This newsletter’s Table of Contents is as follows:
- Can Your Compliance Program Pass the 3 Tests?
- COVID-19 PROVES BOARDS ARE UNDERINVESTING IN RISK
- 9 HOT TOPICS (QUESTIONS) for the Board’s agenda this quarter:
- Long-Term Stock Exchange Launches
1.Can Your Compliance Program Pass the 3 Tests?
Recent days have convincingly demonstrated the importance of the, as the impacts of the COVID-19 pandemic spread and cascaded globally. Under the In re Caremark International line of cases, the board should be aware of the types and magnitudes of the principal risks facing the company, especially in the regulatory sphere, and should assess the company’s risk management policies and procedures that are designed to mitigate those risks. The directors also should satisfy themselves that these policies and procedures have been designed and are being implemented effectively and in keeping with the company’s strategy.
As an integral part of their risk assessment oversight, directors should consider whether the company’s programs and compliance systems would be considered effective if the government were to arrive in the lobby, alleging that the corporation has engaged in wrongdoing. Under federal sentencing guidelines, the existence of an effective compliance program can significantly reduce the punishment imposed on a corporation if its employees were found to have broken the law.
The Department of Justice (DOJ) recently updated its guidance on evaluating corporate compliance programs, and boards should consider this updated guidance in evaluating their own compliance programs. In earlier versions of the guidance, the DOJ posted three “fundamental” questions to ask when evaluating a corporate compliance program: Was it well-designed, was it being implemented, and did it work? The updated guidance refocuses the second question, asking whether the program was “adequately resourced and empowered to function effectively.” In particular, the guidance encourages investing in “further training and development of compliance and control personnel” and providing them with more timely and direct access to company data.
Source: Directors and Boards
2. COVID-19 PROVES BOARDS ARE UNDERINVESTING IN RISK
Corporations that establish board Risk Committees can effectively monitor and address a broad spectrum of emerging risks. Dodd-Frank regulations require financial institutions in the United State to establish Risk Committees separate from the Audit Committee.
Traditionally, the Audit Committee has had responsibility for risk. But often Audit Committee members do not have the needed operational expertise or the bandwidth needed to understand the growing range of risks. A separate Risk Committee enables more time for information sharing and detailed risk discussions that educate the Risk Committee members and enable more focused and effective discussions at the full board meetings. While risk ultimately is the responsibility of the full board, the velocity of change, the breadth of emerging risks, and the increased intensity of possible business disruptions, make it ineffective to have full board discussions without the prep work handled by the Risk Committee.
ADDITIONALLY, leading-edge organizations will establish an ongoing Risk Operations Center (ROC) to enable staying ahead of emerging risks and proactive actions to effectively mitigate those risks. The ROC will enable the continuous monitoring and proactive business disruption risk identification, management, and mitigation response that will elevate risk management to the competitive differentiator corporations need to navigate this crisis and thrive in a post-Covid world.
Source: Corporate Board Member
3. 9 HOT TOPICS (QUESTIONS) for the Board’s agenda this quarter:
- How will the board and management tackle strategic planning this Fall in light of COVID-19?
- Should we make any temporary or permanent changes to our capital allocation framework, our share buy-back policy or our dividend policy in light of COVID-19?
- Should we make any changes to the frequency or scope of guidance or disclosures the company provides in view of COVID-19?
- Does our succession and business continuity plan adequately take into account the learnings from COVID-19 and other recent events?
- Does our planning need to adjust for a second wave or unrelated second shock to business continuity?
- Do we need to revisit our approach to employee compensation and incentives in light of the impact of COVID-19 and other recent events?
- What is our level of confidence in the effectiveness of our internal controls over financial reporting and disclosure controls and procedures despite the challenges of operating during the pandemic?
- Do we need to consider enhancements in light of extended remote working conditions?
- Do we need to strengthen or otherwise update the company’s policies, practices and goals with respect to diversity and inclusion?
Source: Sullivan and Cromwell LLP
4. Long-Term Stock Exchange Launches
The Long-Term Stock Exchange (LTSE) announced its launch last week for trading stocks on its platform and listing companies on the exchange. As the name suggests, the exchange aims to list companies that desire to create value over time.
The LTSE’s listing requirements take a “principles-based approach” to long-termism (in contrast to a one-size-fits-all approach) requiring listed companies to pledge to operate consistently with five principles:
- Stakeholders. Long-term focused companies should consider a broader group of stakeholders and the critical role they play in one another’s success.
- Strategy. Long-term focused companies should measure success in years and decades and prioritize long-term decision-making.
- Compensation. Long-term focused companies should align executive compensation and board compensation with long-term performance.
- Board. Boards of directors of long-term focused companies should be engaged in and have explicit oversight of long-term strategy.
- Investors. Long-term focused companies should engage with their long-term shareholders.
Guided by these principles, listed companies are required to adopt and maintain policies that reflect the companies’ long-term strategies and practices. The LTSE hopes that requiring listed companies to make the policies public will facilitate investors and other stakeholders’ understanding of these businesses. Moreover, taking a principles-based approach allows for the exchange to list a wider range of companies, including companies with dual-class structures.
To date, no companies are yet listed on the LTSE. However, the LTSE allows shares of companies, regardless of whether they are listed on the LTSE or another exchange, to trade simultaneously and in real-time across all U.S. exchanges, alternative trading systems and platforms operated by securities dealers.
The LTSE’s launch comes at a time where market participants and some issuers are grappling with questions relating to stakeholder versus shareholder primacy, stakeholder capitalism concerns and the rise of interest in ESG matters across all asset classes.
Source: Davis & Polk
