While the SEC’s climate proposals have grabbed headlines in 2022, social and governance rules are coming and will demand just as much attention from companies, according to panelists at Practising Law Institute’s securities regulation conference. Proposals surrounding human capital management and corporate board diversity are on the SEC’s rulemaking agenda, so could be just around the corner.
The panelists acknowledged that unlike climate measures, social and governance issues can feel amorphous and be hard to quantify. That does not mean they can be overlooked, said Marian Macindoe, head of ESG stewardship at Parnassus Investments, who was at Uber when the company was brought to its knees by S&G issues.
Macindoe, who was head of ESG at Uber at the time, noted that in 2017 Uber controlled 80 percent of the ridesharing market when it fell victim to a sexual harassment incident and claims of mistreating its employees. The final straw, she said, was how it was seen as undercutting a taxi strike that was in response to the former Administration’s foreign travel ban.
Public perception of Uber plummeted, and it lost 100,000 subscribers almost overnight, Macindoe said. Five years later, Uber is still trying to climb out of that reputational hole, she noted.
Forthcoming proposals. WilmerHale’s Meredith Cross said that she advises her clients that social and governance issues matter but acknowledged that they are hard to pin down. She believes the SEC is taking its time in drafting the rules because different issues are important to different companies and it is hard to encompass the varying priorities within rule proposals.
Gibson Dunn partner Thomas Kim added that the SEC needs to draft its proposals carefully because its first S&G rule, the pay ratio disclosure requirement, was not that successful. Kim said the disclosure was supposed to highlight pay inequality, but all it did was point out that businesses have different kinds of work. It is not a revelation that McDonald’s, which employs workers at lower pay scales, will have a higher pay ratio than Goldman Sachs which hires white collar employees, he noted. Pay ratio is not a useful metric, he said.
Kim said the difficulty in quantifying social and governance issues was underscored by recent SEC comment letters to filers. Many companies now voluntarily prepare and file an ESG report, he noted, and the SEC has asked companies why they did not include S&G issues contained in the report in their 10-Ks. The answer in every instance was “because it is not material,” he said. Social and governance issues do not have a financial component, he continued, so they are measured by what a “reasonable investor” would find material.
Materiality. Emily Zahler, vice president at Tapestry Inc., said that materiality is where her team begins to address ESG issues. The company does a materiality assessment every few weeks by engaging with its shareholders and asking what issues matter most to them. The company then considers what actions it can take to impact those issues, she stated.
Asked what S&G issues generally surface in those discussions, Zahler said that diversity, equity, and inclusion (DEI) is at the top. DEI is so important that Tapestry works it into its compensation program, she noted. After that, shareholders generally bring up issues surrounding ethics and compliance, she said.
Other important social issues can be gleaned from the last proxy season, which D.F. King’s Zally Ahmadi characterized as “the year of the social proposal.” She said that the top social proposals this year were:
- Political spending and lobbying;
- Labor issues and discrimination;
- Equal employment opportunity issues and workforce diversity;
- Racial equity audits;
- Human rights risk assessments; and
- Anti-ESG proposals.