This newsletter’s Table of Contents is as follows:
1. Where is the Board??
2. THE LEGAL OPINION: Board Oversight and COVID-19
3. THE EXTERNAL ACCOUNTANT’S OPINION: COVID-19
4. The SEC’s OPINION: COVID-19 & Conducting annual meetings
1. Where is the Board??
The role of the board of directors and its committees is rapidly and constantly expanding. New matters seem to arise all the time, and the board is viewed, in the court of public opinion if not in courts of law, as being responsible for everything the company does or does not do. THINK COVID-19!
As both a result and an example of this perception of the board’s role, it is not surprising that when anything negative happens to a company, the NEW first question is NOW “Where is the board?”
There are many items that have been on the board’s agenda for many years. These include oversight of risk, strategy, and executive compensation. At the same time, a number of items appearing on board agendas in recent years have taken up more of the board’s time and attention. These include board composition, culture, and shareholder engagement. BUT, the newest items that boards are grappling with include challenges such as the role and responsibilities of the company in society and sustainability, which itself includes topics ranging from environmental concerns to employee activism and now COVID-19.
How has your board responded to this latest challenge? It’s not just Management’s problem and if the Board is not an active participant with Management on this topic/crisis, it will be judged to be NEGLIGENT.
See next article.
Source: Deloitte
EDITOR’S NOTE: SORRY FOR THE NEXT 3 LONG ONES, BUT BOARDS NEED TO READ THESE. 3 GREAT CHECKLISTS!
2.THE LEGAL OPINION: Board Oversight and COVID-19
“Caution is appropriate. Preparedness is appropriate. Panic is not.” (~ U.S. Surgeon General Dr. Jerome Adams, commenting on the coronavirus outbreak)
As the coronavirus outbreak continues to wreak havoc on markets and industries in the U.S. and around the world, businesses are now confronting significant and unique challenges. Successful navigation of these challenges will require thoughtful and comprehensive planning.
Key insights into how to proceed have already been established in last year’s decision from the Delaware Supreme Court, Marchand v. Barnhill, 2019 WL 2509617 (Del. June 18, 2019).
Marchand involved a suit against the board of a private company that manufactured ice cream, which suffered a listeria outbreak in early 2015 that forced the company to recall all of its products, stop production at all of its plants, and lay off over a third of its workforce. The company’s board of directors – despite meeting monthly – became the subject of a Caremark claim for utterly failing in its oversight and compliance-monitoring roles, which ultimately constituted a breach of the Board’s fiduciary duties (specifically, the board’s duty of loyalty). All relevant “red flags” were not identified by the Board, as they did not implement any Board-level system of compliance monitoring and reporting through which to address matters which were “intrinsically critical to the company’s business operation.
With COVID-19’s impact changing every day, boards of all public, private and non-profit companies should determine whether they are taking actions that are sufficient to fulfill their fiduciary duties of care and loyalty including those actions and duties highlighted by Marchand.
Boards may consider the following basic actions:
- Call a special meeting of the Board if a regularly scheduled meeting is not on the near-term calendar.
- Seek input as to how the coronavirus is impacting the company and what short-term measures are being put into place and what long-term plans are being developed.
- Create a special committee to monitor and assess the impacts of the coronavirus and provide oversight to the company and its management.
- Ensure that monitoring and reporting protocols are in place to gather and provide the board with relevant and up-to-date information as to all impacted areas including: employee and customer health and safety, human resources, IT, cybersecurity, cash flow and cash on hand, credit capacity, customer outlooks, supply chains and such other areas that may be applicable to a particular business and industry. Any identified deficiencies in reporting protocols should be addressed immediately.
- Obtain updated calendars for all Board members for the near-term and confirm contact information to ensure availability if additional special meetings need to be called on short notice.
- Create an accurate and detailed record of the Board’s considerations and actions….documented!
- The Board also has to assess how its meetings, requests and actions will impact the time available to management to deal with this rapidly-evolving situation. For example, the Board needs to weigh whether detailed written reports are worth the time required to prepare or whether management’s time is better spent directly addressing the myriad challenges currently presented.
THE PAST AS PROLOGUE! It is interesting that the Marchand decision was issued less than one year ago and almost anticipated the current situation and how the Board’s duty of oversight is measured and valued.
Source: National Law Review
3. THE EXTERNAL ACCOUNTANT’S OPINION: COVID-19
With management focused on addressing the impacts of the COVID-19 crisis on the company’s operations, financial condition and stakeholders, it is imperative that the board enhance its efforts to provide strategic insight, oversight and foresight across short- and long-term horizons while continuing to exercise its fiduciary responsibilities.
We offer the following considerations for board members as they navigate this crisis:
- Clearly communicate a strong tone from the top; model desired attitudes and behaviors; and validate that crisis-related decisions, actions and communications are consistent with the company’s purpose, culture and values.
- Maintain appropriate protocols and information flows with management and external advisors and remain flexible with board operations and schedules so that the board can receive timely information that allows for open communication and effective deliberation and oversight.
- Support transparent and clear communications to stakeholders regarding company developments to guide decision-making, maintain trust and protect the company’s reputation. SEND REGULAR EMAILS TO THEM.
- Obtain timely updates from Management related to the company’s emerging risks and material threats, vulnerabilities and potential impacts (as identified by the company’s ERM program), and adjust risk appetite and tolerances accordingly.
- Determine whether the company’s financial scenario planning and stress testing are designed to adequately assess the levels of liquidity, credit and capital needed over relevant ranges; confirm that appropriate communications are occurring with financial intermediaries.
- As management continues to address employee and customer health, safety and morale, confirm that management is appropriately dealing with emerging legislative, administrative and regulatory developments, stimulus opportunities and developing practices.
- Verify that management is taking the appropriate actions to identify and manage material contractual commitments, insurance agreements, covenants and other obligations from both a legal and practical business perspective.
- Provide strategic guidance and support to management related to social and economic welfare initiatives that may involve short-term costs but deliver long-term value through improved social outcomes and enhanced corporate trust and reputation.
- Continuously challenge the scope, composition and decision-making authority of the company’s crisis management team to enhance its capabilities and effectiveness. Confirm that the team’s work is appropriately balanced between short-, medium- and long-term responses to the crisis.
- Continue to evaluate the company’s business continuity and contingency plans for the appropriate levels of redundancy, supply chain resiliency and effectiveness of third-party service providers to allow for the continuation, or quick recovery, of critical business functions.
- As companies shift to alternative and remote working arrangements, reassess key communication, operational and financial systems to confirm IT resiliency and appropriate levels of cybersecurity and data privacy, and that key controls are operating as intended.
- Confirm that management is continually monitoring the effectiveness of internal controls over financial reporting and disclosure controls and procedures (as well as events or factors that may result in material changes in financial statement reporting and disclosures) to enable the company to meet regulatory requirements for financial and other public disclosures and broader stakeholder demands for material information.
- As business models are adjusted to address the crisis in the short term, challenge how those changes uncover new opportunities along with operational effectiveness and efficiencies over the long term.
- Once the crisis is mitigated, conduct postmortems and assess lessons learned, including how the company’s business continuity plan is working and what actions the company needs to take to help build resiliency for future events.
The COVID-19 pandemic highlights the need for effective risk and crisis management programs to address extreme and unexpected events. Boards play a crucial oversight role with such challenges given their collective experiences with other crises and overall business judgment. Boards can significantly assist management not only with how they respond to the crisis but also how they recover from it with resiliency and strength.
Source: EY
4. The SEC’s OPINION: COVID-19 & Conducting annual meetings
On March 13, the SEC announced guidance regarding conducting annual meetings given COVID-19 concerns. Companies are required to hold annual meetings of security holders under law. Some are also required to comply with federal rules, which require, among other things, delivery of proxy materials. The guidance issued by the SEC staff addresses the following issues:
a. Changing the date, time or location of an annual meeting:
1. If a company has already mailed and filed its definitive proxy materials, the SEC staff will take the position that it can notify shareholders of a change in date, time or location without mailing additional soliciting materials and amending its proxy materials provided certain steps are taken.
2. These steps include issuing a press release announcing the change, filing the announcement on EDGAR, and taking all reasonable steps to notify intermediaries (e.g., proxy service provider) and other relevant market participants of the change. pwc.com/us/governanceinsightscenter Governance Insights A biweekly newsletter for directors and investors
b. Virtual shareholder meeting: The ability to conduct a virtual meeting is governed by law, where permitted, and the issuer’s governing documents.
1. If a company plans to conduct virtual or “hybrid” (where shareholders can opt for virtual access to a physical meeting) meetings, the SEC staff expects shareholders and other market participants to be notified in a timely manner.
2. The staff also expects companies to explain the logistical details of the virtual or hybrid meeting, such as how to participate via remote access and how to vote.
3. If a company has not yet mailed its definitive proxy materials, this information should be in the proxy statement or soliciting materials. If a company has already mailed and filed its materials, the company should follow the “change” guidance discussed above.
c. Presentation of shareholder proposals: SEC rules require shareholder proponents, or their representative to appear and present their proposal at annual meetings.
1. Given the possible difficulties with in-person presentation, the SEC staff has encouraged companies, to the extent feasible under law, to provide shareholder proponents with alternate means of presenting their proposals, such as by phone.
2. In addition, if a shareholder proponent is unable to attend the annual meeting due to hardships related to COVID-19, the staff would consider this “good cause” under Exchange Act Rule 14a-8(h) in the event the company attempts to use this as the basis for excluding a future proposal by the shareholder proponent.
Contact your both your regulator and lawyers and/or external accountants for more information on virtual meetings.
Source: PWC
