Deloitte’s Lamm talks engagement, disclosure and #MeToo
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Do you expect any new ESG issues to arise in 2019 that companies will have to deal with?
It’s hard to predict new issues, but I think there are topics that have considerable room to grow. Even the concept of ESG itself is changing; I hear people using the term ‘social purpose’ a great deal. The ‘G’ in ESG seems to be treated as a separate matter entirely of late – [it] certainly has been the subject of a lot of debate and action by companies in their governance structures and processes – so the focus has been on the ‘E’ and the ‘S’. I think those have morphed into a broader focus on social purpose generally. Social purpose, I think, can go well beyond E and S, although it certainly includes them.
One issue in its childhood is opioids. That’s been the subject of some shareholder proposals and I think it’s going to build. The other big issue is human capital. All the issues that fall under that rubric are going to mushroom like crazy. [For example,] the #MeToo era is continuing to ripple its way through society in general, and certainly through governance.
The future of work includes debate about what the meaning of work is, how people work and where they work. I can’t see an end to that. It affects so many things. I get calls from people who have been with the same company or law firm for a long time and they want to move but they don’t know if they should. I keep telling them I’m probably the wrong person to call because I’ve changed jobs so many times that I can’t keep track.
But think about how that whole approach has changed. When I was a kid, the notion of changing jobs was anathema. A lawyer who changed jobs every few years was viewed as at least weird, if not incompetent or unreliable. Nowadays if you don’t change jobs periodically you’re considered the odd one out. So if you don’t generally change jobs, when you do decide you want to move, you are subject to a great handicap. [That means] human capital and all its ramifications are going to continue to reverberate.
To get back to your original question, I’m sure new issues will emerge, because they always do, but I don’t see any on the horizon that would fall under this rubric. I can see geopolitical change as having a huge impact. There are certainly changes [happening] in the existing geopolitical climate and there are doubtless more to come. And who knows how that shakes out and affects companies and their boards of directors?
Disruption is another area. When I was a young man, ‘disruption’ was not a good word. Now, if you’re not disruptive you’re stagnant. Again, I think all these things will have – potentially huge – impacts on how companies are governed but, again, we will see what happens.
How can boards best address emerging issues proactively, in terms of engagement and disclosure? And how good are they at doing that?
There’s no universal position on this. I’m a tremendous skeptic, but I think boards have become not only better but much better at it. I’ve always felt engagement is the way to go. I understand that there are issues with boards speaking to shareholders, and it has to be done with discretion and good judgment. But if you want to get ahead of the curve and – to use the [Donald] Rumsfeld expression – find out what you don’t know, talk to your investors and find out what they’re thinking about.
Start by reading their voting policies, which nowadays are online. Once you’ve done that homework, ask them what they think the common trends are. It may well differ from company to company, and certainly from industry to industry, maybe even based on geographic location. I think companies can learn an awful lot from their investors; it’s not a one-size-fits-all remedy that applies to all companies, but it works.
Talking to your investors, finding out what they’re thinking about, you’re probably going to learn a bunch of things that have not yet appeared on the radar screen and that you may want to know about.
The flip side is how boards respond to issues when they arise – for example, if there are accusations against a CEO of sexual misconduct. Have you seen an improvement in how boards work with governance and IR teams in this context?
I don’t have any data on this but, based on what I see, I think it’s spotty. I think with some of the issues that have arisen in the last year or so, forget whether they should have been on boards’ radar screens – the fact is they weren’t. Some boards have obviously been taken aback by an activity in which their management or others may have engaged, and they’re grappling with it and don’t necessarily know how [to deal with it].
To some degree – and this is all experiential or anecdotal – I think part of the problem might be that the management teams of the companies may not know exactly what to do either. One of the things that has personally shocked me, again using #MeToo as an example, is perhaps not so much that it’s happened but the extent to which it’s happened.
I think some boards, not to cut them too much slack, are at a loss as to what to do. I also think that as time goes on, boards will develop the tools to [deal with these issues]. I wish they could be a little more proactive than they have been. While the phenomenon isn’t new, the realization of how [far it extends] is, I think, and I hope boards rise to the challenge. I’ve certainly seen some boards, not in the context of #MeToo but in the context of [other] integrity problems with management… stick their heads in the sand.
To go back, you asked about disclosure and I think companies in general do a ghastly job of disclosure, [although] that is changing.
Disclosure in the broadest sense, or in terms of these types of issues?
All of the above. I think this is largely the fault of attorneys. It’s our job to protect our clients against liability. But if you limit yourself or your disclosures to only those that are required, I think you’re doing your clients a tremendous disservice. Again, I think there’s change [happening] here. Companies have finally begun to accept the notion that the proxy statement in particular can be used as a means of effective communication and effective advocacy.
So now you see companies engaging in disclosures that are not required by SEC rules. You see companies adding sustainability [disclosure] increasingly to proxy statements – not necessarily talking about what the company is doing, but rather talking from a governance perspective about how the board exercises its oversight responsibilities regarding sustainability.
I don’t think the proxy statement is the place for all-purpose disclosure. But I do think it affords the board an opportunity to talk about how it executes its oversight responsibilities in these areas. One of the things I think companies are doing a better job of is not just giving a rote disclosure that is required in many cases. Instead of talking about what the audit committee is, which is what the SEC rules demand, they’re going beyond that and saying, ‘This is what our audit committee does. This is why we have eight meetings a year. This is why we are paid these large retainers’, and so on.
I think companies are increasingly using disclosure as an effective communication and advocacy tool. Even your large institutional owners don’t necessarily have an opportunity to understand how the board functions or thinks. It’s a very challenging job, but more and more companies are doing it.
Shareholders continue to generally back companies in say-on-pay votes, but recent research suggests some investors are getting more into the weeds and looking at more metrics in terms of assessing executive pay. Is that something you’ve seen, and do you expect companies to face more pressure to either explain or engage with shareholders on this?
I think the answer to your question is yes. I heard somebody say that just as the human eye is the window to the soul, executive compensation is the key to determining how a corporation is governed. And I think there’s some truth to that. How the board oversees executive compensation says a lot about the company – or at least the board.