Board senseless? The investor fight against climate incompetence

As some investors push back against company boards over climate literacy, others are nominating experts of their own

This article is part of the RI Engagement 2020 series, taking a look at the current state of play for shareholder engagement and ESG, and reflecting on its future. Click here to see all the articles published in the series so far.

Lee Raymond had been a senior board member at JP Morgan Chase for nearly two decades. That was, until last month, when investors ousted the former Exxon Chair from his position as Lead Independent Director – arguably the second most important role at the bank – insisting he was “distinctly ill-equipped to serve in this role” because of his “past opposition to climate change science and policy, and personal financial interests”.

They were strong words, filed to the US Securities and Exchanges Commission (SEC) by New York City Comptroller Scott Stringer, on behalf of three of the city’s pension funds.

“We are a long-term investor, and we are reliant on the directors we elect to represent us in the board room,” Stringer tells RI, noting that JP Morgan is currently the largest financer and underwriter of fossil fuels in the world. “This is an urgent issue: the money that JP Morgan provides to fossil fuels now will have an impact for a long time, so as investors, we need to make sure the right people are at the table right now.”

This isn’t the first time Stringer’s office has opposed a non-contested board member on climate grounds. In 2017, it took on Barry Smitherman, a Director at NRG Energy, because of his views on climate change.

But the company and investor response to the two campaigns suggests something has changed.

In a revealingly quick victory, JP Morgan announced it was demoting 81-year-old Raymond to Director within weeks of the filing with the SEC, sparing itself a vote on the topic at AGM last month. Other investors, including the State Treasurers of Connecticut, Oregon and Rhode Island, and pension giant CalPERS, had already voiced their support for the campaign.

Back in 2017, on the other hand, other investors kept quiet on Smitherman – a man who, when standing as a political candidate, reportedly said he had “been battling this global warming hoax for six years now” – and 93% backed him at the vote. NRG also kept quiet. It appears that it simply did not feel the same pressure as JP Morgan did three years later.  

“Things are changing,” observes Stringer. “Corporate governance has evolved from board independence to board quality. Investors are much more aware of the need to have the right people with the right skills to manage these emerging risks.”

New York City did not, however, support a similar campaign at Exxon this year, led by fellow Comptroller Thomas DiNapoli of New York State, and the Church of England Commissioners. The pair urged investors to vote against the oil giant’s entire board, in protest against its habit of blocking climate resolutions from the ballot via the SEC. In public, the call was to vote against the entire board, but a number of insiders claim the private discussions between investors focused on two board members in particular. And that seems to play out in the votes: of Exxon’s 10 board members, eight received more than 95% support in the vote. The remaining two, Angela Braly and Kenneth Frazier, received notably less, with 84.1% and 83%, respectively.

Blackrock, which has stepped up its climate voting activity this year, confirmed that it voted against the pair, citing “insufficient progress on TCFD aligned reporting and related action” as its justification. It also said that Foster had failed “to provide investors with confidence that the board is composed of the appropriate mix of skillsets and can exercise sufficient independence from the management team to effectively guide the company in assessing material risks to the business”.

In the context of other climate resolutions that have gone to vote this season, 16% and 17% support – which is essentially what the campaign at Exxon achieved – doesn’t seem like a big win. Proposals like the one at oil & gas company Woodside, asking it to set and disclose climate targets, garnered more than 50%. But votes on directors are binding, while those on lobbying and disclosure generally aren’t, so a dip in support for a board member is a serious warning shot from investors.

Indeed, it may even be the binding nature of board elections that causes such low support for these climate campaigns.  

“Investors are still reluctant to vote against directors on climate as readily as they vote for non-binding climate resolutions,” observes Dan Gocher, Director of Climate & Environment at the Australasian Centre for Corporate Responsibility, which advised Australian investors to vote against the re-election of Peter Coates at mining company Glencore and Ian Macfarlane at Woodside Petroleum this year.

“Investors can recognise a particular board member is a problem when it comes to taking climate change seriously at a company – sometimes they will even acknowledge that the person is a climate change denier – but they still see voting against re-election as too much of an escalation”.

Proxy advisors have mostly sided with the board in these matters so far – although Glass Lewis advised against the re-election of Raymond at JP Morgan – and that also has a major influence on the voting results, according to Gocher.

“It seems like proxy advisors don’t consider the personal views of a board member on climate change, even if they have been publicly expressed,” he says, although he acknowledges the difficulty here: board re-election is standard procedure, so climate considerations are never explicitly incorporated into the vote.  

“Proxy advisors are going to have to change the way they review directors,” says Gocher, including how they identify companies that need board members who can manage a low-carbon transition. “An energy company is not the same as a tech company when it comes to the skills required here.”

"Corporate governance has evolved from board independence to board quality. Investors are much more aware of the need to have the right people with the right skills to manage these emerging risks" – Scott Stringer, New York City Comptroller

But in research conducted last year by ISS, one of the world’s largest proxy advisors, investors indicated that they wanted to focus on disclosure when it came to climate change, not board elections. 60% of respondents to a survey on ISS’ mainstream voting policy said advice should be based on encouraging companies to “assess and disclose climate-related risks and take actions to mitigate them where possible”. For companies that didn’t do this, investors said they favour direct engagement and resolutions dedicated to the topic – not voting against directors.

Georgina Marshall, ISS’ Global Head of Research, points out that investors can choose “specialty” voting policies for SRI, faith-based investors and sustainability, which have all recommended opposing the re-election of board members at “a number of companies” over climate concerns. The sustainability option, for example, advised a vote against Lee Raymond this year.

But “climate risk and competency concerns typically come up as specific considerations in climate-related shareholder proposals, rather than being reflected in recommendations on director elections,” she concludes. On differentiating between board composition at companies vulnerable to climate risk and those that aren’t, she tells RI that, again, it depends on the policy an investor chooses: the ISS Climate Policy uses a carbon risk metric, which in turn “contributes to determining when a director, or directors, should be subject to adverse vote recommendations for climate-related reasons”.

The issue looks set to continue to climb the agenda, with influential shareholder engagement initiative Climate Action 100+ identifying board composition as a core component of its governance demands at companies. There are also suggestions that investors could turn their attention to the competency of auditors and other key players in coming years.

Just this week, climate NGOs led by Just Share, launched a campaign against seven board members at South Africa’s Standard Bank, claiming they are “conflicted on climate change-related matters by virtue of their ties to the fossil fuel industry”. Five of those seven are up for reelection later this month, and the group are calling on shareholders to vote against them. If not, it claims, and all the members are elected or re-elected, “directors with fossil fuel ties will represent 42% of Standard Bank’s independent directors (5/12); 47% of its non-executive directors (7/15); and 41% (7/17) of the board as a whole”.

The Companies Act 2008 requires board members to recuse themselves from meetings in which matters will be considered that present a conflict of interest, says Just Share.  “In these circumstances, responsible investors holding Standard Bank shares are faced with no good options: either these board members will recuse themselves, creating a corporate governance void when the board considers some of its most important strategic issues as – by the bank’s own admission, climate-related matters are – or they will not, compromising the ability of the board to provide climate-competent leadership.”

Board nominations

There is another trend developing, too. As the groundswell builds around voting against directors, something happened for the first time ever this proxy season: investors successfully nominated a climate transition expert to a company board.

Samuel Leupold was CEO of Wind Power at DONG Energy, which stood for Danish Oil and Natural Gas, during its transformation into one of the world’s largest pureplay offshore wind developers, now named Orsted.

Carola van Lamoen is the Head of Active Ownership at Dutch asset manager Robeco, which led the effort to appoint Leupold to the board of Italian energy company Enel, so he could “contribute to moving Enel away from its exposure to fossil fuels and towards renewables in an effort to make the company carbon neutral by 2050”.

There were a number of reasons why the initiative was successful, van Lamoen says. Firstly, Enel had already acknowledged climate change as part of the sustainability strategy overseen by its board, so the move wasn’t perceived as at odds with the company’s existing plans.

Secondly, the Italian system lends itself to this kind of campaign: national legislation to protect minority shareholders includes a right for them to nominate directors. Robeco joined the Executive Committee of the country’s asset management body, Assogestion, which coordinates these nominations from minority shareholders.

“These moves may be difficult to achieve at a large scale because not all jurisdictions make it possible,” van Lamoen concedes, but points out that Robeco has also nominated directors in other countries, such as Brazil, in relation to non-climate issues.

And finally, and most importantly, she says, it was down to investor collaboration. Robeco leads on Enel as part of Climate Action 100+, and from the start it got the support of fellow members. “It is essential to realise that nominating board members successfully is not something you can do alone.”

It is also essential to acknowledge how much legwork is involved in nominating climate expertise to the board as a shareholder, she continues. Unlike voting against board members – which takes little extra effort – adding a member is labour intensive. “We started this process almost 18 months ago, and we joined the Executive Committee of Assogestion last summer, so it has been a long time coming and has involved a lot of effort and discussion,” explains van Lamoen. “This is not something you just knock up on a Friday afternoon.”

For shareholders interested in following suit, the first step, she says, is to push companies to undertake a board assessment, which should include climate competence. “Boards must identify the skills they need to help them understand how climate change might affect their particular company, and which of those skills are currently lacking.”

Adding someone with those skills to the board is then an option, she continues, but there are others. “Some companies opt for the establishment of advisory boards composed of external climate experts that can help the board identify strategically important climate issues, for example.”

But ACCR’s Gocher points out that, even when climate experts do have a seat at the table, it isn’t an automatic ticket to success.

“It’s worth remembering that there has been a climate scientist on the board of Exxon Mobil since 2017,” he says, referring to Susan Avery, the well-regarded ex- UN advisor who was once reported as saying “climate science is telling us to get off fossil fuels as much as possible”. She was appointed by Exxon in response to shareholder concerns over climate, but clearly hasn’t satisfied those concerns.

“It just goes to show, one person isn’t enough to change the board,” says Gocher. “Investors need to make sure that the whole board understands what is needed to manage a climate transition.”

Note: The name of the Kenneth Frazier has been corrected in this article.