Emerging Developments in Corporate Governance, Impact of COVID-19, and Looking Ahead to 2022
The enduring COVID-19 pandemic continued to impact corporate governance practices and trends in 2021, while other notable developments, including a surge in shareholder proposals, changes to the proxy rules, and increased demands for climate change accountability, emerged.
Shareholder Influence Grows
With the global battle against COVID-19 far from over, many companies continued to hold annual shareholder meetings virtually in 2021. While the pandemic may have inhibited in-person meetings, it did not stifle investor engagement through the shareholder proposal process. In fact, the 2021 proxy season brought a surge of proposals focused heavily on political lobbying expenditures, emissions and environmental degradation, workforce diversity, and other social initiatives. These proposals were met with record‑breaking support as a total of 71 shareholder proposals passed, an increase of nearly 60% over 2020. As shareholders' voices on corporate governance grew louder, regulatory developments changed the landscape for shareholder engagement in other ways as well.
Universal Proxy Cards
After years of consideration, the SEC adopted rules in November requiring the use of so-called "universal proxy cards" in contested director elections. The rules require both companies and dissidents to include all director nominees on each of their respective proxy cards, effectively providing to shareholders a full menu of candidates and increasing the likelihood of "split-ticket" voting that tends to favor dissidents and their nominees.
Enterprise Risk Management
In September, the Delaware Chancery Court issued yet another reminder of the importance of managing increasing scrutiny over boards' careful oversight of mission-critical enterprise risks, allowing Caremark claims against Boeing's board of directors to proceed past a motion to dismiss for what the plaintiffs claimed were failures to: (i) identify and address risks related to the safety of certain sensors used in, and (ii) promptly report safety problems experienced by, its 737 MAX airplanes. As the progeny of Caremark liability decisions continued to develop this year, courts emphasized that enterprise risks take many forms, and corporate directors' monitoring functions should be accordingly tailored to their companies' operations, industries, and business activities. As specific examples of Caremark claims have proliferated in recent years, including food safety, pharmaceutical development, and financial reporting, evolving forms of enterprise risk, including social issues, are beginning to appear systemic across industries. Supply chain shortages, labor force recruitment and retention, and worker safety, for example, have become chief among the concerns that directors must continue to oversee and monitor in the year ahead. But one particular enterprise risk became more prominently visible than all others in 2021: climate change.
2021 witnessed a sea change in public discourse regarding corporate accountability for climate change and its effects. On the heels of BlackRock chair Larry Fink's annual letter to investors emphasizing the importance of a sustainable future, companies in all industries were challenged to reexamine their role in building and preserving that future. Wildfires, power outages, and publicity of extreme weather events linked to a volatile climate have made pleas for sustainable progress among corporations impossible to ignore. It may not be long before investors recast pleas for progress into urgent demands for fundamental corporate change. In fact, ISS may have heralded in a new era of director accountability for climate change with its adoption of a policy to recommend votes against directors of the 167 "significant GHG emitter" companies currently identified as the "Climate Action 100+ Focus Group," and will recommend against incumbent directors of companies that have not met minimum climate-related disclosure standards and have not issued specific emission-reduction targets.
The Year Ahead…
2021 proved once again that ESG is a movement, not a moment. In 2022, directors must demonstrate their understanding that "ESG" is more than an acronym as corporate America plots its course for the future. Properly understood, and as transformed in recent years, Governance in the year ahead must incorporate Environmental and Social advancements as indispensable priorities—and not merely accessories.
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