Boards Can Drive Science-Based and Risk-Aware Climate Lobbying

Amid the many shocks rocking our society and economy right now, directors may have missed some disturbing new research. In July, the World Meteorological Organization estimated that that the Earth’s average temperature could rise to 1.5-degrees Celsius above pre-industrial levels—considered the tipping point for the planet’s climate—during at least one of the years between now and 2024. This is years ahead of previous projections.

Climate risk is taking on entirely new significance. Accepted as a financial risk, understood to be a material risk, there’s an increasing consensus among central banks and other financial regulators that climate change is now also a systemic risk.

Why should boards and corporations care about this? When a risk is systemic, it affects the very stability of financial markets and there is no avenue to diversify from this risk. The current pandemic offers a useful analogy. Climate change could have such wide-ranging and compounding effects that everyone participating in global financial markets will be impacted.

Given this understanding and the rapidly shrinking window to act, a new Ceres report calls for all corporate action, including lobbying, to take into account the systemic risk of the climate crisis and therefore be aligned with the latest climate science. It calls for “risk-aware” climate lobbying. It asks the following questions: Does your lobbying, especially on climate change, fully consider the risks that global warming poses for your business? And is any of that lobbying actually contributing to creating more risk for your company or industry?

Investors are particularly conscious of how this disconnect between climate science and climate lobbying could create an investment risk.

In 2018, institutional investors with $2 trillion in assets under management called on the 55 top greenhouse gas-emitting European companies to “ensure any engagement conducted on their behalf or with their support is aligned with our interest in a safe climate.” As a result of this investor focus, Royal Dutch Shell, BP, and Total have conducted assessments on the extent to which their large trade association memberships align with their positions on climate change. Building on the success in Europe, in 2019, 200 institutional investors with a combined $6.5 trillion in investments asked 47 of the largest US publicly traded corporations to specifically align their climate lobbying with Paris Agreement goals.

But investors aren’t just asking—they’re acting. In a big win, 53 percent of shareholders at Chevron Corp. voted this summer for a resolution that would push the oil firm to ensure its lobbying activities around climate issues align with the Paris Agreement. This marks the first time a climate proposal won a majority of the company’s shareholder votes. Other climate-related lobbying proposals won support elsewhere this proxy season—at Duke Energy Corp. with 42.4 percent in favor, Exxon Mobil Corp. with 37.5 percent, Caterpillar with 34 percent, General Motors Co. with 33 percent, Delta Air Lines with 45.9 percent, and United Airlines with 31.4 percent.

What role can boards play in helping the companies they serve better align their lobbying activities with climate risk? Directors can do the following:

Assess. Understand your company’s risk management efforts on climate change, including whether and how climate change is assessed as part of enterprise-risk management. Boards could ask management whether that assessment considers the latest climate science and the evolving notion of climate change as a systemic risk. Companies are already starting to conduct climate change-scenario assessments, which could be a great avenue for integrating such thinking.

As a part of this, boards could also encourage management to assess whether their direct and indirect lobbying is aligned with the latest climate science. Ceres calls on companies to use “science-based climate lobbying”—or policies that align with the latest climate science—as the new north star and identifies a number of resources that provide updated details on what this could involve. These assessments should encompass direct lobbying and indirect lobbying done through trade associations.

Govern. Boards should look to see if their companies have the right systems in place to ensure that risk monitoring, sustainability, and government relations are cross-functional and collaborative, particularly in relation to climate lobbying. Boards should also engage management in conversations about how decisions around climate lobbying have the potential to mitigate or exacerbate the risks that a company faces.

Encourage action. Finally, boards should encourage management to act. These actions could include providing disclosures that affirm climate science and directly lobbying on policies that support climate science. Management should be encouraged to engage major trade associations on their own climate lobbying with a view to ensuring that these efforts are also aligned with climate science.

The pandemic shows us the critical value of leadership that combines a clear-eyed assessment of risks with the understanding of the very latest science. It is time to apply this lesson to climate lobbying.

Veena Ramani is the senior program director of Capital Market Systems at Ceres. She leads Ceres’ work on board governance.

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A View from the Front Line: Boards Need Agility Now

The ability of organizations to survive periods of tremendous upheaval lies not in their relative size, strength of their balance sheet, or competitiveness as determined by their current market definitions. Rather, it is the ability and willingness of a business to adapt its current governance protocols and processes while at the same time building on its core governance structures and responsibilities that truly differentiates those firms that emerge successfully from a crisis from those that struggle or fail. Using the COVID-19 pandemic as a lens through which to explore this perspective, firms may consider adapting their governance models using the following series of opportunities and their implications.

If you thought the onslaught of COVID-19 happened quickly, think about this: The world will never be slower than it is today. Implication: The speed and resiliency of a company’s governance structure and business model to adapt is more important than ever.

Environmental, social, and governance (ESG) issues are now table stakes for a firm’s long-term sustainability. The rise of stakeholder capitalism over shareholder capitalism is real and ties back to the critical fact that a firm needs social license to operate—not just a business license. Things that governments used to do, such as act as stewards of the environment, provide health care for the vulnerable, or combat homelessness and racism, now need to be part of enterprises’ ESG mandate. Failure to align the business with ESG goals will result in other consequences. Implication: Successful boards have the resolve to intervene to ensure that progress is made toward meaningful and clear ESG metrics. If this is not a priority, some firms may very well not be able to retain their best employees, attract top directors, or maintain their ability to finance the business.

Similar to adopting the International Organization for Standardization’s safety standards, boards and companies will evolve to adapt to virus-sensitive protocols around how they conduct business and governance operations. If some board meetings are digital, it reduces the board’s physical exposure and travel footprint in a material way. Implication: COVID-19 is not a temporary phenomenon. We now live in a world where learning how to govern and operate safely despite the presence of dangerous, contagious viruses is essential to ongoing business viability and an opportunity to differentiate a company’s value to stakeholders, all while reducing risk.

From a risk and opportunity assessment perspective, customer relationship management systems (CRMs) need to place more emphasis on global issues and their ties to local operations. Implication: Companies that have evolved their ability to become preemptive in their actions due to “over the horizon CRM-ESG radar systems,’ will stay ahead of trends instead of struggling to catch up.

The business strategy and balance sheet must through all phases of the business cycle be disciplined enough to invest in new growth. With the narcotic of low interest rates and an unprecedentedly long bull market, many firms’ business models have been exposed as they were only viable under then-current market assumptions. Implication: Directors need to be healthy skeptics and ask the question: Is our strategy designed to excel under current conditions or can it also propel us to create or enter new markets so that when change occurs, we are less dependent on our current paradigm?

Governance processes (not responsibilities) need to adapt to the times they are in. Implication: Governance is not passive. The board has a responsibility to stay engaged, especially during unprecedented periods like this, and needs to find the right balance between “nose in” and “fingers out.” Some options to consider include the following:
Shift to short monthly meetings instead of quarterly meetings (if you haven’t already).
 Meet virtually with directors the evening before board meetings to regain some of the social interaction that is lost absent in-person dinners and on-site gatherings.
Stay out of management’s way of running the firm if the business continuity protocols are working.
Offer shareholders, proxy advisors, and credit-rating agencies digital access to the board instead of traditional face-to-face meetings.

Business life is not going back to the way it was. Take advantage of the opportunities volatility can create to accelerate innovation. Implication: Fight the tendency to have the organization snap back to the way it was. Lock in the innovations, cost reductions, and process improvements that management has achieved through this period of upheaval.

Executive and board compensation must be aligned with stakeholder interests. In volatile times it is prudent to forego any sort of immediate compensation adjustments unless they are absolutely necessary. Implication: Whatever the compensation treatment may be, it better align with how shareholders, employees, customers, and other key stakeholders experienced this event. The board’s ability to apply discretion while conveying trust and thanks to management and front-liners is especially important at this time.

A diverse and seasoned board of directors is valuable. Directors who have governed through major disruptions such as catastrophic weather events, technology upheavals, financial meltdowns, and so forth are the ones you want on your board all the time, not just in adversity. The board should also seek out not only diversity in decision-making experience but in gender, age, race, and ethnicity to minimize myopic decisions. When recruiting directors, ask them to share something from their leadership experience that went truly awry and what, from a governance perspective, they learned. Implication: We all are good captains in fair weather, but the storms truly bring out the best of leadership in both boards and management.

The secret sauce that makes a firm’s strategy resilient is the quality of leadership at the CEO and board level, coupled with clear and timely communications to stakeholders. The CEO is the linchpin that connects the board to management and sometimes the chair with the board. Implication: Absent leadership and effective communications, this can all be for naught.

Don Lowry is chair of Capital Power Corp., a Canadian power-generating enterprise committed to environmental stewardship. He previously held various C-suite and board-level positions at the likes of EPCOR Utilities, Hydrogenics Corp., Stantec, and more.

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Key Questions to Advance Racial Equity in Business Practices

In response to the increased and widespread call for racial justice in recent months, US companies have put out statements in support of the Black Lives Matter movement. While a good first step, management teams and boards need to ensure that companies are now walking the talk through their own business practices. Corporations can be a significant force for good in society, and they must work to advance racial justice by challenging and, when needed, changing practices inside their organizations that may contribute to institutional racism. With this in mind, NACD recently released Key Questions to Advance Racial Equity in Business Practices.

In this new guide, we outline considerations for boards in their review of specific business practices and norms that may inadvertently institutionalize racial inequities.

Role of the CEO

NACD’s recent conversations with directors have revealed a universal component: The role of the CEO makes or breaks a company’s diversity, equity, and inclusion (DE&I) goals. Boards must ensure that they are not only providing oversight of the CEO’s actions on DE&I, but that the full board is making their expectations around diversity clear and known to the management team.

Thus, the board must treat goals around diversity just as they would treat any other business goals. This means they should consider asking management to develop a few critical metrics to track the progress of the company’s workforce diversity against specific goals to evaluate the company’s culture, values, and inclusiveness. Finally, the board should consider tying compensation to DE&I; doing so will encourage the CEO and broader executive team to focus on DE&I.

Specific questions the board should ask itself and management include:

Are we expecting and incentivizing the CEO to create and maintain a racially diverse executive team and workforce? How does the company define diversity in their hiring strategy? Do our hiring decisions drive racially equitable outcomes?Human Capital Management

Human capital management and talent have been growing priorities in the boardroom. Talent must be considered through many lenses including racial diversity. The board should consider the company’s current employee diversity makeup and understand where and why they may have weaknesses.

Is diverse talent only present at the bottom levels of the organization? Is the turnover rate of diverse employees higher than that of non-diverse staff? The board should have a direct line of sight into the company’s talent and performance management approach to assess the effectiveness of recruitment, development, and promotion aimed at diversifying all employee ranks.  

Questions the board can ask itself and management include:

Is there pay variance between people of color and other employees?Do our current compensation practices contribute to or aggravate pay inequities in the organization? If so, what’s the risk of reputational harm and how would we address these inequities?Have we probed whether management has minimized the risk of racial bias in promotion and advancement decisions for staff?Suppliers

Boards can make important demands to evaluate and improve third-party diversity, including of suppliers, vendors, and contractors. Oftentimes, simply posing questions to management on the racial or gender diversity of third-party suppliers can bring awareness to the issue of inequity. It can also force suppliers to reconsider their own practices regarding diversity, equity, and inclusion.

Boards can ask the following questions to garner a deeper understanding of supplier diversity issues:

Does our company have any internal corporate policies regarding the racial diversity of our suppliers?What percentage of our company’s suppliers and third-party providers are minority-owned? Have targets been set on our percentage of minority-owned and -operated third-party suppliers (including financial services companies, law firms, ad agencies, and manufacturing plants, among others)?The Board

While the board’s oversight of the business’ DE&I efforts is imperative for progress, none of these efforts can succeed without the board looking inward as well. Boards must consider their own makeup and culture as they work to assist in navigating that of their businesses. This is the time for directors to evaluate what skillsets they may be lacking on their boards, and if the culture in the boardroom fosters inclusion.

When looking at succession planning, or during active director recruitment, boards must consider the following questions:

Do we typically look for or favor traditional executive experiences, such as serving as a CEO or a chief financial officer? Are there skillsets that our board is missing that could be filled by a diverse director?How do we identify, recruit, and onboard new directors? If we are working with a search firm, is the nominating and governance committee insisting on racially diverse candidates?Momentum around racial justice has risen and receded many times in history. To stop this ebb and flow, and instead create lasting change, now is the moment for boards and their companies to not only take a visible stance against racial injustice, but to take real action to dismantle institutional racism.

Black Lives Matter. COVID-19. Fiduciary Duties. Onboarding.It’s essential that directors know what to focus on and when.

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Has COVID-19 Made It Essential to Have a Crisis Executive on the Board?

Harvard University professors and crisis experts Arnold Howitt and Herman “Dutch” Leonard have been researching and teaching crisis management in a series of Executive Education Programs at the Kennedy School of Government for decades. In a 2012 crisis seminar, they made the following statement which is apropos to our current national health crisis:

“Devastating crisis events of massive size, which we refer to as landscape disasters, have been occurring with distressing regularity…. What kinds of behavior are most valuable and effective in the moment—that is, during rapidly unfolding, urgent, and high consequence events…?”

Although Leonard and Howitt’s emphasis has been on executive education for senior government officials, every organization, both public and private, will encounter an enterprise crisis at one point or another. COVID-19 is that current “rapidly unfolding, urgent, and high consequence event.” In real-time, companies across the globe are realizing a successful response is critically dependent upon their board of directors and senior management working in concert to affect a positive outcome.  

This raises a question: After the dust settles from the current pandemic, will shareholders expect that a company’s board of directors include an executive with a crisis management background, or should that remain within the company’s business continuity management portfolio?

The “Right Stuff” for the New Normal

Amid any crisis, it’s difficult to predict what the new normal will look like, but it can be agreed upon that there will be changes and corporate governance won’t get an exemption. We’re not arguing for or against the inclusion of a crisis executive to a governance board, but rather initiating a discussion on the topic. We recognize that one of the key rules of good board governance is, “Noses in, Fingers out!” But good management requires solid experience. And now is the time to address the possibility of new experience needed in the board room.

Let’s examine more closely what qualities you’d expect an executive with a crisis management background to possess and how that could impact a board of director’s and corporate management’s response to a global crisis such as COVID-19. The Top Ten Essential Qualities of A Crisis Manager, authored by Mohammed Chughtai for Forbes magazine, describes qualities one could argue are relevant to any leader, not just a crisis leader. That said, academics seem to universally agree that these essential qualities are specific and critical to crisis management:

an excellent communicator who understands the business;decisive leadership; andcalm, proactive, committed, creative problem solving.A board of directors’ approach to overseeing the management of a crisis consists of being able to recognize the three major attributes of a crisis: threat, decision time, and uncertainty. What is the threat to the employees or shareholders, or to the financial stability of the corporation, and what is the uncertainty that needs to be reduced as soon as possible? These skills do not need to reside in one individual, but they are needed to recognize the dimensions of a crisis and to develop a coherent strategy to address the issues that need to be changed in the early stages of a crisis warning. (See Warren Phillips and Richard Rimkunas, Crisis Warning, Gordon and Breach, 1983).

Directors of companies need to recognize that these three attributes are present in every event that a company faces in a crisis. Some events come with high threat, short decision time, and high uncertainty (surprise). COVID-19 would seem to be one of these types of events. Deliberative situations characterized as ones with high threat over an extended time and with surprise, like shareholder demands for change, are a different type of event requiring quite different skills. The military and most hospitals practice extensively on response routines for these challenges. Companies do not normally do so. The challenge to a board of directors is to identify the most likely events, to recognize the nature of their corporate culture, and to identify how to recognize these events and how to oversee the management of each type.

Good corporations recognize the most likely challenges like shareholder demands, accounting errors discovered in an audit, or the loss of a major asset in the company. They are well prepared for these issues both in the board and in management. They turn to expert advice from outside the company and usually run regular exercises to make sure everyone is up-to-date on crisis responses.

A company’s reputation and financial success is dependent upon how it responds to a crisis—but all crises are unique. As nominating and governance committees consider the composition of a board of directors in a post-COVID-19 environment, they should consider which skills they need in house and which they can or should contract from elsewhere. The key here is to ensure that skills in house are able to deal with the high threat, short-term time demands, and uncertainty until the dimensions of a crisis are well-defined and the need for response is agreed upon.

We add one more suggestion. The need to buy time to protect the assets and the culture of the company will vary with the dimensions of the crisis. This means that a broadly experienced board, with solid dialogues with management on how to respond to challenges, must begin long before anything erupts.

In order to be ready for any emergency, boards must invite area specialists to review the company’s economic stability, information technology risks, potential for corporate buyout offers, culture, and human resources health, among other challenges, for diagnosing potential weak spots in the corporate management philosophy and posture. We also advocate regular exercises on potential crisis hotspots to keep everyone ready, willing, and able to get their hands dirty when a crisis emerges.

CACI International, like so many businesses around the world, is laser-focused on successfully managing its response to the COVID-19 pandemic. The CACI board of directors and management, in coordination with other defense and aerospace firms, have and will continue to engage the executive and legislative branches of the US government as it responds to the pandemic. The goal of these engagements is to inform and influence executive and congressional actions in response to the crisis to ensure that the critical national security work of the defense industry continues without disruption.

Warren R. Phillips is lead director on CACI’s board, and Daniel P. Walsh is senior vice president and strategic advisor at CACI.

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Pandemic, Social Upheaval Reshape Some Executive Pay

The social and public health crises that have defined the first half of the year have changed the rules of business and expectations of corporate leadership. Consequently, how compensation committees are now approaching their work and rethinking executive pay practices was the focus of NACD’s first virtual Leading Minds of Compensation peer exchange. Christopher Y. Clark, senior director of partner relations and publisher of NACD Directorship magazine, and Lindsey Baker, associate director of partner relations, moderated the event, which featured the following panelists: Robin Ferracone, founder and CEO of Farient Advisors and director of Trupanion; John Fletcher, director of Repro Med Systems, Axcelis Technologies, ClearPoint Neuro, and Metabolon; Brian Lane, partner at Pay Governance; Wendy Lane, director of Al-Dabbagh Group, Lane Holdings, and Willis Towers Watson; and Steve Van Putten, senior managing director of Pearl Meyer. Highlights of that discussion follow.

What are the key issues underpinning modifications to compensation plans in the current business environment? What are the impacts of those decisions?

John Fletcher: Some crises are a one-time occurrence or of limited duration. The coronavirus pandemic is a different kind of challenge. In the current environment, corporate board members must deal with a high level of ongoing risk, an unknown duration, and an uncertain outcome. In that context, we have compensation committees who will be considering the following issues:

Executive base pay. Should compensation committees insist on executive base pay reductions? If the company is doing furloughs or layoffs, should executives be paid back and under what conditions? When compensation is an element of variable pay, and is less likely to be earned at this time, should that base pay percentage be increased?

Executive incentive. Should compensation committees adjust performance-based pay to align with an adjusted financial outlook? Virtually every company has adjusted its outlook for 2020. Should companies revise their performance goals now, rather than performing a retrospective? If so, should new goals solely reflect quantitative metrics, or are there relative or qualitative measures?

Performance metrics. Are there alternatives to modifying performance metrics and ensuring employees are motivated? Should companies move to quarterly goals? So far, the biggest impact has been in Q2, with some impact in Q3. We don’t know what will happen in Q4.

Perception of compensation changes. If performance measurements and metrics are changed, how will shareholders, employees, and proxy advisors perceive those changes? Did the compensation committee take into account the interests of all constituents when making what were thought to be sound decisions?

What do you expect the impact of these business challenges will be on CEO pay practices?

Robin Ferracone: On the salary piece, I’m anticipating the question of when pay will be restored. A lot of companies are waiting to see if they’re in the clear to bring pay back to what it was. I expect this year we’ll see little increase in compensation—and possibly a general decrease in compensation. The talent market has been destabilized and there’s more supply than demand.

I do want to point out that we have a black swan event and there’s a lot one can learn. I’ve got one client that has a call center. They find there are fewer calls because there is less demand for services; however, because of that, they’re finding that they’re able to respond to calls more quickly and that is improving customer retention. Even companies with durable models can learn something, and that can impact both the measures and the goals in the incentive plan. For those companies that are not so fortunate to have durable business models, there is soul searching to do.

This will have an impact on the measures and what the goals are. I’m expecting to see more qualitative measures to refocus people on the values and ESG concerns that organizations have right now. Secondly, think about the goal ranges and make sure they’re wide enough, durable enough. And use discretion in plans appropriately. One of the things we will see more of is a questioning of long-term incentives. Should we put in more restricted stock as opposed to performance shares? Finally, I think disclosures are going to be case-by-case this year. I think we’ll see better disclosures with a lot of disclosure on the human capital component.

What should compensation committees be considering, beyond the next one or two years?

Steve Van Putten: At the moment, everyone is focused on the near-term impact of this very unusual year. We still need to make hard decisions about temporary pay reductions, if and how to use discretion for 2020 bonuses, and what to do about multi-year incentive goals set in 2020 that are no longer attainable.

Looking to 2021 and beyond, it’s likely we will still be experiencing significantly reduced visibility and increased volatility. When I think about the key areas of attention for compensation committee members beyond the immediate concerns, one that may not be top of mind is whether you have a loss of retention or motivational value in the program. Even if, as we saw with the stock market, prices recovered fairly quickly, it’s likely that the goals you set in early 2020 were either materially impacted or are no longer attainable. And keep in mind that while it may be slow, executive turnover is still happening.

From a director standpoint, what should you do about that? First, don’t overreact. I would start by understanding the magnitude of how your potential and realizable value have been impacted. Also, be certain that those multi-year goals really aren’t attainable because it may be that you have time to catch up and reach those goals. In that regard, proxy advisors are likely to scrutinize any modifications to your long-term rewards.

Given all of that complication, how do you move forward? One thought is to increase the use or weight of restricted stock in future awards. The rule of thumb is that performance-based rewards should represent at least 50 percent of LTI [long-term incentives]. The second [thought] is to address the heightened uncertainty and volatility head-on by allowing yourself more time to set performance goals, but be prepared to consider the use of discretion again.

For companies with a depressed stock price, is it time for a stock option exchange?

Brian Lane: It needs to be considered holistically. For those industries that are still option-heavy—like biotech companies and private companies—a depressed stock price can have significant complications for outstanding equity that is predominantly stock options—and you lose the retentive and motivational value associated with outstanding equity.

There are many things for the compensation committee to consider when evaluating whether a stock option exchange makes sense, namely the fact that you would be repricing management equity awards at a time when your other stakeholders don’t have the opportunity to do the same (e.g., shareholders can’t just as easily reprice their investments).

There are two key implications of that connection between the shareholder experience and the executive experience. First is the need to disclose the business rationale for why an option exchange is being considered, and to that end, understanding whether your institutional investors have released policies or guidelines on option exchanges can be helpful. Second is that the proxy advisors tend to take a pretty hard line on option exchanges, particularly ISS, which has a prescriptive list of features they want to see in order to view an option exchange favorably. Weighing the ISS provisions against what makes sense for the company is really important, as is considering the benefits of an option exchange [for management] in comparison to the experience of shareholders and other company stakeholders.

How do you see the connection between the compensation committee, talent, and the intensified focus on civil rights and workplace equity?

Wendy Lane: Companies are making more explicit recruitment commitments. Think about it: If you have a bias at the beginning, it just gets worse down the line. [Private-equity investment firm] Blackstone Group historically recruited from other Wall Street companies, but is now saying it’s only going to do that as a last resort and instead recruit from historically black colleges and universities.

There’s a really interesting retention program that Intel is doing called WarmLine, which is a way to get a sense of which employees are thinking about leaving and what their disgruntlements are and this has enabled the company to better retain minorities than they had historically. And many companies have more explicit diversity goals when it comes to hiring. Intel set a goal in 2015 that by 2020 they were going to have full representation in their leadership and technology ranks. They achieved that in three years, and in part it was probably because executive pay was tied to a diversity metric, and in part because they made that public declaration. Now, we’re seeing lots of companies making explicit commitments online and they’re backing those up with executive pay practices. My understanding is that CEOs now have about 10 percent of their compensation based on diversity and inclusion metrics and I’m sure this is going to multiple that.

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Redefining ‘Business as Usual’ in the Boardroom

In May and early June, the KPMG Board Leadership Center surveyed more than 300 directors to gauge the near- and longer-term implications of COVID-19 for board oversight and business operations, strategy, and priorities. Five major themes that may be useful for board leaders to keep in mind as they help guide their boards and companies in the months ahead emerged from the survey results.

1. Understanding the scope of COVID-19, its impact on the company, and management’s response plan has required boards to bring a new level of intensity to their oversight. Boards are rethinking how they should exercise their oversight—for example, through the frequency of communications with the CEO and management, the use of virtual meetings, the use of board committees, and the role of the lead director.

While ultimate responsibility for overseeing the company’s response to COVID-19 resides with the full board, 23 percent of directors said that their boards established a special committee or tapped a standing committee to focus on the company’s response. The committees most commonly tapped were the executive committee (40%) and audit committee (20%). Nearly half of surveyed directors reported that their boards spread responsibility to oversee the company’s response to COVID-19 across all of their standing committees, based on the committees’ areas of responsibility.

More than a quarter (27%) said that their board has held formal (virtual) monthly meetings during the pandemic, with 17.5 percent holding formal weekly meetings. Most directors reported an increase in informal communications with management, with 46 percent reporting weekly or more frequent informal updates.

2. During the immediate response to COVID-19, employees and business continuity were key considerations across management and the board. During the first six months of the pandemic, management’s updates to the board have focused on information around employee health and well-being, financial performance, changes in strategy, scenario planning, and the company’s changing risk profile. Directors cited employee and customer safety (90%) and financial performance (93%), including liquidity and access to capital, as top areas of focus at the board level. Seventy-one percent of directors said they’re focusing on scenario planning for the period of recovery and beyond. More than 40 percent reported that their boards are focusing on the company’s changing risk profile.

Those surveyed reported that human resource issues stemming from COVID-19 have been the subject of substantial discussion on their boards, particularly in the areas of employee safety (90%), employee engagement and morale (74%), and normalizing work-from-home arrangements (64%).

The most challenging operational changes during the immediate pandemic response, according to the survey, included employee health and safety (42%), business continuity (38%), and remote working (36%).

3. Management teams and boards are planning now for the longer term (12–24 months out) as companies and the economy begin to recover. More than half (55%) of directors anticipate that their companies will have to rethink near-term strategy, and 48 percent anticipate the same with regard to long-term strategy in a substantial way as a result of COVID-19.

When asked to identify the recovery path for their companies or industries, 40 percent of director respondents said that they will recover along a protracted path, requiring capital reserves to transform operating models and keep up with new consumer expectations. Forty percent also said that their companies or industries will suffer from the effects of an economic slowdown, but will recover more quickly as consumer demand rebounds. An additional 14 percent responded that their companies or industries have not experienced a downturn as consumer behavior shifted in their favor during COVID-19. Finally, 5 percent said that their companies or industries will struggle due to permanently lowered demand for their offerings, insufficient capital to ride out an extended recession, or poor digital transformation execution.

4. Business plans and processes as well as board oversight processes may need to be reassessed. Directors identified the following as areas that their companies and boards should reassess in a substantial way:

Remote working and alternative work schedules (60%)Strategy—both near-term (55%) and longer-term (48%)Crisis readiness and response (39%)Supply-chain/third-party risk (33%)Labor force, including automation and artificial intelligence (31%)Balance sheet, use of capital for buybacks and dividends (28%)Company’s risk profile and ERM processes (27%)When asked about which aspects of the board’s operations, engagement, and effectiveness the COVID-19 situation has highlighted as potential areas for improvement, directors responded as follows:

Understanding the company’s strategy and risk profile (37%)Willingness to challenge management on fundamental assumptions regarding strategy and risk (33%)Need for more frequent meetings and informational communications (32%)Information flow and reports to the board (25%)Allocation and coordination of risk oversight responsibilities among board committees (19%)When asked how COVID-19 will impact their board’s time commitment over the next several years, 13 percent of directors indicated that there would be a significant time increase, while 43 percent indicated a moderate increase and 40 percent a gradual return to normal.

COVID-19 will continue to have a significant impact on board oversight and operations, upping the need for greater time commitment, a deeper understanding of the business model and strategy, and a more intense focus on the issues that matter most to the success of the company.

5. Business leaders are considering more broadly the role of the corporation in society. When asked in which areas COVID-19 is prompting business leaders to rethink how their companies create long-term, sustainable value, 47 percent of directors identified the company’s commitment to stakeholders, including shareholders, employees, customers, supply chains, and communities; 36 percent noted corporate purpose and long-term focus; and 32 percent cited environmental, social, and governance issues most central to the business.

It’s important to note that the survey was launched before the death of George Floyd. The subsequent civil unrest protesting systemic bias and racism, coupled with the pandemic’s disparate impact on people of color, has caused leaders and their organizations to do some soul-searching and to take a closer look at the ESG issues that are most critical for their companies. How a company addresses employee issues (such as diversity and racial inequality, health and safety, sick leave, and work-from-home arrangements) and communicates with its supply chain and customers regarding their challenges related to COVID-19 are important factors of the S in ESG and in creating sustainable, long-term value.

Indeed, in light of the commitments business leaders have made to various stakeholders in response to the above events, companies’ progress on ESG matters—from employee well-being to addressing social justice issues and climate risk—will be front and center as businesses calibrate their strategies and board oversight in the challenging months ahead.

David A. Brown is executive director of the KPMG Board Leadership Center.

Black Lives Matter. COVID-19. Fiduciary Duties. Onboarding.It’s essential that directors know what to focus on and when.

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NACD: Tools and resources to help guide you in unpredictable times.

Expect a Resurgence of Unions Post-pandemic

Everyone wants to know what the world and the world of business will look like once the COVID-19 pandemic abates. Numerous articles have appeared in business publications such as The Atlantic (May  6, 2020), Forbes (April 15, 2020), and The Economist (April 2, 2020) to boldly suggest that business and life will be different for the foreseeable future—and possibly even for good.

Meanwhile, for the past three decades, union membership has consistently declined with membership across the United States now below 11 percent, down from more than 20 percent in 1984. Some boards and executive leaders have confidently moved forward believing that unions are dead and their companies will not be targets of union organizing. Consequently, the topic does not often come up in boardrooms, executive meetings, or strategic planning sessions. Why? Most likely it is because unions are “out of sight, out of mind.”

During the first two decades of the twenty-first century, employee actions and unionization were relatively quiet, even during the recession beginning in 2008. Not so subtly, however, employee protests and walk-outs against management have materialized at iconic brands such as Amazon.com, Google, Whole Foods Market, Tesla, Walmart, Target Corp., and Instacart. These vocal and public actions speak out against the lack of leadership attention to topics such as sexual assault, pay inequity and the racial pay gap, required arbitration in employment agreements, workplace safety, diversity and inclusion, company culture, and other issues important to employees.

Public reaction to such worker actions has been sympathetic, especially among younger generations. Additionally, during the Democratic presidential primaries, these generations largely favored Bernie Sanders’ candidacy. His progressive message resonated as it focused on equality and health care for all, uplifting diversity, taxing the wealthy to provide for poorer Americans, workplace safety, and related initiatives. While Sanders ultimately withdrew from the Democratic primaries, his message lives on in the minds of younger generations. They believe in the right to their personal safety and the government’s role in alleviating the struggle they face living in expensive areas of the country.

In conveying their message publicly, many millennials and other young generational employees believe they, specifically, have been adversely affected by this pandemic, including with regards to workplace safety, job losses, pay cuts, and losses of or reductions in benefits. While employment conditions may have been excellent prior to the pandemic, with free or low-cost cafeterias, gyms, child care, and many other benefits, these are now gone when working from home or not working at all. These generations’ vocal and public calls to company leadership revolve around taking affirmative, active, engaging, and sustained action in their interest. And if corporate leadership does not, enter the possible resurgence of union activity.

While some boards of publicly listed and privately held companies may have discussed possible unionization or remaining union-free, discussion is only talk—and many companies have not invested appropriately in corporate culture to ensure that employees feel supported from within. Indeed, in a Duke University survey, researchers queried more than 1,000 senior executives about corporate culture. Surprisingly, 69 percent said their firms underinvest in culture, only 16 percent believe their firm’s culture is where it needs to be, and 92 percent said improving corporate culture would increase their company’s value.

What can boards do to engage with management to create and sustain a culture that benefits the company, its shareholders or owners, and employees alike? Here are four actionable, agile, and transformational recommendations:

Place culture at the top of the strategic objectives list. Understand, accept, and agree that without a strong, open, honest, transparent, vibrant, collegial, safe, diverse, respectful culture, companies cannot achieve organizational excellence, successful operational execution, customer loyalty, sustainability, and financial objectives.Ensure every executive leadership and business function has a seat at the table. While this recommendation saw improvement over the past decade, the expertise of the people at the table needs to be assessed frequently. Take a look, for example, at the July/August 2015 issue of NACD Directorship magazine which published an article titled, “The HR Threat to Board Effectiveness.” Just because a business function is represented at the table does not mean that the person representing the function possesses the knowledge, know-how, and expertise across the business to remain effective.Involve, listen, and then act. Too often, companies make decisions at the top and then cascade the decisions downward to lower-level teams. In doing so, the members of the teams may often ponder, “Why didn’t they ask for our input and ideas before making another decision that affects us?” If a board and an executive leadership team have concluded that change and transformation are required in the company, begin the conversation with as many team members as possible by asking the question, “How can we best solve this problem?” Consider forming cross-functional teams to work collaboratively on actionable, thoughtful solutions. Once these decisions are approved by senior leadership and, if necessary, the board, and with a member of the management team as an involved sponsor, give those team members the responsibility to act. And when success comes, recognize and praise them for their achievements.Remember: not just once, but always. Boards and senior executive leadership acting on these recommendations need to remember that these are not one-time events. Transformational change needs to be sustainable change. Thoughtful planning which involves the collective organizational team must be consistent, thoughtful, and open to continuous improvement and necessary change. Involve everyone, not just decision-makers. Let teams take responsibility for offering ideas and acting on their suggestions.Taking these recommendations into account can provide greater assurance that your teams are an engaged part of your company culture and sustainable business successes. And with your team successes, there will be far fewer team members taking their message to the public, to the press, and to the unions.

Hedley Lawson is the global managing partner of and Victor Deksnys is an alliance partner with Aligned Growth Partners, LLC.

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COVID-19 Underscores Need for D&O, EPL, and Wage and Hour Insurance

The COVID-19 pandemic is a public health crisis that continues to threaten the safety of people in the United States and around the world. It’s also an unprecedented economic event, and companies and their boards are not immune from the risks it presents. Directors of public, private, and nonprofit organizations will face liability exposures during and after the pandemic that could trigger claims under directors and officers liability (D&O), employment practices liability (EPL), and wage and hour liability (W&H) insurance policies—which makes understanding such coverage more important than ever.

Expect Board- and Management-Targeted Litigation

Since the World Health Organization declared COVID-19 a pandemic on March 11, 2020, we have seen a number of securities class action lawsuits filed against public companies and their directors and officers. To date, shareholder litigation related to COVID-19 has mainly taken the form of securities class action litigation, although there has been at least one derivative action filed. We have also seen a handful of US Securities and Exchange Commission actions filed against companies and at least one individual officer.

Despite the limited number of derivative actions to date, the possibility of an uptick in this type of litigation should be of great concern to directors. A drop in stock price is a prerequisite for a securities class action. But derivative litigation, which involves allegations of a director’s breach of fiduciary duties, can be filed without such a fall in stock price. Derivative settlements and judgments are not usually indemnifiable, making them particularly problematic as they may expose directors’ and officers’ personal assets if they do not have appropriate Side-A insurance coverage in place.

The global impact of the virus has brought a significant increase in supply-chain disruptions and a slowdown or complete halt of business operations in some industries, both of which can heighten insolvency risks. These impacts could thus lead to a company’s inability to fund the defense of its directors involved in company-related litigation, making D&O liability protection essential. Compared to public-company D&O policies, private- and nonprofit-organization D&O policies typically offer broader coverage. Depending on policy wording, the latter coverage could be triggered by pandemic-related claims from various stakeholders, including customers, vendors, and employees.

Potential Liabilities for Employers

The pandemic’s extraordinary effect on workplaces could generate a variety of EPL and W&H claims. We expect plaintiffs’ counsel to advance novel legal theories under the Families First Coronavirus Response Act, the Family and Medical Leave Act, and the Americans with Disabilities Act, among other legislation, as employers struggle to comply with new and sometimes conflicting requirements under these and other employment laws.

History has shown that wrongful termination suits, discrimination suits, and other workplace litigation tend to follow on the heels of an economic downturn. Widespread layoffs, furloughs, and closures amid the pandemic will likely drive future claims. These claims could also be fueled by some new paid sick leave laws that include antidiscrimination and antiretaliation provisions, which prohibit employers from taking adverse action against employees who exercise their rights.

Businesses should also be mindful of potential claims that could arise in connection with managing remote workforces, including employee privacy and cyber claims. Directors and officers might be held personally liable for some alleged violations under wage and hour laws and state equivalents to the Worker Adjustment and Retraining Notification Act, which requires advance notice of plant or office closings.

Certain aspects of these and other types of workplace litigation claims could trigger EPL or W&H coverage, depending on the facts of the claim and policy wording.

It’s difficult to predict the next turn for businesses during the pandemic, but they must ready themselves for potential D&O, EPL, and W&H claims in the weeks and months ahead. Boards and management should work with their insurance advisors to understand how their coverage can apply and prepare to manage potential losses as the crisis continues to unfold.

Sarah Downey is a managing director and the D&O product leader at Marsh.

Black Lives Matter. COVID-19. Fiduciary Duties. Onboarding.It’s essential that directors know what to focus on and when.

Become an NACD member today.

NACD: Tools and resources to help guide you in unpredictable times.

COVID-19 Underscores Need for D&O, EPL, and Wage and Hour Insurance

The COVID-19 pandemic is a public health crisis that continues to threaten the safety of people in the United States and around the world. It’s also an unprecedented economic event, and companies and their boards are not immune from the risks it presents. Directors of public, private, and nonprofit organizations will face liability exposures during and after the pandemic that could trigger claims under directors and officers liability (D&O), employment practices liability (EPL), and wage and hour liability (W&H) insurance policies—which makes understanding such coverage more important than ever.

Expect Board- and Management-Targeted Litigation

Since the World Health Organization declared COVID-19 a pandemic on March 11, 2020, we have seen a number of securities class action lawsuits filed against public companies and their directors and officers. To date, shareholder litigation related to COVID-19 has mainly taken the form of securities class action litigation, although there has been at least one derivative action filed. We have also seen a handful of US Securities and Exchange Commission actions filed against companies and at least one individual officer.

Despite the limited number of derivative actions to date, the possibility of an uptick in this type of litigation should be of great concern to directors. A drop in stock price is a prerequisite for a securities class action. But derivative litigation, which involves allegations of a director’s breach of fiduciary duties, can be filed without such a fall in stock price. Derivative settlements and judgments are not usually indemnifiable, making them particularly problematic as they may expose directors’ and officers’ personal assets if they do not have appropriate Side-A insurance coverage in place.

The global impact of the virus has brought a significant increase in supply-chain disruptions and a slowdown or complete halt of business operations in some industries, both of which can heighten insolvency risks. These impacts could thus lead to a company’s inability to fund the defense of its directors involved in company-related litigation, making D&O liability protection essential. Compared to public-company D&O policies, private- and nonprofit-organization D&O policies typically offer broader coverage. Depending on policy wording, the latter coverage could be triggered by pandemic-related claims from various stakeholders, including customers, vendors, and employees.

Potential Liabilities for Employers

The pandemic’s extraordinary effect on workplaces could generate a variety of EPL and W&H claims. We expect plaintiffs’ counsel to advance novel legal theories under the Families First Coronavirus Response Act, the Family and Medical Leave Act, and the Americans with Disabilities Act, among other legislation, as employers struggle to comply with new and sometimes conflicting requirements under these and other employment laws.

History has shown that wrongful termination suits, discrimination suits, and other workplace litigation tend to follow on the heels of an economic downturn. Widespread layoffs, furloughs, and closures amid the pandemic will likely drive future claims. These claims could also be fueled by some new paid sick leave laws that include antidiscrimination and antiretaliation provisions, which prohibit employers from taking adverse action against employees who exercise their rights.

Businesses should also be mindful of potential claims that could arise in connection with managing remote workforces, including employee privacy and cyber claims. Directors and officers might be held personally liable for some alleged violations under wage and hour laws and state equivalents to the Worker Adjustment and Retraining Notification Act, which requires advance notice of plant or office closings.

Certain aspects of these and other types of workplace litigation claims could trigger EPL or W&H coverage, depending on the facts of the claim and policy wording.

It’s difficult to predict the next turn for businesses during the pandemic, but they must ready themselves for potential D&O, EPL, and W&H claims in the weeks and months ahead. Boards and management should work with their insurance advisors to understand how their coverage can apply and prepare to manage potential losses as the crisis continues to unfold.

Sarah Downey is a managing director and the D&O product leader at Marsh.

Black Lives Matter. COVID-19. Fiduciary Duties. Onboarding.It’s essential that directors know what to focus on and when.

Become an NACD member today.

NACD: Tools and resources to help guide you in unpredictable times.

The Healthy Departure: Considerations for Effective Off-Boarding

Long viewed as a point of arrival rather than a point of entry, a board seat is not what it used to be. Gone should be the days when renomination is assumed as a given. A significant minority (46%) of directors believe that members of their boards—including board leaders, board chairs, lead directors, and committee chairs—should be replaced, according to a November 2019 NACD data snapshot. That statistic is a sign of an insufficient process that has failed to keep up with the increasing expectations of board performance by all stakeholders, both internal and external; indeed, 85 percent of directors agree that performance expectations for all board members are higher than three years ago. As one director noted during a recent meeting of the NACD Nominating and Governance Committee Chair Advisory Council, “We have a hard time with appropriate turnover because we as a society have always considered board work as the ultimate demonstration of accomplishment.” The director went on to add, however, that “you have to be ready to do the hard work of governance.”

The current pandemic has increased performance expectations of board members and boards need to think clearly and critically about the skillset of their members, including themselves, and if those skills align with what the company needs in the COVID-19 environment and beyond.

Investors and proxy advisors have historically created policies to help encourage regular refreshment of the board to ensure skills properly align with business needs. Boards, in turn, have created tenure-limiting or refreshment mechanisms, such as age limits and director term restrictions. These measures, however, belie the cultural and emotional difficulty of removing a fellow director. They also deflect the responsibility of the individual director to critically evaluate their own professional and personal goals, relying instead on process over substance. Some of the challenge is self-inflicted, too. While most boards have a robust onboarding process, few have similar discipline around directors leaving the board or off-boarding—voluntarily or for performance reasons.

To change the dynamic around the off-boarding process and support directors who choose to step down, boards can use these key points of guidance for success:

1. Set expectations at the outset.

Directors should view appointment to the board as the start of a new career rather than a final destination.

“We have conversations that are a part of onboarding; we say it is not a lifelong appointment. Because the director dynamic has changed, we’re not all buddies, but it makes it have less stigma to leave a board. Create an onboarding plan right up front that includes why you were selected and how you fit in, here is what we expect of you and what you can expect of us,” one director advised. “Make it clear at the top of the page: Being a director is not a lifelong appointment.”

2. Make conversations about performance and the company’s needs a regular occurrence.

Building from the onboarding process, the nominating and governance committee chair or lead director should have regular conversations with board members about their performance and how they are feeling about their board service and that of the entire board—outside of the formal evaluation process.

“We bake in feedback twice a year. Typically, we have our lead director or sometimes the nominating and governance chair… give feedback and ask directors how they’re feeling. This creates the expectation that a review will happen twice a year and makes feedback a normal process,” said another director.

3. Make the evaluation process worth your time.

Outside of informal feedback, evaluations can be a tool that helps directors to recognize board members who may be falling behind on expectations—evaluations may even help a board member to self-identify as a director whose own ability to contribute to the board is waning.

According to one committee chair, “We have an internal evaluation system. The way we are trying to help [directors] save face is [by] trying to encourage rotation off the board and getting new perspectives. In time, we will refresh the whole board. Now, the truth is the people we are off-boarding are the least impactful and their backgrounds are the least relevant.”

4. The nominating and governance chair and the full-board leader together should guide the process.

The nominating and governance committee chair should work in conjunction with the lead director to conduct the difficult conversation about off-boarding specific directors.

“We had someone who was showing signs of dementia,” a director participant said. The nominating and governance committee chair “approached [the board member’s] spouse and got them to seek medical advice. It took three months, and at the end, we said we can’t in good conscience have you continue on the board. It was a very difficult decision and process, but at the end of the day, it was in the best interest of the company.”

5. Create a pathway for engagement post-directorship.

Directors who have been with the company for a long period of time may have valuable insights to share with current and new directors through a director emeritus program.

“For directors who have a lot of experience with the company, you can bring them in to do a half day Q&A and dinner with the existing board,” a committee chair recommended. “A lot of what these directors want is to have an emotional relationship with the company.”

At the end of the day, a board is only as good as the directors serving on it. While all accomplished professionals serve on the board for a reason, business strategy and needs change, and so should the board. Beyond tools to address an underperforming director, boards should also think proactively about the culture of service to the company that they want to create among their directors. When handled correctly, opting to step off a board will not be seen as a failure or as something signaling the board’s concern, but will rather be seen as an act of leadership calling forth respect. As one director thoughtfully noted, “The concept of directorship is not to serve as long as you want to; it is to serve as long as you’re needed.”

The above is a brief excerpt from NACD’s Considerations for Effective Off-Boarding.

Note: The Advisory Council meeting was held using the Chatham House Rule, under which participants’ quotes are not attributed to individuals or their organizations.

COVID-19. Uncertainty. Fear. Recession. Fiduciary Duties.It’s essential that directors know what to focus on and when.

Become an NACD member today.

NACD: Tools and resources to help guide you in unpredictable times.