Shareholders in XPO Logistics last week rejected proposals including two that would have linked executive compensation at the company to either ESG metrics or efforts to stop sexual harassment – but voting also indicated a level of opposition to the company’s overall executive compensation.
As with hundreds of other companies, XPO Logistics held its May 14 AGM in a virtual format due to the public health concerns arising from the Covid-19 pandemic. If approved, one proposal would have called on the XPO Logistics board to ‘examine and report to shareholders… describing if, and how, it plans to integrate ESG metrics into the performance measures of named executive officers under the company’s compensation incentive plans.’
The measure was introduced by the Office of the State Comptroller for New York State. The supporting statement reads: ‘Strong management of ESG risks has a positive effect on long-term shareholder value and value creation. Failure to adequately manage and disclose performance on ESG issues can pose regulatory, legal, reputational and financial risks to a company and its shareholders.’
It cites a 2019 United Nations study as finding that 84 percent of executives from the world’s largest companies point to a link between sustainability and business value and that 66 percent of CEOs would agree to have their compensation linked to sustainability performance.
‘By integrating ESG metrics into executive compensation, companies can reduce risks related to ESG underperformance by incentivizing executives to meet sustainability goals, thereby achieving greater long-term value for shareholders,’ the proposal’s materials state, adding: ‘XPO should provide clarity regarding whether its plan to improve ESG performance includes integrating ESG metrics into executive compensation assessments.’
In response, the board recommended that shareholders vote against the proposal, stating: ‘An effective approach to managing risks associated with ESG objectives requires more than simply tying executive compensation to arbitrary goals.’
The board argues in the proxy statement that its compensation committee is best placed to design and implement executive compensation arrangements tailored to the company: ‘We are committed to serving the interests of our employees, customers, stockholders and the global community. However, given that ESG goals are inherent in our strategy, we believe our existing compensation program already addresses the objectives of the proposal.’
The proposal secured the backing of roughly 21 percent of shares that were voted. ‘XPO’s compensation and ESG practices remain a concern for investors,’ a spokesperson for the Office of the State Comptroller for New York State says in a statement. ‘After significant support from shareholders, we encourage XPO to address these concerns by considering ESG issues, like worker safety and environmental impacts, when determining its executive compensation.’
Similarly, around 19 percent of shares voted backed a proposal on aligning executive pay to a human capital issue – up from 18 percent last year. That proposal, if passed, would have called on the board to ‘strengthen XPO’s prevention of workplace sexual harassment by formalizing the board’s oversight responsibility, aligning senior executive compensation incentives, reviewing (and if necessary overseeing revision of) company policies and reporting to shareholders by December 31, 2020 on actions taken.’
The supporting statement notes the significant attention to workplace sexual harassment in general among the media and policy-makers, not least as a result of the #MeToo movement, and points to the damage it can inflict on companies by, for example, harming corporate reputation and stock price.
It also argues that robust board oversight of such issues is important at XPO following what it describes as multiple reports and media coverage of alleged sexual harassment and gender and pregnancy discrimination at XPO prompting calls for an investigation by members of the US House of Representatives.
The board urged shareholders to vote against the proposal, arguing that it has reviewed the company’s existing policies and practices and that they ‘already provide a robust framework to prevent any kind of workplace harassment, including sexual harassment.’ It states that the board has already defined its oversight role in a ‘clear and sufficient manner’ in the company’s policies and public disclosures and provides overall risk oversight.
It states that when allegations were raised in 2018 related to the company’s pregnancy accommodation practices, XPO engaged Tina Tchen, former chief of staff to Michelle Obama and executive director of the White House Council on Women and Girls, to assess the company’s implementation of its accommodation policy. Tchen found no wrongdoing by the company but recommended additional education and training of supervisors and workers, which the company immediately implemented, according to the board. It adds that the company also adopted a new pregnancy care policy.
The board further argues that it has implemented a compensation structure that ‘strikes an appropriate balance in motivating senior executives to deliver long-term results for the company’s stockholders, while simultaneously holding its senior leadership team accountable.’
SAY ON PAY
Also at the AGM, a say-on-pay resolution received the backing of 67 percent of shares voted, a score that proxy advisers typically consider to be worth noting. The executive compensation proposal received the same level of support last year. ISS says that when a say-on-pay proposal receives less than 70 percent support of the votes cast it will conduct ‘a qualitative review of the compensation committee’s responsiveness to shareholder opposition at the next annual meeting.’
Glass Lewis states in its 2020 guidelines that ‘any time 20 percent or more of shareholders vote contrary to the recommendation of management, the board should, depending on the issue, demonstrate some level of responsiveness to address the concerns of shareholders.’
‘XPO’s failure to align executive pay with the company’s overall performance has resulted in excessive payouts that are not in the best interest of shareholders,’ New York State comptroller Thomas DiNapoli said in a statement ahead of the AGM. ‘The New York State Common Retirement Fund will be holding XPO’s directors accountable for failing to align pay with performance, and we encourage shareholders to support our proposal asking XPO to consider ESG issues like worker safety when determining executive compensation.’
A spokesperson for XPO referred Corporate Secretary to a letter the company sent Glass Lewis before the AGM in response to the proxy adviser’s comments on the executive pay resolution in a report on the company’s meeting. In its letter, the company states that the board’s compensation committee ‘believes our executives’ realized pay has been maintained at appropriate levels that align directly with stockholder value creation.’
It adds: ‘In determining the framework for performance-based awards, the committee sets rigorous, long-term growth targets and grants incentives at critical inflection points in the execution of the company’s strategy, rather than annually or on a pre-defined basis… The awards typically reflect the inherent hurdles in achieving aspirational goals over a long period of time, and align executive interests with the interests of our stockholders.’
The company further states in the letter that its executive leadership team ‘has generated total stockholder returns of 40 percent, 85 percent and 95 percent on a one-year, three-year and five-year basis, [respectively,] significantly outpacing our industry and broader equity markets.’