Boards are falling short on overall effectiveness: US survey finds executives want boards to be more prepared, more engaged and more willing to challenge management Key Takeouts ▪ Despite the fact that most executives perceive their board to have a good grasp of company strategy, risks and company culture, 40% of executives surveyed consider that their board falls short in terms of overall effectiveness ▪ 82% of executives surveyed think that at least one director should be replaced ▪ The report suggests that the gap between perceptions of board skills/grasp of the business and perceived board effectiveness may be due to perceptions that directors are overburdened and/or that directors lack expertise in certain areas (eg IT). ▪ The survey found there is an appetite for boards to be more engaged, more prepared and more skilled in specific areas (ie areas outside of operations and finance). PwC and The Conference Board have released a report – Board Effectiveness: A survey of the C-suite – presenting the findings of a survey of 550 US executives' views on board performance. The headline finding is that though most executives consider their board to have a strong understanding of the business and broadly, to have strong skills/expertise, most executives do not consider that their board is executing its role effectively. Key findings Boards have a good grasp of the business ▪ Generally, executives consider their board to have a good grasp of the business. For example: – 94% of executives surveyed consider their board understands company strategy somewhat/very well – 89% of executives surveyed consider their board understands the company’s key business risks Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 6 ME_171017618_1 – the report also found that executives consider their board to have a good understanding of the company's shareholder base (87%), competitive landscape (86%), corporate culture (85%), and talent development and pipeline (85%) Executives perceive boards to be ineffective ▪ 40% of executives surveyed consider that their board falls short in terms of overall effectiveness ▪ Executives in IT roles were the most critical of directors with 74% rating their board's effectiveness as 'fair' or 'poor'. Appetite for board refreshment ▪ 82% of executives surveyed think that at least one director should be replaced, and 43% consider that two or more should be replaced. ▪ 31% of CEOs and CFOs and 40% of Chief Legal Officers support replacing two or more directors Areas for improvement The report suggests that the gap between perceptions of board skills/grasp of the business and perceived board effectiveness may be due to perceptions that directors are overburdened and/or that directors lack expertise in certain areas (eg IT). The report highlights a number of areas in which executives would like to see improvement. These include the following. ▪ Most executives consider that directors come to meetings without being fully prepared: Only 37% of executives consider their directors come to meetings fully prepared dropping to 7% among executives in IT roles. ▪ Director expertise is lacking (outside of operations and finance) – Less than half of executives surveyed ranked director expertise as good or excellent in certain areas including: IT/digital/data privacy (48%), ESG (47%), cyber risk (46%) and crisis management (37%) – Executives rated director expertise in operations and finance more strongly at 65% and 63% respectively ▪ Most executives consider that their board is not able to respond well in a crisis: – 57% executives consider their board has a somewhat or very good grasp of the firm's crisis management – Less than a third (30%) of executives consider their board is able to respond well in a crisis ▪ Appetite for more rather than less engagement with management. – Only 9% of executives consider their board oversteps its authority – 25% consider that their board is reluctant to challenge management, particularly in the context of crisis preparedness/crisis management. – The primary area where executives consider boards need to challenge management more is crisis preparedness (48% of executives nominated this as the key area where more challenge is needed). ▪ Director age: 44% of executives consider that 'diminished performance due to director age is an issue on their board' ▪ Overboarding: 38% consider that directors are serving on too many boards. The authors conclude from this that there is appetite for directors to: a) increase their expertise, especially in areas outside operations/finance; b) be more prepared to engage with management; and c) to be more prepared to challenge management on critical issues, including crisis preparedness. It's suggested that boards may wish to consider reevaluatiing their own evaluation processes including engaging with management on how they can add value/the areas where improvement is needed. It's also suggested that boards increase their engagement with management – for example, that boards consider reaching out to management ahead of meetings to seek clarification/additional information about particular issues/materials if needed – and generally, to take steps to ensure that management has more insight and undesrtanding of board operations. This will assist management in providing the board with the support it needs to execute its role effectively. [Sources: Harvard Law School Forum 23/02/2021; Full text of the report: Board effectiveness: A survey of the C-suite] Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 7 ME_171017618_1 Diversity Findings of the fifth and final Hampton-Alexander Review released: FTSE 350 boards crack 33% target The Hampton-Alexander review has released its fifth and final report into progress toward increasing the representation of women on FTSE 350 boards and in senior leadership. Context The 2016 Hampton-Alexander Review set two targets: ▪ FTSE 350 companies should aim for a minimum of 33% female representation on boards by 2020 ▪ FTSE 350 companies should aim for a minimum of 33% female representation across their executive committee and in the direct reports to the executive committees by 2020 Some Key Findings The 33% board representation target has been met As at 11 January 2020 the report found that: ▪ Women hold more than a third (34.3%) of FTSE 350 board positions (an increase of 50% over the past five years). Put another way, 220 of the FTSE 350 companies now meet the HamptonAlexander target of having at 33% female board representation. ▪ Drilling down larger companies are leading the way: – Women account for 36.2% of board positions on FTSE 100 boards (up from is 32.4% in 2019). – Women account for 33.2% of board positions on FTSE 250 boards (up from 29.6% In 2019). – Women account for 34.3% of board positions on FTSE 350 boards (up from 30.6% in 2019). ▪ The number of FTSE 350 all-male boards stands at zero (down from two in 2019) ▪ The number of boards with only one women has decreased from 116 to 16 ▪ No evidence of overboarding among female directors: The majority of female directors on FTSE 350 boards (96%) hold only one or two board appointments in the FTSE 350. Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 8 ME_171017618_1 UK vs peer countries Comparing the level of female board representation in different 'peer countries' the report found that the UK ranks fifth behind France, Norway, Sweden and Italy (all of which have quotas in place) in terms of female board representation. In first and second spot, France and Norway have both reached gender parity (over 40% female board representation). Companies fell short of the senior leadership target ▪ FTSE 100 companies: – Women account for 30.6% of senior leadership roles in FTSE 100 companies (up from 28.6% in 2019). The report comments that this is the largest increase in the number of women in leadership in four years. – Women hold 70% of human resources director roles, 50% of company secretary positions, and 40% of combined general counsel and company secretary roles. – Women hold only 17% of finance director roles, and 16% of chief information officer roles. ▪ FTSE 250 companies: – Women account for 28.5% of senior leadership roles in FTSE 250 companies – Women hold 65% of human resource director roles, 55% of company secretary roles and 42% of general counsel positions. – Women hold only 16% of finance director roles, and 9% of chief information officer roles. ▪ Women account for 29.4% of senior leadership roles in FTSE 350 companies ▪ There are 28 all-male executive committees in FTSE 350 companies (down from 44 in 2019) ▪ There are only 17 female CEOs of FTSE 350 companies Pressure to increase diversity The report comments that stakeholder pressure on companies to increase board diversity is accelerating and lists a number of initiatives pushing for progress including: ▪ The FRC's Corporate Governance Report 2020 flagging companies failure demonstrate actions and outcomes on diversity, including a lack of targets at board and Executive Committee level as a concern ▪ Institutional Shareholder Services (ISS) recommending voting against FTSE 350 Nominations Committee Chairs with less than 33% women on the board ▪ Glass Lewis, Federated Hermes and Rathbones Crossman, all recommending voting against FTSE 350 Nominations Committee Chairs with less than 33% women on the board Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 9 ME_171017618_1 ▪ BlackRock Stewardship Expectations 2021: in the UK, large company boards should adopt the recommendations of the Parker and Hampton-Alexander Reviews with a view towards more voting action against boards not exhibiting diversity in 2022 ▪ The Investment Association Shareholder Priorities 2021 include Red Top for FTSE 350 companies with 30% or less women on boards or 25% or less on Executive Committee & Direct Reports. Sir Philip Hampton’s recommendations going forward Were another review established, Sir Philip recommends that it should: focus on increasing representation of women in executive roles (where progress has been the weakest) and potentially be expanded to include large private companies as well as listed companies. Sir Philip Hampton makes four recommendations for driving progress on the issue going forward (whether or not another review is established). These are as follows. ▪ Women should hold at least one of the four roles of Chair, CEO, Senior Independent Director (SID) and CFO as a matter of 'best practice' and this should be supported by investors ▪ Companies should publish a gender pay gap for their board and their executive committee ▪ The Business, Energy and Industrial Strategy (BEIS) deparment and the Government Equalties Office (GEO) should coordinate as much as possible on government-based diversity initiatives ▪ The BEIS and GEO should also annually review (with the Investment Association and other investor groups) any voting sanctions (eg ‘red top’ advice to shareholders) applied to listed companies that fail to meet the gender targets they have set. Sir Philip futher suggest that public policy could be adjusted 'in the event of persistent concerns over diversity at senior levels in businesses'. [Source: Hampton Alexander Review 2020 Report] WGEA has announced that the national gender pay gap has fractionally decreased over the past six months to 13.4% The Workplace Gender Equality Agency has announced that that average national gender pay gap narrowed very slightly (0.6%) over the past six months to 13.4%. This means that, on average, full-time male employees earn an average of $242.20 per week more than their female counterparts. Decrease driven by men earning less, not women earning more Commenting on this, WGEA Director Libby Lyons, said that while welcome, the slight decrease is not due to structural changes in women's overall position in the workforce, but rather reflective of labour force volatility over the period. In particular, there has been an increase in the number of men moving into lower paid full time roles. Ms Lyons suggests that as Australia's COVID-19 recovery progresses, male wages may increase (without a corresponding increase in female wages), potentially widening the gender pay gap. WGEA calls on employers to maintain their focus on the issue Ms Lyons urged employers to maintain their focus on progressing gender equality as a business priority. 'There are indications that the momentum towards gender equality in our workplaces is stalling. The challenge we now face is to ensure that all employers take immediate action to remedy this and reverse the indicative trend. I appreciate that 2020 was a very difficult year for many Australian businesses but we cannot allow the effects of the COVID-19 pandemic to be an excuse for inaction and inertia. Our economic recovery depends on women and men having genuine choice and equal access to re-engage and fully participate in the workforce. In fact, the business case is very clear. Improving gender equality outcomes in your business will improve your company’s performance, productivity and profitability. Achieving workplace gender equality is not just a commercial imperative. It is also one of the most effective ways to close our nation’s stubborn gender pay gap. Australian employers play a crucial role in this process. I urge all employers to pick up the pace and take action on pay equity to ensure the work of all female employees is fairly valued and rewarded, as is the case for men'. [Source: Workplace Gender Equality Agency media release 25/02/2021] Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 10 ME_171017618_1 US Disability groups are urging SEC and Nasdaq to include people with disabilities in Nasdaq's board diversity proposal Context ▪ In December 2020, Nasdaq filed a proposal with the Securities and Exchange Commission (SEC) to adopt new listing rules related to board diversity and disclosure. ▪ Under the proposal, all Nasdaq-listed companies will be required to publicly disclose board-level diversity statistics through Nasdaq’s proposed disclosure framework and to meet minimum board diversity requirements or explain why not. For a brief overview of the proposal see: Governance News 9 December 2020 at p5. Calls for the proposed new requirements to be expanded to include disability ▪ The proposal defines a diverse director as one who self-identifies as female, underrepresented minority or LGBTQ+. ▪ Not for profit group, Disability:IN and the American Association of People with Disabilities (AAPD) have jointly called on the SEC and Nasdaq to expand this definition to explicitly include people with disabilities. ▪ The groups argue that this would: a) be a step towards ensuring people with disabilities are represented on boards; b) positively impact the economic independence and quality of life for people with disabilities; and c) be in line with institutional investors' expectations around diversity on boards. [Source: Disability:IN media release 23/02/2021] 2020 Study into gender diversity on US private company boards finds only 11% of seats are held by women A joint Crunchbase, Him for Her and Kellogg School of Management study into the composition of the boards of the 350 most heavily funded US based private venture-backed companies has found that in 2020: ▪ 89% of seats are held by men: – Overall, of the 2,457 board seats included in the study, women held 11% of board seats (up from 7% in 2019) – Only 3% of seats are held by women of colour (compared with an estimated 18% held by men of colour) – Crunchbase comments that by comparison women account for 28% of S&P 500 board seats and 23% of Russell 3000 board seats. ▪ Almost half of boards include zero women – 49% of companies had all male boards (down from 60% in 2019) – 81% of companies do not include a woman of colour on their board – 18% of the boards studied included two or more women – 6% of the boards studied included at least three women – Crunchbase comments that by comparison, there are zero S&P 500 companies with all male boards and only 7% of Russell 3000 companies with all-male boards. [Sources: Crunchbase media release 01/03/2021] In Brief | The Governance Institute is launching its flagship directors course in a women's only format in a bid to boost senior leadership roles for women. Governance Institute CEO Megan Motto said that the aim is 'to encourage a new level of diversity at the top by helping equip, empower and inspire the next generation of female leaders' [Source: Governance Institute of Australia media release 25/02/2021] Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 11 ME_171017618_1 Corporate Social Responsibility and Sustainability Addressing inequality: Could introducing a right for workers to appoint board representatives work in the US context? Key Takeouts ▪ Broadly, the paper argues that the introduction in the US of a right for workers to appoint a certain proportion of directors to boards is unlikely to be effective (on its own and in the absence of the supporting frameworks in place in jurisdictions where codetermination is already established) in amplifying worker voices and ensuring their interests are factored into company decision making/distribution of financial returns. ▪ The paper puts forward a number of suggested policy measures that would support worker interests now, and lay the groundwork for the introduction of a form of minimal codetermination should it be introduced at some point in future. ▪ Among the suggested policy reforms is the suggestion that board compensation committees at all large companies be replaced with 'board workforce committees' which would have broad responsibility to ensure fair pay and working conditions for the company's entire workforce (not just full time employees) as well as oversight of policies on pay, workforce diversity, equity, inclusion, safety and corresponding disclosure requirements. A new paper - Lifting Labor’s Voice: A Principled Path Toward Greater Worker Voice And Power Within American Corporate Governance – looks at the potential for introducing a new right for workers to appoint a certain percentage of directors on company boards in the US context (as has been suggested by some US lawmakers – Part 1 of the article outlines the key current proposals), and what would be required to make the new requirement work as intended to amplify worker interests and ultimately to ensure workers receive a fair share of corporate gains. Some Key Points ▪ Broadly, the article argues that board level representation is only one element of 'the comprehensive codetermination regulatory strategy as it is practiced abroad' for example, in Germany that enables it to be effective. The writers argue that in the absence of a similar supporting framework in the US, the introduction of a new board level representation requirement on its own, is 'unlikely to be successful'. ▪ As a practical matter, the writers consider that it would also be necessary to answer a number of questions around how the requirement would operate, before it could be implemented in the US. For example, it would be necessary to decide: a) which workers would be eligible to vote for directors; b) who would be permitted to serve as a worker director; c) how worker director campaigns and elections would be conducted; and how boards with worker directors would function. ▪ The article goes on to outline a number of policy reforms which the writers consider would serve to both amplify workers' voices and to facilitate/support the eventual adoption of 'an effective and efficient system of board-level representation for American workers' should it be introduced in future. The proposed changes are intended to work together to 'align corporate governance and labor law policies toward environmentally responsible, sustainable growth, fair profits for stockholders, and fair treatment of all stakeholders, and specifically workers'. Suggested policy reforms Suggested policy reforms include: ▪ Requiring all large US corporations (public or private), to respect the interests of all stakeholders, including workers, and to focus on sustainable growth ▪ Mandating the Securities and Exchange Commission (SEC) to require to require Employee, Environmental, Social, and Governance (EESG) disclosure from all large companies and institutional investors; ▪ Replacing board compensation committees at all large companies with 'board workforce committees' – these new board workforce committees would have broader responsibility to ensure fair pay and working conditions for all employees (ie the company's entire workforce), and have oversight of policies on pay, workforce diversity, equity, inclusion, safety and corresponding disclosure requirements Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 12 ME_171017618_1 – the new board workforce committees would also be authorised to institute European style 'works councils' to increase worker voice and provide information to the board or, merely to monitor worker sentiment, oversee forums at which workers can be heard and ensure that there are protections from retribution against workers who participate. The writers comment that 'The workforce committee would, in this model, become a centre of accountability. At companies that did not treat workers well, the members of the committee would have to bear the heat now applied only to management. And the requirement for worker director membership, and greater full board involvement in workforce issues, will give the worker directors more clout. Experimentation of this kind might lead to converging best practices that eventually make the implementation of a system of ground-up worker voice at all large companies feasible'. ▪ enacting labour law reform to 'reinvigorate workers’ rights to join a union and authorise sectoral bargaining' ▪ ensuring institutional investors align their behaviour with 'the interests of the people whose capital they deploy' by: – ensuring all institutional investors are free to take into account key EESG factors (and requiring socially responsible mutual funds, index funds, pension and retirement funds to do so) – disclosing how they factor EESG considerations into their stewardship policies. [Sources: CLS Blue Sky blog 25/02/2021; Strine, Leo and Kovvali, Aneil and Williams, Oluwatomi, Lifting Labor’s Voice: A Principled Path Toward Greater Worker Voice And Power Within American Corporate Governance (February 24, 2021). U of Penn, Inst for Law & Econ Research Paper No. 21-09, Available at SSRN: https://ssrn.com/abstract=3792492] Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 13 ME_171017618_1 Institutional Shareholders and Stewardship 'Activist stewardship'? Engine No 1 pushes for board change at Exxon Mobil with support from CALSTRS Engine No 1 is pushing for board change at Exxon Mobil to trigger a shift in strategy Activist Engine No 1 is exerting pressure on Exxon Mobil to implement steps to address its financial underperformance, which the group attributes to Exxon's failure to adjust to and/or plan for the changes impacting the sector, including the transition to a net zero economy. Among other things, Engine No 1 argues that the company has failed to develop a long-term strategy to protect/increase value in the face of the rapid change and to 'install directors' with the necessary energy industry skills/experience to 'enhance long-term shareholder value'. To help address these issues, Engine No 1 has been pushing since January for the company to appoint four independent director candidates to trigger what it considers to be the required shift in direction. California State Teachers' Retirement System (CalSTRS) has put its support behind Engine No 1's nominees and behind the Reenergise Exxon campaign on the basis that: 'ExxonMobil’s board must be strengthened to improve the company’s underperformance linked to declining returns on capital expenditures and undisciplined capital allocation. As shareholders of ExxonMobil, we believe the ExxonMobil board requires significant change to fulfil these goals, and the candidates submitted by Engine No. 1 are equipped with the skills needed to address ExxonMobil’s financial underperformance and prepare for the global energy transition'. Exxon has appointed two new directors Ahead of the company's investor day on 3 March, and AGM on 27 May, Exxon Mobil announced that two new directors (neither of whom are Engine No 1/CALSTRS backed nominees) have joined the board. The new directors are: ▪ Michael Angelakis, the current chair and CEO of investment company Atairos, non-executive director of TriNet Group Inc and Groupon Inc and former chair of the Federal Reserve Bank of Philadelphia ▪ Jeffrey Ubben, co-founder of Inclusive Capital Partners and ValueAct Capital Partners and non-executive director of Appharvest Inc, Enviva Partners LP and Nikola Corporation) have joined its board of directors Announcing the changes, Exxon Mobil Corporation Chair and CEO Darren Woods said that the new appointments will bring valuable experience and expertise to the board. 'We welcome these new directors as part of our ongoing board refreshment, which builds on the diverse global business experience of our current members. Michael and Jeff’s expertise in capital allocation and strategy development has helped companies navigate complex transitions for the benefit of shareholders and broader stakeholders. Their contributions will be valued as ExxonMobil advances plans to increase shareholder value by responsibly providing needed energy while playing a leadership role in the energy transition'. Exxon's statement goes on to say that the appointment of the new directors means that 12 of the 13 directors on the board are independent and brings director tenure down to less than five years (as seven directors have been appointed since 2016) which is substantially less than the eight year average tenure for S&P 500 companies. Engine No 1 has previously stated that, 'While the Company has pointed to the frequency with which the Board refreshes itself, we believe it is telling that such refreshment over the years has not been accompanied by a new direction or material progress on these issues. We believe that enhancing the Company’s long-term future requires a clean break with the past, and we look forward to continuing to make the case for real change at ExxonMobil'. An example of activist stewardship Writing in Harvard Law School Forum, Robert Eccles (Oxford University), Aeisha Mastagni (CalSTRS), and Kirsty Jenkinson (CalSTRS) frame the Reenergise Exxon campaign as an example of 'activist stewardship'. Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 14 ME_171017618_1 Activist stewardship describes a situation in which a universal owner (in this case CALSTRS) faced with a company that has proven resistant to engagement efforts over a prolonged period (eg Exxon), and for whom divesting the stock is not an attractive proposition, opts to back an activist campaign for board change in order to trigger a necessary shift in strategy. The aim of this approach from the perspective of universal owners like CALSTRS is both to address concerns about the individual financial performance of the company, and more broadly at a system level. In this case for CALSTRS 'Exxon Mobil is problematic at both the company (loss of shareholder value) and the system (puling high carbon assets out of the ground) level. This is why it is supporting Engine No. 1’s campaign'.