ANALYSIS: Corporate Governance, B.C./A.D.

Corporate governance, B.C. (Before Coronavirus): A rock concert-sized crowd of shareholders packs into an arena in Omaha every year to hear from Warren Buffett (and buy discount Hanes underwear and other Berkshire Hathaway products).

Corporate governance, A.D. (After Disruption): Businesses sit empty, the economy contracts, and companies must adjust the way their organizations operate, often on the fly.

Some changes resulting from the pandemic may be temporary, and will fade with the threat of infection. Other changes will be transformational and will mark the spring of coronavirus as a sharp dividing line between the past and a new future.

The Board Leadership Challenge

The coronavirus pandemic will have a profound impact on the way that corporate boards oversee the operations of their companies. In the months and years after the main virus threat subsides, boards will need to develop more robust risk assessment and mitigation policies, and to oversee extensive long-range contingency planning to a greater degree than they are doing now. It is essential for a board to closely scrutinize management’s assessment of the company’s exposures, and to ensure that the directors are receiving the timely information and business intelligence that they need during this and future crises.

Directors may want to engage with each other and with management more frequently than their periodic meeting schedule allows, and should consider establishing a permanent emergency response committee to handle board-level matters related to the pandemic. After the current threat passes, such a committee could shift its functions to focus on long-term disaster preparedness and mitigation.

Even with the remote meeting options that I discussed previously, directors will be facing significant increases in the demands on their time due to the coronavirus crisis. These demands shine a light on a continuing problem in corporate governance: overboarding. Directors should carefully consider whether they can realistically meet the expectations placed on them in a time of crisis when they are serving on several boards at the same time. The investor community, and the plaintiffs’ bar, will be watching closely.

Companies must also deal promptly with an unpleasant but necessary task in the time of coronavirus. Boards must carefully review succession and business continuity plans. The virus has hospitalized a head of state and stricken senior corporate officers. Boards must be prepared to deal with the possibility of key personnel becoming incapacitated due to illness. Most companies will have such plans in place already, but boards and management should review them to determine if they are appropriate for what may be a very fast-moving pattern of change. Succession planning can be a cumbersome and time-consuming process, and should be in place before the crisis arises. Directors must also be mindful of company disclosure policies with regard to communications about members of senior management who become ill.

Shareholders and Coronavirus

I previously discussed the mechanics of virtual meetings. Companies are holding virtual meetings out of necessity this year, but what are the prospects for the future?

One question that must be addressed initially is: When will shareholders feel comfortable gathering in large numbers? After the coronavirus, will there ever again be an active secondary market for passes to join 40,000 other attendees at Warren Buffet’s “Woodstock for Capitalists” in Omaha (and get the discount underwear)? The question will take time, perhaps through next year’s meeting season, to resolve.

A more important question is: Can the genie of virtual meetings be returned to the bottle after the 2020 expansion?

Shareholder advocate James McRitchie is skeptical. “After going virtual and getting to pick, choose, ignore or simply not allow questions,” he recently told me, “why go back to allowing shareholders to put questions to management or the board?”
Under Delaware law, companies may conduct audio-only annual meetings, negating the opportunity for investors to see the management team. McRitchie added that virtual-only meetings “have become an easy way to discourage shareholder communications.”

Stakeholder Governance After the Virus

The pandemic is crashing directly into last summer’s aspirational statement by the Business Roundtable on stakeholder governance. The BRT, an organization of large-company CEOs, stated that its member companies “share a fundamental commitment to all of our stakeholders,” including employees, suppliers, their communities, and the environment. The problem now is that rational long-term objectives are often forgotten in cases of global crisis. Companies shift from looking 10 years down the road to surviving the next week of the pandemic.

The pandemic also points out, however, the importance of all of those stakeholders to achieving corporate success in a post-coronavirus world. Companies should manage their operations in a way to minimize the risks and impacts of supply chain disruptions and customer displacement. It is essential for companies to understand the needs of their customers, suppliers, service providers, and shareholders, and to effectively communicate with these interests.

Finally, the pandemic reveals the importance of a company’s commitment to its human capital. The employee base is essential to corporate resilience and operational continuity in the face of future crises. Boards and management should set the tone at the top through communications and socially responsible policies directed at all stakeholder constituencies, including employees.

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