Securities Regulation Daily Wrap Up, CORPORATE GOVERNANCE—Using social and governance goals proactively: experts discuss how to get ahead of requirements, (Nov 8, 2021)

By Lene Powell, J.D.

The idea of doing well by doing good has been around for a long time. How can companies actually do it?

With the ESG landscape seeing new developments every day, panelists at a securities conference took a step back from specific disclosures and engagement strategies to look at the big picture of social and governance considerations: of running a company where employees want to work, customers want to buy, and investors want to invest. From an in-house, investor, and outside adviser perspective, panelists discussed the importance of listening to key stakeholders in addition to investors to really understand what is going on in a company. Panelists shared insights on how to go beyond employee surveys and line-item disclosures to drive change and communicate effectively to the market.

The panel “The S&G of ESG” took place on November 4 at PLI’s 53rd Annual Institute on Securities Regulation and was moderated by David Lynn, co-chair of Morrison Foerster’s Corporate Finance and Capital Markets practice.

Change begins at home. Investor engagement seeking social and governance changes has “pushed the ball back” in the court of the company itself, said Marvin J. Owens, chief engagement officer at Impact Shares. More and more, companies are beginning to understand that social and governance considerations are not just about making public pronouncements and writing checks, but about looking at how to ingrain values within their own cultures. Beyond the external conversation, there has to be an internal conversation that becomes the foundation of what you are trying to do, said Owens.

Increasingly, investors are looking to align their investing capital with their social values, said Owens. For example, a group of investors in Impact Shares’ NAACP fund from Alabama questioned the inclusion of Amazon in the fund, when Amazon was not cooperating with workers’ organizing activities in Alabama. Investor interest in values-aligned investing along these lines is driving regulatory changes like SEC rules on human capital disclosure, said Owens.

Listening to employees. Keir Gumbs, chief legal officer at Broadridge Financial Solutions, Inc., observed that things do not happen in a vacuum and employees are having real life experiences tied to broader societal events. For example, last year Uber surveyed employees about the impact of COVID and found that 60 to 70 percent of the Black and Latinx employees at Uber had at least one family member who had either died or had a very serious case of COVID. These events are impacting employees’ lives in a very real way, said Gumbs.

Further, employees watch what the company is doing and saying about societal events. In recruiting employees at Uber, they wanted to know what Uber was doing about a variety of issues they cared very deeply about. For example, candidates asked about the company’s sustainability report and what the company has said about racial justice. Similarly, as Gumbs himself was interviewing last year for his current role, he discussed with the CEO the issue of racial justice and the murder of George Floyd. The CEO said he made the decision after the death of Floyd to make a statement about racial justice and to make a number of commitments.

Gumbs noted that with “The Great Resignation,” companies are in a war for talent, for the best lawyers, the best engineers, and other employees. For those advising boards and management teams, it is malpractice not to be talking about these issues and what the company is doing and saying with respect to those issues, said Gumbs. People need to realize that a transformation is occurring, where we are no longer in a place where employees do not really care about what the company says or does with respect to ESG issues. Employees are evaluating whether they want to work any place where their values are misaligned with things they care about. Again, this is not just current employees, but the ones you are trying to recruit and attract, said Gumbs.

According to Ning Chiu, partner at Davis Polk, employees are one of the key parts of "S”, maybe the key part of "S'. Employee surveys have a place in understanding what employees are thinking, but the way questions are written affects the results. Open-ended questions can solicit useful feedback, but companies often look for more quantitative information. However, some can be concerned about declines in results from year to year, and so companies may desire to “manage” that quantitative information. As a result, employee surveys are not always the best way to get employee feedback.

Chiu said she sees a lot of companies say that they respect everybody for who they are, we want people to bring their authentic self—but they don't always like the wide range of views sometimes. It is a tough thing to align, said Chiu.

Owens agreed it is critical that internal engagement is not torpedoed by a company saying we want to go through the process and say we have done it—but we do not value what comes out of it enough to make to make any changes as a result.

Lynn added that existing employees are not afraid to speak up. They have used the shareholder proposal process and aligned with activist investors, as well as other things to voice their concerns, like quitting.

Disclosures. As far as regulatory requirements go, Alyn Bedford, senior corporate counsel at Granite Point Mortgage Trust Inc., explained that so far SEC social disclosure requirements have been very “light” and principles-based compared to what a lot of companies get a lot of investor pressure to do voluntarily. In Europe, there's the Workforce Disclosure Initiative, but it has not really taken hold here in the States. SASB has some human capital management components here and there, but not a comprehensive framework. It can be challenging for issuers to decide what to disclose, beyond, for example, EEO-1 data, which they are already filing anyway. So the SEC’s upcoming human capital disclosures proposal might actually fill a hole on that front, said Bedford.

Bedford observed that it is important to consider the audience and what kind of information they are looking for. If investors are asking a risk management question about data risk and data privacy, then a response about involvement with Girls Who Code or other partnerships is going to miss the mark. Conversely, for questions about social impacts and really pressing issues affecting stakeholders, customers, employees, and communities, it can come off as tone-deaf to respond by saying those issues will not really have an impact because the company is B2B, said Bedford.

Owens noted that on a voluntary front, there are many different disclosure frameworks and standards out there. For example, the YWCA on gender issues and NAACP on racial equity issues are tremendous resources and can take the pressure off the company from thinking they have to figure it all out.

According to Owens, the disclosure conversation has been framed in a regulatory, almost penalizing kind of context, rather than something companies want to engage in because it is going to get them down the road to be a better company. In Owens’ view, the conversation needs to be reframed from how not to get tagged to how to actually build a better company and culture. Because the goal is not just to do well or just to do good—it is to do both.

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