Businesses Need to Care About the Governance in ESG

Stuart Kaplow

Companies are under increasing pressure to do the right thing and to report it through publicly released environmental, social and governance (ESG) data. While investors, regulators, shareholders, customers and other stakeholders often focus on environmental and social matters, from climate change to Black Lives Matter, the Governance prong, the “G” in ESG is key to how all of this is accomplished by a company.

Boards of directors have oversight obligations for ESG risks and disclosures of those risks. Those obligations flow from current interpretations of both the federal securities laws and fiduciary duties of loyalty and care rooted in state law. Against that statutory framework for company governance, impacting public companies and family business corporations alike, good governance often requires a new broader skill set and more communication about the company decision making process.

We often assist companies in disclosing ESG governance describing how the business leadership acts responsibly and pursues sustainable practices when measured against articulable government standards. In 2021 stakeholders want to see hard data demonstrating diversity in the board and c-suite and more.

A limited number of companies are California based, but the state’s corporate diversity requirements are particularly good to measure against.

California’s AB 979, signed into law September 30, 2020, requires public companies headquartered in California to have at least one board director who is from an “underrepresented community” – defined as “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.” The law requires additional board members from underrepresented communities by the end of calendar 2022, depending on the total number of members on a company’s board. Companies that violate the law may be fined $100,000 for the first violation and $300,000 for subsequent violations.

AB 979 followed an earlier 2018 California law (SB 826), that required a public company headquartered in California to have at least one woman on its board of directors by the end of 2019, with future increases pegged to a company’s board size. A 2020 report from the California Partners Project found that while nearly 30% of public boards in California were all male in 2018, the figure decreased to less than 3% after the passage of SB 826 – an increase of 669 board seats filled by women. (We will post a future blog article about the California law.)

New to measure against and likely a better yardstick for public and private companies alike is Maryland’s new corporate diversity law that includes multiple requirements for reporting diversity data.

Maryland House Bill 1210 requires specified businesses in the state to demonstrate either (1) diversity in their board or executive leadership or (2) support for “underrepresented communities” in their mission. The bill also requires a state equity report that compiles diversity data relating to corporate boards, leadership, and missions. Additionally, the bill requires a person that submits an annual report to the State Department of Assessments and Taxation to submit related diversity data.

We have worked with companies that have utilized other race neutral measures that promote corporate diversity. For example, a model we have used multiple times is the SEC’s own internal self assessment tool for evaluating the diversity policies and practices of entities regulated by the agency.

Another example is “the Rooney Rule” used by the National Football League to address the significant lack of minority head coaches in the League. The rule requires teams to interview at least one minority candidate for a vacant head coach position. At least one analysis showed the Rule increased diversity among coaches in the League.

And while not yet approved, we are assisting public companies understand the Nasdaq proposal filed with the SEC to adopt new listing rules related to board diversity and disclosure. If approved by the SEC, the new listing rules would require all companies listed on Nasdaq’s U.S. exchange “to publicly disclose consistent, transparent diversity statistics regarding their board of directors.” Additionally, the rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.

So yes, governance is more than about shareholder value. Good governance is key to ESG.

As we await new federal statutory and regulatory action promised by the Biden Administration, today we provide legal and non-law solutions not only to mitigate ESG risk but also to work with businesses in order to maximize ESG opportunities and much of the efficacious low hanging fruit can be in matters of governance.

We are already preparing clients to thrive in the all but certain and fast approaching more prescriptive ESG regulatory framework.

There is no one right answer for each individual company on how to mitigate risks and maximize opportunities with respect to ESG governance issues. These are complex, evolving and, in some instances, highly charged issues, but businesses must act now.

About the Author

Nancy Hudes and Stuart Kaplow, two Maryland attorneys who are among the principals at ESG Legal Solutions have combined forces, joining together to publish this blog leveraging their focused experience and legal knowledge for business interests in the ESG space.

Subscribe
Subscribe to ESG Legal Solutions, LLC via Email or RSS
Please enter a valid email address and click the button.
Recent Posts
More content can be found in the Find section.