Nom/Gov committees response to COVID-19

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Notably, COVID-19 seems to have sparked a new emphasis on one aspect of ESG in particular—employee welfare, including, perhaps, at another level, broader concerns that have been marinating for a while.  A new paper co-authored by former Delaware Chief Justice Leo Strine, “Toward Fair Gainsharing and a Quality Workplace for Employees: How a Reconceived Compensation Committee Might Help Make Corporations More Responsible Employers and Restore Faith in American Capitalism,”  addresses some of these concerns related to the workforce—particularly economic inequity.  The goal is to reimagine the compensation committee, giving it an expanded scope, as suggested above, so that it becomes the board committee  “most deeply engaged in all aspects of the company’s relationship with its workforce,” from retaining and motivating the workforce to achieve the company’s business objectives, to overseeing that the company fulfills its obligations as a responsible employer and, most of all, to positioning the company to “restore fair gainsharing.”  The authors suggest that a “reconceived compensation committee” might be one way to help boards “sensibly address society’s demand” for fair pay and fair treatment for the workforce. The authors expect that, in light of the pandemic and recent trends, boards will now be called on “to dedicate more time to considering how their companies treat their entire workforce, how inclusive their workforce is, the appropriate incentive systems that should exist not just for top management, but the whole employee complement, and the appropriate gainsharing that should exist among the company’s employees, stockholders, and top management.” To address these issues, they say, “the most sensible answer is for the mandated board committee that is required to address the related area of top management compensation—the compensation committee—to expand its perspective and become a committee focused on the company’s workforce as a whole.” (See this PubCo post.)

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In a discussion among a group of CEOs of major U.S. companies convened by EY to assess the impact of COVID-19, the CEOs in the group also reported that the “pace of interactions with the board has accelerated. Companies are now having weekly or biweekly board calls. Several speakers emphasized that total transparency is critical in these board discussions, especially in cases when the outlook is bleak. Some have also adopted a practice of scheduling individual outreach to select board members to complement the formal board meetings.”

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In this article from The Conference Board, the authors suggest that, in light of the recent requirement for social distancing, boards will need to determine how best to manage board and committee communications, with chairs ensuring that virtual meetings are disciplined, inclusive and not dominated by the loudest voices. More specifically, they recommend that companies “avoid having directors (or a subset of directors) exchange messages between or during board meetings, which can undermine the collective decision-making process.”  They also recommend that individual directors “refrain from deluging management with suggestions, no matter how well-intentioned. An individual director’s idea will often be improved, and management will have a more reasonable workflow, if suggestions are first vetted by the board or appropriate committee—or, at the very least, funneled through a committee chair or lead independent director/independent chair.”  (See this PubCo post.)

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Before the pandemic struck, investor groups had expressed concerns that virtual-only meetings could be used to “silence dissenting shareholders” and insulate management and the board from criticism and some of that skepticism has continued. For example, although ISS does not have a policy to recommend votes against companies that hold virtual-only meetings, it has nevertheless encouraged boards to commit post-pandemic “to return to in-person or ‘hybrid’ meetings (or to put that matter to shareholders to decide) as soon as practicable.”  (See this PubCo post.) The Council of Institutional Investors has historically, “been skeptical about replacement of in-person shareholder meetings with purely virtual meetings.” While CII recognized the imperative to hold meetings virtually this season, it also expressed the hope that companies “will make it clear that this decision is a one-off, tailored for current circumstances.” Now, is it possible that data showing an increase in shareholder participation with the virtual format might lead investor groups and proxy advisory firms to look more favorably on virtual shareholders meetings?   There’s not much evidence of that yet. In a letter to the Chair of the SEC’s Investor Advisory Committee, the CII was mildly complimentary of the practices followed by a few companies for virtual participation in meetings; however, on the whole, based on anecdotal evidence, CII expressed its concern “that too often, virtual meeting practices may be falling short.”