When it comes to New Year’s resolutions, socially conscious directors might consider tackling this trifecta: gender diversity, climate risk and sustainability-tied compensation.
These issues stood out in a recent Conference Board study, which looked at transparency and performance in select areas of S&P Global 1200 companies.
Gender diversity at the management and board levels
Only 12% of North American companies disclose the percentage of women in management positions. By comparison, European companies are almost four times more likely to report this information in their annual reports or sustainability reports.
The low levels of disclosure highlight an unflattering reality: Women hold just one in four management positions among North American companies. And while disclosure represents a step in the right direction, by no means will that alone move the diversity needle. Among European companies, where more than half report on this metric, women represent only about one in five management positions.
Directors should pay particular attention to imbalances between the median percentage of women in the overall workforce and the median percentage of women in management positions. For instance, data from the financial sector show a significant imbalance. Despite women accounting for 52% of the workforce among financial companies, women represent only 27% of management positions at these companies, a gap of 25 percentage points.
Diversity data for boardrooms is not any rosier. Today, women fill only one in five board seats among S&P Global 1200 companies. Even among health care companies, where on average women account for more than half of the workforce, women held only 20% of board seats. Given these figures, it comes as no surprise that the issue of board diversity is getting the attention of shareholders. Last year, for example, shareholders in the U.S. voted on eight proposals asking companies to prepare a report on steps toward increasing board diversity. Two of these shareholder proposals passed.
Directors can take a step toward improving board diversity by considering the “Every Other One” approach. Coined by the Committee for Economic Development, the approach entails appointing a woman to every other vacant board seat. By doing so, while retaining existing female directors, women can occupy about a third of corporate board seats in just a few years — certainly a step in the right direction.
Climate risk reporting
With investors increasingly recognizing the link between climate risks and shareholder value, companies are responding by developing climate-change strategies. But while stakeholders expect companies to be transparent about these strategies, North American companies significantly lag in this area. For instance, 68% of companies in Europe and 71% in Asia-Pacific have publicly adopted a climate change strategy. This is well over twice the rate of companies in North America, where less than one-third report having a climate-change strategy.
Directors should take stock of their companies’ level of transparency on this front. Does the company report on its climate- change strategy? Are material climate-related risks discussed in the company’s financial filings? This type of disclosure is gaining steam: During last year’s proxy season, proposals requesting greater disclosure of climate risks received the highest average support among all environmental and social (E&S) issues brought forth by shareholders.
In fact, average shareholder support for this topic surged in just one year, from 27.5% of “for” votes in 2016 to 39.2% in 2017 (See chart). Of the six proposals on E&S topics that passed in 2017, three called for climate-risk disclosure. All three of these proposals were submitted at large U.S. energy companies, and all had a public pension fund as the main proponent.
Incentive compensation and sustainability performance
A small but growing number of companies are making explicit links between environmental, social, and governance (ESG) performance and executive compensation.
In fact, 21% of companies in North America report linking compensation to some measure of sustainability performance, a practice already underway among more than one-quarter of companies in the European sample. Not surprisingly, companies in heavy industries apply this practice the most — namely, companies in energy, materials and utilities sectors, which have long included safety metrics as part of compensation schemes.
As an example, Xcel Energy bases 30% of long-term incentive compensation on the achievement of specified reductions in the company’s carbon dioxide emissions. At American Electric Power, the company bases annual incentive compensation in part on a number of ESG measures, including safety, employee diversity and engagement, and volume of renewable energy projects.
While the data show an increase in the number of companies linking ESG performance to compensation, wide variation remains in the quality and breadth of disclosure. The lack of a standard methodology for linking compensation to ESG performance means companies that opt to make this link do so in different ways. Transparency on the details of these specific compensation schemes also falls short. Moreover, most companies offer little explanation on how their incentive compensation schemes incorporate sustainability issues.
Directors should consider their companies’ priority ESG issues, and whether it makes sense to adopt compensation incentives to improve performance against these issues. This represents just one way to send a clear message to stakeholders that the company means business about embedding sustainability into its core strategy.
Thomas Singer is Principal Researcher in the Sustainability Center at The Conference Board. He is the author of the new report, Sustainability Practices.