Board Member Votes
Proper corporate governance starts at the top. Along with senior management, the board owes a fiduciary duty to its shareholders. Good board selection and structure are crucial to long-term success, and much emphasis has been placed on board composition over the past few years. Unfortunately, a lot of that activity has been geared towards appointing board members based on gender and skin-surface characteristics, rather than on merit and qualities that drive shareholder value.
Strive believes that board members should be appointed on merit. That is why we dedicate so much time to researching every single board member of every company across all our funds. This year, the process involved thousands of man-hours and three levels of human review. This is what we promise our clients, and we deliver.
Each and every board member goes through an initial proprietary review. Well beyond the four-corners of the proxy ballot, we search work history, public statements, social media posts, and other sources. Our goal is to determine whether the individual promotes or advances non-pecuniary causes or means: Is their experience relevant to the company? Do they promote fiduciary value or espouse non-financial values? Do they publicly advocate for stakeholder capitalism, ESG, or DEI? If the answers to any of these questions suggest the board member or nominee may not always put shareholders first, we conduct a deeper analysis.
The deeper analysis determines whether we vote against a board member or simply abstain. At a high level, we vote against board members that are promoting non-pecuniary factors within the boardroom. We abstain from board members that fall just below that threshold.
In addition to the qualifications of each individual, board structure is also a key component of strong corporate governance. Accordingly, after we research each board member individually, we conduct analysis based on their position on the board itself. Those analyses are explained below.
Companies such as Antero Resources and Smith & Wesson feature an “ESG Committee” as one of the standing committees of the Board of Directors.[108] Others, like Nasdaq, Kohl’s, and Albertsons, include “ESG” in the title of one of their board committees.[109] If a director serves as the chairperson of an ESG committee, whether it is so named or has ESG as part of its title, Strive will vote against that director. Even if an ESG committee were concerned merely with workplace safety, for example, we would vote against the chairman; to specifically use the term “ESG” reflects either the company’s dedication to ESG principles or, at the very least, its acquiescence thereto.
Furthermore, the board—whether through one of its committees or as a whole—should not bear oversight for ESG policies in the first place, because the scope of its authority does not extend to every level of the organization. The compensation committee, for example, determines the compensation and benefits for named executive officers, but has no influence over how any entry-level employees are paid. The board of directors possesses limited resources, and therefore if a body for oversight of specific issues like workplace safety or personnel disputes must exist at all, it should be formed at the management level, where decisions regarding company operations are actually made.
We use the nomenclature “ESG committee equivalent” to refer to any board committee that bears responsibility for determining one or more facets of a company’s ESG strategy. Often, ESG oversight is delegated to a nominating and corporate governance committee, which may in turn receive reports from a management-level ESG steering committee or DEI council. At American Eagle, for example, an executive committee sets ESG strategy and the Board monitors the progress of related initiatives.[110]
There are other instances when the compensation committee is tasked with addressing issues specifically related to DEI, since the committee may also oversee talent management, while the nominating committee covers all other ESG matters. This is the case at many companies, including Host Hotels and Smucker’s.[111] Strive will always vote against a director who chairs an ESG committee equivalent.
We vote against the chairman of the compensation committee if we have determined that the executive compensation plan contains clear non-fiduciary factors. Best Buy, for example, included ESG metrics in its latest compensation package, worth 15 percent of its short-term incentive program.[112] At Harley-Davidson, DEI goals comprised 25 percent of the executive performance-based awards, weighted equally to the company’s total revenue.[113] Consequently, we voted against the sitting Compensation Committee chairs at these companies—and at many others, for similarly egregious compensation packages.
At many companies, the audit (or risk) committee of the board is responsible for ensuring that the ESG reporting promised and created by other board committees (such as an ESG oversight committee) complies with the relevant legal requirements of the jurisdictions in which the company operates. Because the audit committee is not typically involved with setting or promoting the ESG strategy, we typically do not vote against the committee chairperson if they merely ensure that the company’s reporting is accurate and compliant.
Where the audit committee’s role goes beyond compliance, however, Strive will vote against the committee chair. At BJ’s Wholesale Club, for example, the Audit Committee is charged with “assisting the board with its oversight of environmental, social and governance . . . strategy.” The Committee also bears “oversight responsibility for risks and opportunities related to ESG issues.”[114] These functions extend the Audit Committee’s mandate beyond managing risk to actively participating in ESG initiatives. Because the Audit Committee’s role in this instance was akin to an ESG Equivalent Committee, Strive voted against the Committee chair in that instance.
