Eli Kasargod-Staub, executive director and co-founder of Majority Action, tells Ben Maiden that more directors are going to face votes over board actions in response to social issues and related shareholder proposals
How significant is the emergence of racial equity audit shareholder proposals this year?
I think the racial equity audit proposals we are seeing are as significant a development in corporate governance as anything we have witnessed in the last decade or longer. [They] are part of a wave of shareholder action… that is evolving beyond calls for companies to disclose how they view the risks to themselves of various ESG-related topics. [They are] moving in the direction of calling on corporate boards to assume the comprehensive responsibility they have always held for addressing risks both to their company and to broader long-term diversified portfolios.
Racial equity audits are a tremendously important tool because they call on corporate directors to take responsibility for the oversight of how their company’s behavior either ameliorates or exacerbates systemic racism. In doing so, they can help companies better address those risks to themselves and can be a critical tool for helping investors address the systemic-level risks of systemic racism to long-term investor portfolios.
[There is a] broad GDP drag driven by systemic racist inequities in wages, housing and health – $16 tn in forgone GDP over the last 20 years.
I think the racial equity audit proposals we are seeing are as significant a development in corporate governance as anything we have witnessed in the last decade or longer
Do you think developments this year, such as at ExxonMobil, signal a greater focus on directors as a feature of investor action on ESG issues?
Oh yes. There can and will be dissident slate challenges, whether next year or in future years. And I think we are poised to start seeing a significant uptick in voting against directors. The vast majority of S&P 500 companies have majority voting, which means you do not need a dissident slate to bring consequences for directors who are failing in their stewardship responsibilities as long-term investors collectively define them.
I think we’re going to start seeing – on both environmental and social issues – a significant level of action. That is both because they communicate a far more powerful signal and because they have an altogether different level of consequence.
Majority Action and state treasurers have an initiative, Proxy Voting for a 1.5°C World, which aims to hold board directors accountable for their failures to address climate change. Is it possible to have similar efforts in terms of social policies?
Absolutely. I think this is going to evolve over the next few years. For example, let’s say a company loses a majority vote [requesting that it] conduct a racial equity audit. These proposals call on companies to conduct independent, third-party audits that engage with companies’ stakeholders to get the full analysis of the impact of a company’s business practices.
And then imagine that evidence of harm from a company’s behavior emerges over the course of the audit process and the company chooses not to engage with those stakeholders, does not try to address those issues, does not provide a channel for them to engage with someone on the board. You could easily start to see those kinds of actions turn into votes against directors who are failing to meet shareholder expectations about engaging on these issues.
On some social issues it may be that that voting on directors has more to do with responsibility around process than responsibility about outcome, unless and until benchmarks around company behavior become widely adopted by shareholders.
How would decisions be made about which director on the board should be held responsible in such instances?
There is the circumstance in which there is a majority vote on a proposal and the company fails to implement that to its shareholders’ satisfaction, which could very well be happening in the social space and very well be an area of voting next year. Those kinds of votes would often be directed at the chair or lead independent director, because that’s who is responsible.
In board diversity matters, often the nominations and governance committee is the right venue. Many [boards] have a committee with express oversight of the firm’s political spending and in that case the chair and/or other members of that committee would likely be the subject of a ‘vote no’ effort.
When it comes to racial equity audits, it might depend on the particular circumstances of the company. These audits are calling for whole-of-company responses, similar to transformational change on climate. In some or many cases I can easily see that leading to votes on the board chair and lead independent director.
What do you view as the links between corporate governance and social issues generally, and what do you view as the role of the board?
It’s an essential question. The role of corporate governance and why it’s so fundamental here is two-fold. First, corporate directors have a fundamental duty to be stewards of the companies they govern and to understand that no company is an island. This is true when it comes to climate change, biodiversity or dealing with the fundamental nature of some of these social issues.
I think we’re going to start seeing – on both environmental and social issues – a significant level of action
Second, if you’re a member of a board of directors and you don’t happen to believe that yourself, that’s fine – your shareholders are increasingly going to believe it for you.
For a long time, we have imagined a perfect alignment between corporate director interests and long-term shareholder interests. But long-term investors are increasingly waking up to the systemic nature of the crises facing their portfolios and the reality that companies are either ameliorating or exacerbating those risks, but not detaching from them.
Investors are increasingly saying, Wait a minute: we don’t care if you think it’s a good idea to undertake behavior that is driving systemically racist outcomes or exacerbating climate change. We know that’s bad for us. Directors are either going to embrace that view or have it embraced for them by those with voting power over director elections.
