes a baseline for companies and investors in terms of how they look to invest and operate sustainably, including for example their environmental impact. It can also be social impact in terms of treatment of employees and operations in a country with weaker worker safety regulations or less democratic regimes that may impact employees’ willingness to work there… or people’s willingness to buy products from there.

I think the portfolio managers are thinking that while they don’t necessarily fully align with ESG as a concept they recognize the underlying issues are essential to what they look at when they look at the risks inherent in buying shares in a company. In other words, do the investee companies manage those risks properly? I think that’s where they might be getting that disconnect in what ESG really means. Everyone has probably a different definition because it’s as yet undefined and some people have a more extreme view that it’s purely for “woke” purposes but has nothing to do with shareholder value.

The opposite end of the spectrum is people think, this is actually going to drive or create shareholder value. I think the reality is somewhere in the middle and it ultimately depends on how you define ESG.

Chris: When you’re talking about stakeholders, it’s their expectations of how organizations and companies will respond to ESG. It’s complex and nuanced, not just for management or investors but also for the board of directors.

Bob: Absolutely. The board members may bring their own experiences which may be more pragmatic regarding the need to spend a lot of money reporting on these issues. They may think money and time invested in the gathering and disclosing the requested data may not have actually any impact on the bottom line because the information requested is overly broad, and there may be a particular fact that a survey or reporting framework is seeking from the company even though it has no business in that area, but they still have to spend the time and resources gathering that data.

They may think of it as more of a chore or burden without any benefit. The benefit is a bit harder to define because it’s whether investors will look at that as a relevant data point in their investment analysis. You would want companies to be able to attract investors who view the information that they’re getting as helpful to making an investment decision. Nevertheless, if nothing else, it helps the governance and stewardship teams understand that these issues are, one, identified and understood then two, that they’re being addressed in some way that mitigates the risks to the company and ultimately shareholders. It is particularly acute with passive index fund holders. They can’t sell, they can’t follow the Wall Street walk so the only way they can protect their investment is through the power of the ballot or jawboning in most cases.

Chris: You said everybody can have their own definition, which is problematic. Two, Fortune 500 CEOs are just embracing the environmental, the “E”, the climate change component is good business. I’m thinking to myself, that’s a slam dunk for Fortune 500 CEOs, but does that belief also travel to mid-cap and small-cap CEOs?

Bob: I think it depends a lot on the company’s industry and where it operates, and whether they see ESG as an opportunity for more transparency (and to attract more capital) or more of a burden imposed by mandates under detailed disclosure requirements particularly in Europe. Or if they see it as pressure from shareholders to provide sustainability reporting. Ten years ago, sustainability reporting was mainly confined companies that had more direct environmental impact such as oil & gas and mining companies. Now pretty much every company has a sustainability report even if they are making, say, software.

The software company probably has very limited direct environmental impact, but shareholders are still interested in how you’re managing, for example, office energy usage. The expectations from shareholders have really pushed companies to provide more information and I think that shareholders feel that has improved the ability to have a dialogue on these issues.

Chris: Is the flashpoint or the backlash still more on the social side of things than environmental governance?

Bob: While social issues are not necessarily more prevalent than environmental, they have always been harder to quantify, measure and address consistently.

In that light, when my friends and family ask what I do (most have no idea), and I reference ESG as one aspect, they ask how that relates to returns. ” I start with the “G” since that’s the easier one to describe. I provide examples of where ESG is fundamental such as when investing a multi-class share company where unaffiliated shareholders have either limited voting rights or no voting rights at all. I explain that’s a significant governance risk because the shareholders will have little to no real ability to effect change if necessary. There is some caveat emptor (you bought the shares; you knew what you were getting into) but nonetheless shareholders generally expect to be able to provide some level of input.

Even with governance, studies on companies with certain clearly defined governance features, e.g., independent chairs, classified boards, poison pills can be inconclusive or even contradictory as to the effect of better governance on returns.  As you move that away from governance to the “E”, some aspects become harder to evaluate, for example the quality of the sustainability report. Is it greenwashing or does it actually show commitment and progress? Then when you come to social issues, that’s even more elusive such as if you treat your employees well, how does that lead to better performance? However, companies’ poor treatment of employees can lead to lawsuits and those costs can be directly measured. Social issues are an easier target for critics of ESG, and I think understandably so because it’s a softer aspect of these analyses, but I think still relevant in some cases, depending on the company. If you’re producing sneakers in a developing country and their employment laws are very weak, maybe progressively minded customers won’t buy those products. That’s risk, and it’s also still impactful ultimately on your bottom line if people decide not to buy your product.

Chris: What are the tangible downsides to companies, particularly to their CEOs not addressing societal issues?

Bob: I think companies, first, have to determine, is this societal issue something that is material to the company? Is it something that they can actually change or address via action towards their employees or customers or is it something where they feel compelled to issue a statement to provide their view?  However, the whale that spouts first gets harpooned so companies should be cautious of how vocal they are. I think they need to evaluate, is this issue really a risk for them? If so, can they do anything about it, or is it just making a public statement for the sake of making a public statement?

Will making a statement in one situation create an expectation you’ll always have to make a comment? I think CEOs have to evaluate, “Is this something we should be weighing in on? Is this something that is actually going to be impactful to us?” The last point should include evaluating the impact on employees. For example, with the growing number of state restrictions on access to abortion, companies may not be able to impact the laws, but they can reassure employees about the company’s support for them. Companies can support employees rather than weighing in publicly and expecting to change hearts and minds among the politicians. In any case, I think CEOs should bear in mind that anything they say to their employees is very likely going to be made public.

Chris: There are no secrets.

Bob: Right. Things can be taken out of context, so I think the messaging has to be extremely clear and really about the employee protection and support, rather than just criticizing the politicians or a bad law.

Chris: Stuart and I do a lot of work with strategic communications, and the majority of cases, directly with CEOs. The most frequent question is…”Should I comment on this issue? If so, why?”

Bob: There’s an expectation from either the press or your employees, “You commented on X, why aren’t you commenting on Y?” It’s a difficult situation, but I think you really have to choose something that is really going to affect the company, even if it’s just employees, and then taking more measured approach with any public-type statement, including broad company-wide messaging.

Chris: Do you know of a few CEOs that really do well in terms of communications about ESG issues?

Bob: I think, in general, it’s those that have the gravitas, tenure and board support, where they feel secure enough that it’s not going to create a firestorm or a backlash from customers, the public or politicians. Without naming anyone in particular, I think successful leaders are consistent with their approach and messaging, and therefore don’t backtrack in the face of public or political pressure. Some CEOs perceived as tough managers are among those forward leaning on some issues such as LGBTQ+ rights. It helps when CEOs have been successful and have the fortitude to stand behind their comments.

 I think you need a CEO who’s really personally committed in a position, so their approach comes from a position of strength, not defense. They feel like they’re not being defensive about reacting. It’s really about being consistent and not swaying with different political backlashes and saying, “Oh, we can’t do that anymore.”  If you had a good reason for it in the first place, a good CEO would probably continue to pursue that path.

Chris: It’s a real tightrope for a new CEO and a new CEO in a smaller company, because they’re at the opposite end of the spectrum compared to a well-known, long-tenured CEO of an established larger company.

Chris: What ESG insights or issues should be top of mind as we sit here talking today?

Bob: I think some issues that are getting a lot attention such as climate change risk. Regardless of the politics involved, climate remains a material concern for shareholders and companies. For example, executives and shareholders of insurers want to know what the risk of the company is with regard to “insureds” affected by natural disasters whose effects are exacerbated due to the warming planet … and the fires in Canada with smoke that affected the Northeast, and the fires that devastated Hawaii are cases in point.

Irrespective of what politicians say, and to your point earlier about the CEO survey from Fortune, climate change is something that will continue to be a high level of attention.

Even the U.S. military is evaluating the risks to their bases that are near the ocean, and they’re not exactly considered a more progressive-leaning organization. I think if the environment is 1A, then 1B is diversity.

Companies that are looking at Diversity, Equity & Inclusion (a.k.a. “DE&I”) may be a little less vocal and may be pulling back from quotas or targets. Nevertheless, I think shareholders will continue to push for diversity, equity, and inclusion, but perhaps a little less with numerical expectations because they themselves are under a little bit of scrutiny from politicians for what they’re doing.

I think those are probably the areas that will continue to get a lot of focus, particularly the climate and the environment. I think that’s an easier one, so to speak because it’s more directly impactful on the company’s performance or returns depending on the nature of the industry and geography.

Chris: Is there anything on the forefront from the SEC in some of their proposed rules on disclosure? Is there anything there that is on top of your mind?

Bob: I think the disclosure about climate-related risks is a challenge in coming up with rules about what is the most relevant information to disclose. There are several different frameworks, different ESG rating groups, and they struggle to come up with a consistent taxonomy that’s applicable across a certain industry let alone a broad swath of companies. Then you have some ESG rating agencies rating companies very differently, the results can vary widely based on the choice of metrics – and their weighting.

The challenge for the SEC is what data they will want companies to disclose. Companies are waiting to find exactly what they have to do, but I think shareholders are no longer waiting. I think irrespective of what the SEC does, there’s probably a higher expectation among most shareholders that companies should provide more and better data on climate risk and other environmental and social risks.

Chris: What’s next on your governance bucket list?

Bob: Having been in this space for 25 years, I am encouraged at the steady, profound changes we’ve seen over that time, e.g., the professionalization of boards, and the removal of most anti-takeover provisions whether it’s poison pills or classified boards. Most companies are more transparent regarding executive compensation both because of, say on pay, but also, because they are just doing a better job of providing more information as a result of constructive engagement with shareholders. We’ve come a long way from the days where the white smoke would come up and only then would you find out how much CEOs were being paid.

Further, you have much more engagement initially about compensation (spurred on by say on pay) but broadening into many more areas like director experience, skills, and diversity; I think it’s been really constructive for both sides. We have witnessed an increase in shareholders’ rights in terms of majority voting for directors, say on pay, proxy access, and the universal proxy card. I think this incremental approach has been largely successful so don’t see a reason to push for the next big change just for change’s sake.

I do think there is one area to keep an eye on, which is the proliferation of dual or even multi-class companies. I buy part of the argument that it provides runway for a new company to begin very long-term projects and see them to fruition without being subject to short-term pressure, either from markets, in general, or particular shareholders. What I question is whether that it is necessary in perpetuity for the control of the company to be held by one or a small group of founders, and to be passed down to heirs much like a royal succession rather than having shareholders have any input/ability to apply pressure if necessary. I think that’s an area that warrants some more examination.  Companies should at least consider sun-setting the multi-class structure once they achieve a level of success and maturity such that those protections are no longer necessary, and since shareholders in many cases already understand and support the long-term nature of a company’s business.

There are certainly many examples of companies without multi-class share structures that were able to focus on the long term with shareholders support from the early days. I think it is a potential step back if companies feel multi-class share structures are the only way they can go public. To close, I think having seen the shareholders continue to evolve their approach and the various governance terms and acronyms morph over the years, I think fundamentally, the issues are the same. ESG issues are enterprise issues so, while they may have a different name, the focus on them is not going to change.

It’s always a pleasure chatting with you, Chris.

Chris: Cheers!

Robert McCormick is presently a Senior Advisor at Third Economy and an Advisory Council Member at PJT Partners. Prior, Bob oversaw policy development of Glass Lewis’ proxy voting guidelines and the analysis of 20,000 Proxy Paper research reports on shareholder meetings of public companies in over 100 countries.

Chris Clark joined Stuart Levine & Associates as a senior consultant after a distinguished career at the National Association of Corporate Directors. His expertise ranges across a variety of disciplines including corporate governance (with data-driven board assessments, cyber risk diagnostics, and strategic communications audits as cornerstones), strategic communications, conference management, and digital content creation.