August 14, 2020

Blog: Nom/Gov committees response to COVID-19

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In a recent survey of over 70 nominating/governance committee chairs of S&P 500 and Fortune 500 companies, consultant SpencerStuart asked respondents about how their boards responded to COVID-19 and the nature of any long-term governance changes they anticipated post-pandemic. Somewhat surprisingly, given the issues COVID-19 has created or highlighted for companies, committee chairs do not appear to be in any kind of rush to institute changes—in fact, quite the opposite seems to be the prevailing perspective. Is it just too soon to be thinking about structural or other adjustments to the board? Or, does “stay at home” also mean “stay the course”?

Succession Plans. The vast majority of chairs believed their emergency succession (85%) and long-term executive plans (81%)were adequate; however, boardroom leadership succession plans were not quite as current, with only 56% saying they had succession plans in place for the board chair or lead director.
Board Refreshment. Notwithstanding the recent renewed push for more board diversity, 74% of chairs did not anticipate any changes in board composition “largely due to discomfort with appointing a director in the absence of in-person meetings.” For the same reason, 24% expected board refreshment to actually slow down, and only 3% expected an acceleration. According to the survey, 29% were very uncomfortable and 29% were somewhat uncomfortable with the idea of appointing a director without an in-person meeting; only 17% were comfortable. SpencerStuart observed that, although there is “a clear preference for face-to-face interviews when it comes to appointing a director to the board,” in the current constrained circumstances, directors will “need to be pragmatic about addressing boardroom needs and intentional about building personal relationships in an environment where they aren’t traveling.”
Committee structures. Once again, the survey found that 94% of the respondents did not plan to make any changes to their committee structures—only 6% thought that they now needed an additional committee. According to SpencerStuart, COVID-19 has accelerated ESG as a board oversight responsibility, with some boards establishing a specific ESG committee or assigning ESG oversight to a standing committee, sometimes renaming the committee to reflect its expanded scope.

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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.)

Board meetings. Forty percent of respondents indicated that they had increased the frequency of board meetings substantially in March and April—to every other week—significantly increasing the demands on directors’ time.

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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.”

Of respondents, 84% said that they expected more virtual meetings (my question: who are the 16%?) and 56% anticipated more formal communications from the CEO and management, i.e., fewer casual conversations and unscripted interactions. SpencerStuart advises that “boards will need to find creative ways to recreate ‘water cooler’ conversations, deepen the scope of their discussions and make sure they continue to stay well-informed and connected.”

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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.)

Shareholders meetings. In a bit of a surprise—to me, anyway, given that many institutional shareholders and advisors are not exactly high on virtual shareholder meetings—48% of chairs said they expected to eliminate their in-person annual shareholders meetings.

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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.”

Board composition. The chairs seem to be quite satisfied with the skill sets of their boards as currently composed—only 8% thought that the pandemic exposed a skills gap. In particular, as the pandemic began, the survey found that boards relied much more heavily on executives and directors with significant experience, particularly directors who serve on multiple boards, are in board leadership, have direct industry expertise or were long-tenured directors. SpencerStuart commented that the “crisis has highlighted the value of having diverse skills and perspectives in the boardroom.” While, in the midst of the crisis, operational skills and crisis management were viewed as critical, other skills might be called for to address strategic and other concerns post-crisis.

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