5/9/24 – Issue 8.66 – Your weekly news on all things board. 

Competing visions of corporate purpose –shareholder primacy or stakeholder commitment– are nothing new, yet the debate over whether and how boards consider the interests of various constituents continues. Shareholder lawsuits are the latest tool being deployed to convince boards to prioritize the interests not solely of investors but also of the broader society. This week a Delaware judge dismissed a shareholder suit against Meta, which had aimed to hold the board accountable for maximizing profits at the expense of broader social interests which it argued was a failure of corporate governance. And a new legal commentary suggests that many such shareholder suits, often filed by activist investors aiming to advance change on singular environmental or social issues, would detract from the true goal of long-term corporate sustainability which by definition must take the interests of all stakeholders into account. 

In other news: Musk’s attempt to become “Indispensable”, evolving lines of ownership between the board and management, corporate political spending, nurturing and measuring stakeholder trust, and moving the needle on AI board oversight.

In the Spotlight

Dismissed Meta Shareholder Lawsuit May Spark Debate On Board’s Role In Society  

Stimulating greater discussion about the board’s role in dealing with social problems

“A shareholder lawsuit asserting that corporate board members’ fiduciary duties should extend beyond generating profits for investors to include upholding broader societal and economic interests was dismissed by a Delaware judge this week, setting the stage for greater debate over whether corporations should be held responsible for potentially detrimental effects their products might have on society and the global economy…Vice Chancellor J. Travis Laster rejected shareholder James McRitchie’s lawsuit that claimed Meta Platforms’ board of directors and founder Mark Zuckerburg breached their fiduciary duties because its social media platforms emphasized profits without taking into account external factors of corporate governance.” CORPORATE BOARD MEMBER

Opinion: Stakeholder Governance and the Eclipse of Shareholder Primacy

Short-termism has hobbled corporate innovators, impeded long-term economic prosperity

“...Today, there is a growing recognition of the harm that shareholder primacy has wrought.  In a widely heralded edition of his annual letter to shareholders, Jamie Dimon, CEO of JPMorgan Chase, recently decried the ‘treadmill to ruin’ for companies that succumb to the undue pressure of quarterly earnings by resorting to shortcuts, calling instead for building shareholder value over the long run by considering all of the company’s stakeholders, from customers to employees to communities….The panoply of complex stakeholder issues that companies face today remains integral to corporate sustainability, responsible risk management, and value creation.  But the agendas of activists targeting stakeholder issues — in some cases, opposing consideration of such issues altogether, and in other cases, seeking to mandate the board’s prioritization of a specific stakeholder issue — threaten to distort stakeholder governance and undermine our progress away from the era of shareholder primacy.” CLS BLUE SKY BLOG (COLUMBIA LAW SCHOOL)

From Boardspan this Week:

The Real Business of Business

Criticism of shareholder-oriented capitalism has called on companies to focus on a broader set of stakeholders

"The guiding principle of business value creation is a refreshingly simple construct: companies that grow and earn a return on capital that exceeds their cost of capital create value. The financial crisis of 2007–08 and the Great Recession that followed are only the most recent reminders that when managers, boards of directors, and investors forget this guiding principle, the consequences are disastrous—so much so, in fact, that some economists now call into question the very foundations of shareholder-oriented capitalism. Confidence in business has tumbled. Politicians and commentators are pushing for more regulation and fundamental changes in corporate governance. Academics and even some business leaders have called for companies to change their focus from increasing shareholder value to a broader focus on all stakeholders, including customers, employees, suppliers, and local communities.” MCKINSEY & COMPANY via BOARDSPAN LIBRARY

Across the Board

Elon Musk Tries to Make Himself Indispensable at Tesla Ahead of Pay Vote

Tesla has boosted spending on AI development and has stressed development of a robotaxi

“Elon Musk likes to say he doesn’t want to be CEO of Tesla. But the chief executive has spent the past weeks dramatically reworking the automaker in ways that make the person in the CEO chair even more crucial to its future. He is pushing for changes that make Tesla’s traditional car business less of a priority. As he instead focuses on robotics and driverless cars, he has threatened to take his ideas on advanced tech elsewhere if he isn’t given more ownership of the electric-car maker. Meanwhile, Tesla has begun a campaign to win shareholder approval in June to reauthorize his record $56 billion compensation package, first approved in 2018.” THE WALL STREET JOURNAL

Is Elon Musk’s Historic Proposed Pay Package Fair?
The board is making a curious argument about why he deserves the package a judge threw out as excessive

“Outlandish pay for a CEO is nothing new, of course. But CEOs typically get paid not for what they’ve done, but for what companies hope they will do: The pay is an incentive for good performance in the future, not a reward for past accomplishments. (That’s how Elon Musk’s 2018 package was designed: He would get paid in stock options based on hitting certain performance targets in the future.) But in this case, shareholders are being asked to give Musk stock options worth roughly 10% of the company, without him having to do anything more to earn them.  From a purely rational point of view, this would seem to make little sense. Even if you think Musk deserves something for the work he did over the past six years, Tesla’s board of directors had no obligation to offer him the original deal…The board could have taken the opportunity to negotiate a new compensation arrangement that would be less costly to shareholders. It just didn’t.” FAST COMPANY

Evolving Lines of Responsibility Between the Board and the Management
Who is responsible for corporate strategy, human capital, risk management, and operations?

“As the business environment continues to evolve in complexity, so does the oversight role of boards. At the same time, investor, regulator, and other stakeholder expectations of board involvement in certain aspects of the business, including aspects traditionally within management’s sole purview, are changing in ways that may blur the lines of responsibility between the two. Ultimately, management’s job is to manage, whereas the board’s role is to oversee. Effective oversight relies upon maintaining clear lines of responsibility between the board and management…To facilitate independent board oversight of management and avoidance of conflicts of interest, some may advocate for a separation of the roles of the board chair and CEO and selection of an independent chair or, where there is a combined CEO/chair structure, appointing a lead director whose specific responsibilities are principally aimed at providing independent leadership to the board.” HARVARD LAW SCHOOL FORUM ON CORPORATE GOVERNANCE

Primer on Corporate Political Spending for Incoming Directors
Election contributions from the corporate treasury, can be unlimited to some political actors

“Over the past year, several corporate executives have expressed a concern to the Center for Political Accountability that new members of corporate boards often lack a broad knowledge of corporate political spending and what it entails. They saw this as impairing new directors’ ability to set political spending policies and conduct the due diligence required to protect their company, especially in today’s risk fraught political environment…The Primer opens by laying out the types of risk political spending poses to companies. The focus is on election-related spending using corporate or treasury funds. This is important for distinguishing the types of political spending in which companies can engage.” HARVARD LAW SCHOOL FORUM ON CORPORATE GOVERNANCE

How Boards Are Nurturing and Measuring Stakeholder Trust

Few include stakeholder trust-building in their governance strategy. What’s stopping them?

“Trust is at the core of all great human relationships. For businesses, earning and protecting stakeholder trust is fundamental to ongoing viability and success, not just in terms of reputation, but as an important driver of financial performance. Recent Deloitte research revealed that trustworthy companies outperform their peers in market value by up to four times, and that 88% of customers will return to buy from a brand they trust. Our research also found that customer perceptions can sour when companies fail to build trust, negatively impacting brand value. Workforce research uncovers the powerful link between trust and employee engagement: We found that 79% of employees who highly trust their employer feel motivated to work.” DELOITTE

AI’s Role in Shareholder Proposals
Given the growing adoption of AI by businesses, we will observe more proposals in the future

“An investment trust for union members, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) filed an AGM proposal demanding greater transparency on AI at five entertainment companies (Apple, Comcast, Disney, Netflix and Warner Bros). It also filed a proposal at Amazon asking for a new committee of independent directors on AI to address human rights issues…This note focuses on the response of leading proxy advisors, Glass Lewis and ISS, to this new type of shareholder proposal with an emphasis on the one filed by AFL-CIO at Apple. We have  concentrated on this proposal since it was endorsed by both proxy advisors and their analyses encompassed similar and additional aspects compared to those reviewed in the context of Arjuna’s proposal the Microsoft AGM. As major institutional investors typically receive the research and vote recommendations produced by one or both of these advisors prior to voting at shareholder meetings, their stance carries significant weight, especially for a new and complex topic like AI.” HARVARD LAW SCHOOL FORUM ON CORPORATE GOVERNANCE

The Board Member’s Oversight of AI Risk – Moving from Middle to Modern English

Boards will need to be methodical in their approach to navigating the risks of leveraging GenAI

“‘A generative AI system is one that learns to generate more objects that look like the data it was trained on.’ It is a revolutionary technology akin to the release of mobile telephones in the 70’s or better still, the introduction of automobiles a mere 500-years after Chaucer penned his literary classic…Regulators and lawmakers alike have begun to take notice. On the tail end of FTC Chair Lina Khan’s joint statement on AI, we heard of the White House’s piqued interest in this technology during the summer of 2023 when the Biden-Harris Administration successfully secured voluntary commitments from some of the world’s leading technology companies to manage the risks posed by artificial intelligence. Companies like Amazon, Google, Nvidia, Microsoft, and Salesforce committed to ensuring the safety of their artificial intelligence products before public introduction, building systems that put security first, and earning the public’s trust before, during, and after the development and release of said products.” HARVARD LAW SCHOOL FORUM ON CORPORATE GOVERNANCE

Seat at the Table

• ExxonMobil elects to its board Maria Dreyfus, CEO and Founder of Ardinall Investment Management

• Emerson announces to its board Calvin Butler, President and CEO of utility firm Exelon

• Tropicana Brands Group appoints to its board Olu Beck, former CFO of food company Ben's Original

• Equifax elects to its board Barbara Larson, former CFO of Workday

• Neighborhood app Nextdoor Holdings adds to its board Marissa Mayer, CEO of tech firm Sunshine Products; Niraj Shah, Co‑founder, Chief Executive Officer and Co-Chairman of Wayfair; and Robert Hohman, Founder and former CEO of Glassdoor

• Life insurance company Guardian elects to its board Lauren Tyler, EVP and Global Head of Human Resources for JPMorgan Chase Asset & Wealth Management

• Cetera Financial Group appoints to its board Marten Hoekstra, former CEO of UBS Wealth Management Americas

• Cloud based tech firm Alight welcomes to its board Dave Guilmette, former CEO of the Global Health Solutions division of risk firm Aon; and Coretha Rushing, former Corporate Vice President and CHRO for Equifax

• Marketing firm Ibotta adds to its board Stephen Bailey, CEO and Co-Founder of ExecOnline

• Seaport Therapeutics elects to its board Denice Torres, former President of J&J Consumer Healthcare

• Semiconductor manufacturer Cohu appoints to its board Karen Rapp, former EVP and CFO of National Instruments Corp

• Edgewise Therapeutics adds to its board Arlene Morris, former CEO of Syndax Pharmaceuticals

• TriSalus Life Sciences welcomes to its board Liselotte Hyveled, Chief Patient Officer at pharmaceutical firm Novo Nordisk

• Specialty metals manufacturer Metallus elects to its board Melissa Miller, EVP and CHRO of manufacturing firm Arconic

About Boardspan
Boardspan is the leading provider of digital governance solutions for boards across all sectors. Our cloud-based assessments, benchmarking analytics and governance education programs complement our board search and advisory services to deliver a holistic approach to governance. Boards of all sizes and stages rely on Boardspan to deliver analytics, insights and outcomes that improve their effectiveness and performance. Clients include KKR, The Kellogg Foundation, Ingersoll Rand, Farfetch, McAfee, Beyond Meat, Box, e.l.f. Beauty, Satellite Healthcare and the U.S. Olympic & Paralympic Committee.