This newsletter’s Table of Contents is as follows:
- WARNING: Executive and director pay cuts starting to add up during COVID-19
- The Board and succession planning during Covid-19
- Do’s and Don’ts to Avoid a Stale Board
- World Economic Forum Pledges to Stand By Stakeholders (and not just shareholders) in the COVID-19 Era
1. WARNING: Executive and director pay cuts starting to add up during COVID-19
About 15% of Russell 3000 companies have reduced executive compensation due to the COVID-19 pandemic, according to data (as of May 8) from The Conference Board. The companies cut CEO base salary by a median 44%. Other named executive officers’ pay was lowered by 25%. The findings are based on research of SEC Form 8-K filings by Russell 3000 companies that have announced executive and director pay reductions.
Consumer discretionary companies have the highest percentage of companies that cut executive pay, accounting for 36% of the 462 companies that have announced reductions. Industrials rank second at 23% and other industries such as retail, hospitality, aerospace and airlines have also made cuts, reflecting the economic impact of the pandemic, The Conference Board points out.
Overall, middle-market enterprises are responsible for most of the changes. More than two-thirds of companies cutting pay had annual revenue below $5 billion. Most CEO pay adjustments came relatively early in the outbreak. Just under 240 Russell 3000 companies announced cuts in late March and early April. The pace has leveled off more recently, with about 50 new companies disclosing compensation changes each week since then.
Boards are also sharing the pain with their CEOs, the data shows. Eighty-three percent (83%) of companies lowering executive compensation also reduced cash retainers paid to directors. And of the companies that reduced director pay, 57% reduced CEO and director pay equally, while 26% reduced director pay more than CEO pay.
Source: PWC
2.The Board and succession planning during Covid-19
During Covid-19, one area where the role of the board is to be appropriately more involved is that of succession. The board is ultimately responsible for CEO succession and it must provide oversight of management’s succession planning for other key roles. For boards, Covid-19 is a challenge to the existing emergency succession planning. This virus may make it more likely not that a key leader is lost, but that leaders at many levels of an organization fall sick or are absent, recovering for a few weeks at a time. For boards, time spent on succession planning during a crisis like Covid-19, which may build over time and in waves, is likely well spent.
Boards should discuss succession risks, particular positions openly, together with management, formed by their views, and again in executive session. And the board should do this with a risk lens:
Vacancy risk – what is the risk that a particular position becomes vacant for whatever reason?
Availability risk – how available are internal candidates to take over a position should it become vacant?
Readiness risk – the risk that a person who plans to step into the vacant position does not have the right set of skills to take over.
Disruption risk – the potential for disruption to the larger organization when an executive moves from his or her current position to the new position.
Control risk – the risk that the absence of individuals renders control frameworks ineffective and business processes fall behind.
Covid-19 throws all of these risks into high relief. For each of these risks we boards must engage with management and with human resources teams in particular. Key Questions: Do we need to review our succession planning process? Do we review it regularly? How prepared we will be if our CEO was not available for a sustained period of time? The CFO? Have we asked our CEO about how Covid 19 is affecting his or her view on talent and future plans?
Source: Deloitte
3. Do's and Don'ts to Avoid a Stale Board
Board director Marsha Everton offers these do’s and don’ts on keeping a board fresh and nimble:
DOs:
- Have annual performance reviews of individual board members as well as the full board with a clear annual decision about whether to re-elect each member to the board. This helps create a performance-based culture at both the individual and group levels. Assign responsibility to the governance and nominating committee with a report to the full board.
- Conduct an annual review of key strategic opportunities and risks for the company. Identify the board talent that can best support the delivery of the strategy and manage the risks. Assign responsibility to the governance and nominating committee with a report to the full board.
- Strongly advise or require individual board members to interact with employees and/or customers in order to keep a finger on the pulse, observe company culture in action and understand the business. The “nose in/fingers out” approach is important. It’s about understanding, not providing direction.
- Recruit directors who are curious and remain engaged at many levels as continuous learners. They will naturally bring fresh ideas and agility.
- Provide unstructured or loosely structured time for directors to interact with each other as well as with employees. This is where ideas are born and innovation happens.
- Encourage a boardroom culture in which the ability to “agreeably disagree” leads to the breakthroughs that come with constructively reviewing a range of perspectives.
- Use board diversity as a competitive advantage, bringing diversity of perspective into the conversation, thought process and decision making.
- Add at least two new board members when bringing on new directors. One is a lonely number. Two can join forces to confidently bring new ideas to the full board.
DON’T
- Create an expectation that the board position is a lifetime appointment.
- Choose “big name” directors for their name and title, not their ability and willingness to contribute to decision-making.
- Assign oversight of emerging risk factors like cybersecurity to a specific person or department without requiring the full board to engage in learning and decision-making.
- Engage in “groupthink.”
- Base recruitment on “who you know” rather than “what we need.”
- Fail to cast a wide net.
Source: Private Company Director
4. World Economic Forum Pledges to Stand By Stakeholders (and not just shareholders) in the COVID-19 Era
The World Economic Forum (WEF), an international organization that fosters public-private cooperation on global, regional and industry agendas, released this month the “Stakeholder Principles in the COVID Era” (Stakeholder Principles) as part of its COVID Action Platform and called businesses to action stating that, during this time of crisis, “[t]he business community’s contribution: [is] to be leaders of responsiveness and stewards of resilience.”
In January 2020, the WEF made headlines by issuing its Davos Manifesto 2020, challenging companies to incorporate stakeholders into their corporate purpose, as well as issuing, through its International Business Council (IBC) a draft corporate sustainability disclosure framework, “Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.”
The Stakeholder Principles are newsworthy insofar as they demonstrate the WEF’s continued commitment to encouraging businesses to embrace their corporate social responsibilities by coming together to minimize the pandemic’s impact on public health and limit its potential for further disruption to lives and economies worldwide.
“[W]e are experiencing how profoundly the COVID-19 emergency is affecting the world,” reads the statement, while also acknowledging the challenges and pressures facing employees, suppliers and customers. By working together, “[W]e can ensure that our society and economy get through this crisis and we can mitigate its negative impact on all of our stakeholders.”
The Stakeholder Principles essentially call for businesses to make a commitment:
- To employees, to keep them safe;
- To suppliers and customers, to secure their shared business continuity;
- To consumers, to maintain fair prices and commercial terms for essential supplies;
- To governments and society, to offer full support; and
- To shareholders, to maintain the long-term viability of the company.
Its name and the fact (likely not to go unnoticed by issuers) that the shareholder-related principle is listed last reflect that the Stakeholder Principles are meant to embody “stakeholder capitalism.” This perspective departs from the traditional view regarding a corporation’s purpose, at least in the United States, where shareholder interests come first and meeting stakeholders’ needs are viewed through the lens of maximizing shareholder profits.
Source: David Polk
