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ANALYSIS: Are Covid-Era Governance Challenges Here to Stay?

Nov. 16, 2020, 11:36 AM

Businesses will continue to struggle with the Covid-19 pandemic throughout 2021, in both the marketplace and the boardroom. Measures companies took in response to the crisis, such as the use of remote director meetings and virtual annual shareholder meetings, will likely remain part of the governance landscape through 2021. In addition, boards will face additional pressures and demands on their time, as investors and regulators will expect directors to take a more active role in risk oversight and loss mitigation.

Doing Corporate Business During, and After, the Pandemic

Many companies moved their annual shareholder meetings from in-person venues to virtual formats for health and safety reasons during 2020. Delaware law allows companies to conduct completely virtual meetings. Companies incorporated in other jurisdictions should check local law and their charters and bylaws for the requirements applicable to remote meetings.

Remote meetings are also likely during 2021 for health reasons, as coronavirus infection rates are again rising in many parts of the country. The question is, though, whether an emergency requirement will become the new shareholder engagement norm.

Virtual meetings provide significant cost and time savings for issuers as compared to in-person sessions. The virtual component may actually increase investor participation, as it eliminates the travel costs and burdens for shareholders.

Companies will not face last year’s challenges of canceling an extensive series of venue and vendor contracts, and having to find a service provider for a remote session on short notice. In addition, while Delaware law requires that virtual meetings provide “stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings,” a virtual format does allow the company greater freedom in how it controls its interactions with shareholders.

Meetings may be conducted as audio-only, and it is possible that only the company sees the questions submitted by shareholders. Investors will also have far less access to the management team than in an in-person setting.

The temptation to maintain virtual-only meetings is understandable, even after the pandemic subsides. It is likely that many companies will continue with these arrangements, but there are some countervailing forces.

The first is local law. Delaware is quite flexible on virtual meetings, but some states in 2020 allowed companies to act through emergency measures that may be applicable only during the pandemic. Companies will also want to review the guidelines issued by the leading proxy advisory firms. ISS stated in April that while virtual-only meetings “may be both necessary and desirable” during the emergency, they have not issued guidance for post-pandemic practice. Glass Lewis, meanwhile, stated in March that the firm would “generally refrain from recommending to vote against members of the governance committee” during the past proxy season due to Covid-19 concerns. Despite its temporary Covid-related concession for the 2020 proxy season, the firm’s general opposition to virtual-only meetings remains in place.

Companies also face the challenge of getting their institutional investors to buy in to a virtual-only meeting program. Comments from the Council of Institutional Investors (CII) indicated that getting that buy-in may not be easy. According to CII, the group has long been skeptical of virtual-only meetings. In the spring, CII cautioned that a move to virtual-only should be “a one-off, tailored for current circumstances.” While institutional investors would be receptive to a hybrid model, offering virtual access as a supplement to in-person attendance, they may well balk at a virtual-only approach.

Covid-19 and Risk Management

Corporate boards also largely moved to meeting remotely in the wake of the health crisis, a far less controversial action than conducting virtual shareholder meetings. The lessening of demands on director time for travel to in-person meetings may be quite necessary, as a post-pandemic world will significantly refocus the demands on directors in terms of their risk management obligations.

I spoke with Nell Minow, Vice Chair of ValueEdge Advisors and a frequent commenter on corporate governance matters. She told me that she expects to see “more push from investors on risk management, including ESG.”

The Covid-19 pandemic is likely the first global sustainability governance crisis. As a result of the economic consequences of the outbreak, investors are likely to evaluate several areas of corporate performance not typically captured in traditional financial reporting to determine if particular companies are worthwhile investment targets.

In the next year, boards will have to pay attention to several key risk management areas, including:

• Supply chain risks. Companies must be prepared to respond to an environment in which lockdowns and border closings may result in cutting off vital components of their supply needs.

Changing regulatory risks. Both in the U.S. and abroad, regulatory structures can change quickly in response to the pandemic, and companies must be able to react with agility.

Information technology risks. Cybersecurity is always a concern, but with thousands of employees working remotely over networks of varying degrees of security, the risks become even greater. The company’s internal control and cybersecurity systems may be unable to keep pace with such rapid change.

Revenue and business continuity risks. The impact of the pandemic cuts across industries. Operations can be shut down and facilities closed, and health care costs can dramatically increase — all against an uncertain timeframe for when normal business operations may resume.

Human capital risks. The human capital management systems of many companies are being placed under unprecedented stress due to layoffs and furloughs, remote working and displacement, and succession planning.

Under SEC rules, public companies must disclose “the extent of the board’s role in the risk oversight of the registrant, such as how the board administers its oversight function.” That requirement — challenging enough in normal circumstances, with everyone in the same room — will demand much more from board members in 2021.

Access additional analyses from our Bloomberg Law 2021 series here, including pieces covering trends in Litigation, Transactions & Markets, the Future of the Legal Industry, and ESG.

Bloomberg Law subscribers can find related content on our In Focus: Remaining Operational resource.

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