A Mid-Season Look at 2022 Shareholder Proposals

As we sit squarely in the middle of proxy season, we have a useful vantage point from which to consider already announced shareholder proposals and anxiously await investor feedback on those matters presented for shareholder votes. From this vantage point, corporate directors can better anticipate and prepare for trends that may ultimately be presented to them.

If the most recent shareholder proposals can be considered a guide, directors should plan on a busy wrap-up to this proxy season. This is the case given continued investor focus on environmental, social, and governance (ESG) matters, renewed pressures on diversity, equity, and inclusion (DE&I) initiatives, and increased attention to the corporation’s social voice. All of these issues must be considered against the backdrop of the war in Ukraine and the twin economic pressures of increasing inflation and the prospect of an economic slowdown.

Corporate boards should keep their fingers on the pulse of possible investor interest in these and other nontraditional topics emerging from the 2022 proxy season.

Established Procedures

Public company shareholders can submit proposals for consideration at a corporation’s annual meeting through a well-established process that is administered by the US Securities and Exchange Commission (SEC). The SEC requires proponents to satisfy certain procedural and substantive requirements before a proposal is included in a company’s proxy statement. The SEC views the shareholder proposal process as fundamental to shareholder democracy and it is actively involved in adjudicating disputes between companies and proponents as to whether a company may properly exclude a shareholder proposal from its proxy statement.

In November 2021, the SEC issued guidance in which it scaled back the basis on which companies could properly exclude shareholder proposals. In applying the “ordinary business” exclusion, in which companies are permitted to exclude a proposal if it deals with a matter relating to the company’s ordinary business operations, the SEC had historically focused on the nexus between a policy issue and the company’s business, which led to many shareholder proposals being excluded where nexus was lacking. In the recent guidance, the SEC clarified that it will no longer focus on the nexus between the policy issue and the company but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In so doing, the SEC indicated it will consider whether the proposal raises issues with a broad social impact such that it transcends the ordinary business of the company. For example, a proposal relating to greenhouse gas emissions would not be excludable solely because greenhouse gas emissions are not a significant business issue for a company since climate change has broad societal impact.

What We’ve Seen to Date

A variety of indicators, including SEC data, suggests that the volume of shareholder proposals submitted during this proxy season will meet or exceed the heightened pace of the last several years. Many of these proposals fall into the ESG field. Indeed, recent news report noted that more than 500 ESG-related shareholder proposals had been submitted by mid-March, which reflects a 22 percent increase compared to the same time last year.

Significant and potentially controversial resolutions continue to be proposed outside of the ESG area, including those dealing with topics such as new product risk and the conduct of business in countries with authoritarian governments.

Based on available data, many of the resolutions submitted to date can be allocated into the following categories:

Corporate Governance: Resolutions in this bucket focus on special meeting thresholds, employee representation on corporate boards, use of an independent board chair, director background evaluations, DE&I and civil rights expertise for directors, written consent practices, continued use of dual class shares, virtual shareholder meetings, and director retirement requirements.Environmental: Resolutions relate to the removal of certain ingredients or practices from the supply chain, environmentally sensitive packaging, terminating support of fossil fuel initiatives, greenhouse gas emission controls, ending deforestation, environmental justice audits, limitation of natural gas use, recycling commitments, climate change risks, and food and water equity matters.Discrimination: Proposals target the institution of civil rights and DE&I audits, workplace non-discrimination, and management diversity commitment.Human Rights: Proposals relate to human rights violations in countries where a company conducts business, forced labor in the supply chain, use of child labor, human rights audits in certain international business lines, and the rights of indigenous peoples.Lobbying: Resolutions target the alignment of lobbying activity and support of the Paris accords.Executive Compensation: Proposals focus on pay equity gaps along gender and racial lines, review and approval of executive severance and termination pay, restatement clawbacks, limitation of the use of options and bonuses, deducting legal defense costs from incentive compensation, regulating changes to compensation metrics, and golden parachutes.Political Spending: Proposals suggest banning the practice.Business Practices: Resolutions relate to conversion to a Delaware public benefit corporation or California social purpose corporation, employment agreement concealment clauses, anticompetitive business practices, arbitration of securities law matters, the development of certain controversial products, investments in certain industries and products, and paid sick leave.

Primary Lessons and Projections from the Proxy Season

Midway through the 2022 proxy season, the following lessons and projections can be gleaned by boards:

ESG-related initiatives will remain front and center, particularly as climate change-related policy initiatives move forward and environmental incidents are highlighted in the media.Social justice issues are primarily (but not exclusively) focused on the performance of racial, gender, and DE&I audits. Human rights concerns remain of interest with proposals relating to international companies.Proposals remain with respect to traditional governance issues such as the status of the lead independent director, board composition, and director background evaluations.There is continuing interest in resolutions aimed at curtailing certain controversial business practices.Greater attention may be given to board commitments to compliance in response to evolving Delaware decisions on board oversight of mission-critical risks.There may be a need to respond to governance-related proposals arising from recent challenges to state diversity statutes and from pressure to increase director refreshment in order to make room for additional diverse directors.Increased emphasis on director effectiveness may lead to additional demands for enhanced full board and individual director evaluation processes.New resolutions may arise from the acute social issues of the day, including legislation and judicial decisions regarding abortion, voting rights, and sexual preference, and their impact on a company and the culture of its workforce.

Overarching lessons relate to both the enduring value associated with a board commitment to direct engagement with major shareholders and the ability to respond to acceptable resolutions with internal reviews and other measures intended to address shareholder concerns in as confined and restricted a way as possible.

Michael W. Peregrine and Eric Orsic are partners at McDermott Will & Emery.

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Why the CEO and Board Need to Prioritize Security Crisis Management

Business decisions are hanging in the balance as the war in Ukraine challenges the status quo. It is no surprise, then, that well-established cybersecurity threats, such as ransomware, may not be at the top of the boardroom agenda now.

Yet the oversight could be costly—and not just financially. In its State of Cybersecurity Resilience 2021 research, for example, Accenture found that 20 percent of costs associated with ransomware and extortion incidents are attributed to brand reputation damage.

Business priorities are in the spotlight following any ransomware attack, and your security team should have an incident response plan in place that details how to get the business up and running again. But Accenture’s research suggests that the connection between business strategy and security efforts could benefit from being even more closely aligned.

Board members need to consider how the business currently responds to cyber crisis events and ask themselves:

Are we treating cyberattacks as “just a security problem”? Enterprise crisis response is a team sport, so your security team’s traditional cyber-incident response plans should evolve. A business-focused crisis management approach is necessary to deal with modern destructive events.Are our crisis communications fit for purpose? Cyberattacks are complex, and existing crisis communications often lack the transparency and agility to deal with them. A predefined decision framework—coupled with a greater understanding of the industry, its regulations, and customers—can support more robust crisis communications.How comprehensive is our approach? Think about your business and the business of others: as attack surfaces evolve, crisis response needs to extend to address impacts on customers, corporate subsidiaries, suppliers, third parties, investment portfolios, and mergers and acquisitions targets.

Buying In

Disruptive roadblocks such as pandemics and geopolitical issues aside, opportunity is knocking on the boardroom door. Recent times have shown us how business models can be reinvented, supply chains restructured, and increases in productivity made a byproduct of remote working.

Businesses have gained new momentum from this period of compressed transformation, and we’ve all been amazed by the scientific and technological breakthroughs that have made it possible. But perhaps most importantly, we’ve been shown how collaboration and communication make all the difference to the end game.

Because boards steer the business, their decision-making must be influenced by the right information. Having a holistic “bigger picture” means they can adjust the overall strategy to suit. In its State of Cybersecurity Resilience 2021 research, Accenture found that many organizations are already improving the C-suite channel to security teams—72 percent of chief information security officers are now reporting to key business decision makers, whether that’s boards (23 percent) or CEOs (49 percent).

As Accenture cyberthreat intelligence has identified, ransomware is anyone’s game and is proving to be easier than ever—now, you can buy access and malware and simply execute a ransomware attack. This means ransomware and extortion practices are growing—there’s a 107 percent year-over-year increase in ransomware and extortion attacks and 33 percent increase in intrusion volume from ransomware and extortion.

Below are three areas boardrooms should consider closing the gaps between the business and security:

Introduce a “real-life” attack scenario. Ensure tabletop exercises with security personnel include executive-level simulations so that organizations can test their defenses against a typical ransomware attack. Imagine three lines of business are down due to an attack, with a threat actor asking for $10 million. You might need to determine in real time which business should be recovered, how to communicate your response, and who is responsible for making those decisions.Define a crisis decision framework up front. Identify decision-making thresholds aligned to the business strategy, the organization’s risk tolerance, its cyber communication strategy, and clear accountability for both technical and business decisions during a crisis event. Decision-making criteria should be reviewed and fine-tuned regularly to keep pace with organizational change.Document and use that framework. Shape the communication strategy and implement a balanced approach to threat containment and eradication by better preparing to speed up responses and ease the pressures of extortion demands.

With more agile, robust, and transparent crisis management capabilities, the CEO, board, and rest of the company can handle ransomware events better and improve overall cyber resilience.

Robert Boyce is a managing director in Accenture’s global cybersecurity practice.

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Federal Forum-Selection Provisions: A Key Tool to Defend Against Offering-Related Securities Lawsuits

Public companies and their directors and officers are frequent targets of shareholder class action lawsuits arising from an initial public offering or secondary public offering. These lawsuits, asserting violations of the Securities Act of 1933 (the “Securities Act”), are driven by experienced plaintiffs’ firms and can be extremely burdensome and costly to defend, especially if allowed to proceed into fact discovery. Companies often feel pressured to settle these lawsuits—even if the case is ultimately winnable—to avoid these costs and distractions to the business.

Understanding the background and effectiveness of federal forum provisions as a defense tool against Securities Act lawsuits is essential for directors, which the rest of this article explores.

Plaintiffs’ Lawyers Seek Advantages in State Court

Most securities claims are brought under provisions of the Securities Exchange Act of 1934 and must be litigated in federal court (not state court). Defendants in securities cases generally prefer litigating in federal court because the procedural standards are more favorable and the judges are usually more familiar with the intricacies of the law. Whether or not a case proceeds in federal court versus state court can often determine the outcome.

Lawsuits relating to an offering, however, often include claims under the Securities Act. In recent years, plaintiffs’ firms have taken advantage of a quirk in the law that allows plaintiffs to file lawsuits brought under the Securities Act in state court and bars defendants from moving these cases to federal court. This practice was affirmed by the US Supreme Court’s 2018 decision Cyan Inc. v. Beaver County Employees Retirement Fund.

Immediately following Cyan, the number of Securities Act lawsuits filed in state court skyrocketed to all-time highs. Companies increasingly faced costly and duplicative parallel state and federal actions, as well as multiple lawsuits in different state courts.

Companies Adopt Federal Forum Provisions

After Cyan, many companies amended their corporate charters and adopted federal forum provisions (FFPs) requiring that Securities Act lawsuits be brought exclusively in federal court. The theory was that if a plaintiff shareholder filed a Securities Act lawsuit in state court against a company that had adopted an FFP, the lawsuit could be dismissed on the grounds that it should have been brought in federal court.

In March 2020, the Delaware Supreme Court ruled in Salzberg v. Sciabacucchi that FFPs are facially valid under Delaware law. However, the Delaware Supreme Court acknowledged, “Perhaps the most difficult aspect of this dispute is not with the facial validity of FFPs, but rather, with the ‘down the road’ question of whether they will be respected and enforced by our sister states.” In other words, would state courts outside Delaware enforce FFPs?

Enforcement of Federal Forum Provisions in State Courts

In the two years since Sciabacucchi, the consistent answer among state courts has been “yes.”

Most notably, several decisions from California and New York state courts have upheld and enforced FFPs following Sciabacucchi. In 2020 and 2021 combined, more than 80 percent of state court Securities Act lawsuits were filed in either California or New York. Plaintiffs’ firms routinely file Securities Act lawsuits in these states due to perceived strategic advantages, including less stringent pleading standards and some individual courts allowing plaintiffs to engage in fact discovery before a ruling on the motion to dismiss—a practice that is not allowed in federal court.

In California, at least four separate state court decisions have enforced FFPs in lawsuits brought against Restoration Robotics, now part of Venus Concepts, Uber Technologies, Dropbox, and Sonim Technologies. A New York state court likewise recently enforced an FFP in dismissing a lawsuit brought against Casa Systems, and a Utah state court enforced an FFP in a lawsuit brought against Domo.

Key Takeaways for Companies and Boards

Companies that anticipate making a public offering should strongly consider adopting FFPs in their charters if they have not done so already. FFPs provide an effective, practical defense against shareholder class actions brought under the Securities Act. While plaintiffs may still file Securities Act lawsuits in federal court, an FFP can effectively deter weaker lawsuits and gives the company the best shot at winning early and avoiding a costly settlement down the line.

Furthermore, even if an FFP is adopted after the offering at issue, this likely would not render the FFP ineffective. While the law is still evolving on this issue, numerous court decisions have held that analogous forum-selection clauses are enforceable even if adopted after the alleged wrongdoing occurred.

Finally, while the enforcement of FFPs adopted by Delaware corporations is now relatively settled, some uncertainty remains about whether FFPs adopted by companies incorporated outside of Delaware are valid and enforceable. While this issue has not yet been addressed by any state courts, the recent decisions in California, New York, and Utah suggest that FFPs could similarly be held effective.

Jonathan Rotenberg is a partner and Paul Yong is an associate at Katten Muchin Rosenman.

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Using Executive Pay as a Tool for M&A Success

Mergers and acquisitions (M&A) deals create a cascade of new considerations for boards, and in many deals, talent retention and executive compensation are some of the most important factors to get right. Companies across industries—especially in the tech and biotech space—view their people as their top asset.

A strong management team is critical to a company’s value and performance and incentivizing employees and treating them fairly are essential ingredients in the transaction’s success. Boards need to pay particular attention to compensation before, during, and after a deal closes to ensure that all-star talent stays in place.

At the same time, boards face increasing hurdles when it comes to executive pay. Last year’s M&A boom, combined with labor-demand pressures due to the Great Resignation, and the normalization of remote work broadening executives’ opportunities, gave management teams more negotiating power when it came to compensation.

Executive pay is also a topic that is often thrust into the limelight. Employees, media, investors, and other stakeholders have increasingly scrutinized pay equity in organizations, and companies open themselves up to real reputational risks if pay is deemed unfair. Some public companies have faced challenges in getting shareholder support in the advisory “say on pay” votes, and other shareholder proposals related to pay are on the rise. From a regulatory perspective, the US Securities and Exchange Commission requires robust executive compensation disclosure for public companies, and certain states and cities (such as Portland, Oregon and San Francisco, California) have tax penalties related to executive pay ratios. 

Complicating things further, the current economic environment is in a state of uncertainty. The first quarter of 2022 saw another surge of coronavirus cases, a tougher regulatory environment, and a new war in Ukraine, leading to market volatility and a slowdown in dealmaking. Interest rates, while still low, are rising, and high inflation is impacting consumers.

All in all, there is a perfect storm of factors making compensation committees’ oversight of executive pay more complex and nuanced than ever, especially when companies are pursuing a deal. Boards need to evaluate whether compensation packages and retention arrangements are appropriate to hold on to a company’s executive talent, if that is a key goal, while balancing stakeholder interests and market pressures.

Before, during, and after a deal, board compensation committees for both acquirers and target companies should consider doing the following:

Ensuring seamless cultural integration. Cultural integration is a crucial ingredient to ensuring that a new, combined company thrives after the deal is done. From an executive pay standpoint, compensation committees must ensure that strategic incentive metrics are appropriate to the new company’s specific business model and culture.

Connecting strategic metrics to overall strategy. Recent pushes to tie diversity, equity, and inclusion (DE&I) and environmental, social, and governance (ESG) issues to executive pay are ramping up, but there is no one-size-fits-all model, and companies need to carefully consider whether and how to implement metrics. Any such metrics should be developed in consideration of the company’s overall DE&I and ESG strategies. Board members and management teams should consider their vision for where the new company stands on DE&I issues, as well as a holistic ESG strategy, to begin effectively tying compensation to these commitments.

Balancing the need for retention with other factors. Compensation packages and retention agreements should be generous enough to incentivize management team members to successfully guide the new, combined company after a deal closes. But compensation decisions should also consider the input of the full spectrum of stakeholders, including shareholders, investors, employees, customers, and suppliers. In these circumstances, investor outreach efforts can be helpful.

Integrating human capital management (HCM) into business strategy and, in turn, executive pay. In recent years, board mandates have expanded into issues related to talent and HCM, which involves taking a closer look at areas that may have historically been seen as human resources duties, such as recruiting, training, and performance planning, to uncover new opportunities to drive employee engagement and business value. As boards continue to get familiar with HCM, they can add value by taking into consideration how HCM ties to the new, combined company’s business strategy and how to integrate HCM into incentives in compensation plans.

Evaluating how inflation and market volatility may impact executive pay. Market volatility and an uncertain economy can impact compensation awards that have financial performance targets. Because changes in market conditions can lead to significant fluctuations in company performance and stock price, performance-based incentive goals may be seen as less certain and equity grants as less incentivizing. Additionally, executives may be expecting increased base salary amounts at rates higher than we would ordinarily see in a given year. While it is impossible to know how long market turbulence will last, the overall state of the economy is always an important consideration in all compensation decisions.  

Executive compensation is rarely a simple formula, and the stakes are high to get it right—especially in M&A. But with their nuanced understanding of a company, its management team, and the market at large, boards are in an excellent position to use compensation as a valuable tool for guiding their organizations to long-term success.

Jean McLoughlin is partner and cochair of the executive compensation group at Paul, Weiss, Rifkind, Wharton & Garrison.

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How Compensation Committees Are Battling Uncertainty, Talent Woes

Some experts say attracting and retaining talent isn’t all about the money. But amid the Great Resignation, what else are compensation committees thinking about? To discuss this and how boards are managing uncertainty in their pay plans, NACD in late March brought together speakers Eric Hosken, partner at Compensation Advisory Partners; Lori Miller, partner at Farient Advisors; Matt Turner, a managing director at Pearl Meyer; and Christine Y. Yan, a board member at Ansell, Cabot Corp., Modine Manufacturing Co., and Onsemi. Lindsey Baker, NACD director of partner relations, moderated the event. Below are key questions and answers from that conversation.

How can companies keep incentive plans effective and relevant in this uncertain environment?

Turner: Number one is the category of performance measures themselves. Performance measures are drivers of value. But are there things you can do to tailor the measures to remove some of the variability? You want your management team to be responsible for all aspects of how value is created, but you also want to make sure that they’re focused on the things they can control.

Number two are the performance ranges. Most of my clients have widened their performance ranges not only for profit, but also for revenue growth for 2022, reflecting the increased expected variance of results. A good rule of thumb is to avoid plus or minus X percent just because that’s what peers are doing. What are the factors that are driving the expected variability in your results? That may lead you to a plus or minus threshold. It might even be asymmetrical. You might say, “We know where the downside risk is. We know what the upside risk is. There’s more on one side than the other.” Factor that in.

Number three is the number of measures. We’re seeing an increase in the number of performance measures in short-term and long-term plans. Part of that is driven by the [environmental, social, and governance] agenda. But part of it is companies taking a good look and saying, “We want to make sure we have covered the full range of performance aspects that lead to value creation for shareholders.” That might mean an incremental measure in your plan.

Finally, don’t discount the use of discretion, the ability to look at the results at the end and recognize that you know that doing this job can’t always be reduced to a couple of performance measures.

How have the boards you are involved with shifted conversations to reflect more recent human capital needs?

Yan: Seventy-five percent of my boards have changed the compensation committee to human capital and compensation. A lot of companies have changed not just the name, but also the charter to reflect that human capital is the most important asset of the company. The committee looks at hiring practices and diversity, equity, and inclusion. For diversity, we look at workforce representation from minority groups, pay equity, and talent and leadership development. How do we keep our employees safe during COVID? We also talk about flexibility and work policy post-COVID. With employee engagement surveys, we look at turnover stats and employee engagement scores to see how engaged people are beyond the CEO and their direct reports.

One of my boards would go to operating locations a couple times a year before COVID to visit locations. The board had opportunities to interact with employees. One of the trips, we had a picnic and we invited all employees. Any employee could walk up to a board member and ask any questions and vice versa. That open environment gives the board a chance to directly see how the organization is truly living and breathing the company’s value and purpose, and feel the company’s culture deeper down in the organization.

Another thing I like to do is arrive at a board meeting the day before and have dinner with an affinity group and have open dialogue with them. Some topics [I would discuss with them] include what is going well for them and where improvement needs to be made. Is our company providing the right opportunity, making sure everybody’s voice is heard, and driving a culture of openness and inclusion? These informal interactions provide a lot of insights into company culture.

How has COVID-19 impacted the market for executive talent and what are the implications for executive compensation?

Hosken: It doesn’t matter where you’re located. There is competitive pressure on wages for executives and it’s giving executives more flexibility. The positive side for some companies in smaller cities, where you may feel like you don’t have as many options for talent (and where, historically, you had to not only find the right candidate, but the right candidate that was willing to relocate to your city) is that now those companies are realizing that they can compete for talent elsewhere, but also that they have to pay a nationally competitive wage to do it.

You also have the potential for people to move or to decide they don’t want to live in high-cost cities like New York anymore. They may want to go somewhere with a lower cost of living, and it doesn’t necessarily mean that they’re going to have to take lower pay. Many companies have different salary structures for people in different locations, and there’s going to be pressure for that to go away. For more and more talent, the United States is going to see a national labor market, especially for jobs that aren’t rooted to a single place.

Some executives feel like it’s very important for the management team to have face time together, even if there are people that are located in Hong Kong—they want them to spend time with the executive staff in the home office. Zoom doesn’t really replicate that discussion-in-the-hall type of situation. Some companies are going to approach hybrid work as, “We want you in the office, and out of the office on an exception basis.” But other companies, by the nature of their workforce, are going to be remote a lot of the time. The biggest impact on executive compensation is the change in the market from local to more national.

With increased expectations of the compensation committee, how have committee chairs’ relationships with management, consultants, and the board shifted?

Miller: In the past, our relationships used to be more routine and predictable. Now, we work a lot with the committee chair and management to talk about what should be on the agenda. Committee meetings are much more fluid. In addition to the standard agenda items, more topics are getting raised that require follow up at the next meetings, such as talent management and retention. What’s going on with attrition? How are we losing people? What insights do we get from the exit interviews? We’re working a lot more with the committee chairs to help design how the meetings should flow. The committee chair is driving what’s important and they don’t want to hear, “Well on this day, we normally do goal setting, and on this day, we do compensation levels.”

The amount of time that I’ve seen the chairs commit to these committees is exorbitant. They almost feel like they are employees. Committee chairs are having a lot of meetings in between, too, dealing with whatever new issues are coming up and raising questions, providing guidance. What do we need to work on? How do we want to make this meeting run? What does management want to talk about? I’ll have clients who will tell me, “I had three board committee meetings last week because we’re dealing with the issue of workforce safety, or we’re dealing with talent.” The relationship [between management and the board] is much closer right now. They are seeking out advice from the directors more often.

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Key Practices to Foster a Culture of Belonging in a Hybrid World

The COVID-19 pandemic accelerated the trend toward hybrid work. In fact, 52 percent of employees surveyed in an April 2021 McKinsey & Co. study now prefer a hybrid or flexible work schedule; only 37 percent want to work on-site full time. The new challenge for companies is how to create feelings of belonging and inclusion with a fully or partially virtual workforce. While there is no one-size-fits-all solution, below are ten practices that forward-thinking companies are deploying to build cultures that foster belonging. 

1. Be clear with all stakeholders. Boards should work with management to decide on and commit to a work modality that suits the firm given the industry, type of work, and type of talent required. Are you a virtual company that meets on occasion? Are you a fully remote company? Or are you a remote-friendly or hybrid company? These are some of the questions facing firms today as they grapple with the changing dynamics of work, workforce, and workplace. Forward-thinking companies will decide which they are—and declare it proudly—which will allow them to attract and retain the talent that they require to thrive in the marketplace. 

2. Create a robust virtual orientation and onboarding system. This should include mentoring for new employees. Small details matter. Erica Dhawan, author of Digital Body Language, says to“write authentic digital communications.” In her book, Dhawan suggests that when someone is new to your team, send them a welcome message on their first day or after a big meeting. Boards should encourage management to let new employees know how excited they are to work with them. Dhawan says that authentic digital communication is achieved when you are yourself, so leaders may choose to use emojis and exclamation points if they like them, or call new employees if they prefer.

3. Mix it up. Management should consider orchestrating virtual meetings between people from different departments. If everyone is not meeting in person, it is still possible to get to know people outside their department and outside their own four walls. Innovation and collaboration are enhanced when people form relationships across an organization.

4. Create intentional social opportunities. Without a physical workspace where employees can gather, what are employees—and even the board—supposed to do? The answer, according to Dhawan, is to create time to informally chat and check in. She notes that it doesn’t have to be a strictly planned social gathering, but five to ten minutes at the beginning of a team meeting will do. The team should feel comfortable acknowledging and discussing that they have lives outside work.

5. Initiate office hours for drop-in opportunities. It is no longer easy to pop across the hall for a quick question or ask someone to walk into your office for feedback. Managers can hold regular office hours when their team can book 5-10 minute slots. These become the opportunity to “drop in” for a few minutes, rather than needing to formally schedule longer meetings which are harder to schedule. Board members may also wish to institute this practice with the C-suite.

6. Incorporate your people into town hall or large group meetings. Boards can encourage management to consider acknowledging and recognizing individuals during large group meetings to showcase achievements. This will help people throughout the company learn about who else works for the organization and what they do. 

7. Support employee resource groups. These are a vital way to allow for individuals with more niche interests or backgrounds to find and support one another across the organization.

8. Conduct regular employee surveys. Employee surveys reveal much about morale, culture, and many other elements of employees’ work-life experience. Management should review the results with the board at a company level as well as by tenure, department, gender, and ethnicity to understand employee satisfaction levels and where there may be challenges to address.

9. Track and measure employee retention by tenure and demographics. Telltale signs of talent problems can be uncovered by ensuring that the board (and the human capital committee, if there is one) looks at retention rates by tenure as well as by demographics. If the tenure of those departing is very short, especially in certain demographic groups or teams, then it’s likely a warning indicator that these departing individuals did not feel welcomed. Make sure as a board member to ask what is being done to increase the feeling of belonging and continue to watch these numbers to see if the desired results are achieved.

10. Acknowledge, acknowledge, acknowledge. Salary is only one way companies can show that they value employees. Acknowledgement, however, goes further toward creating a feeling of belonging, especially when hybrid or fully remote employees feel less “seen.” A sincere thank you and genuine applause helps motivate employees and helps them feel that they belong as a valued and recognized part of the organization.

Creating a feeling of belonging is essential in this new environment of hybrid and remote-friendly work. Given the Great Resignation and the rise of gig and nomadic workers, it is important for boards and management teams to determine what is right for their companies to attract and retain talent, as well as to get the best from that talent when they work with your company, wherever they may be doing that work.

Roberta Sydney is a seasoned board director and former CEO serving as the lead director of Kiavi, the leading technology and lender solution for real estate investors.

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Be Introspective to Expand Your Board Portfolio

Every board member of a publicly traded company got their start somewhere. Many first served on nonprofit or industry-focused boards. Others achieved C-suite success in their careers and jumped straight into board service. But all mobilized their time and energy to expand and upgrade their board portfolios.

Serving on a board can benefit your career, organization, profession, and industry. Finding the best, most appropriate opportunities for expanding your board portfolio is a multistep process that involves determining what types of companies fuel your passions, analyzing the benefits of board service, and evaluating your own skills and abilities. It is probably easy to pinpoint the industries, organizations, and areas of expertise that command your interest and align with your professional goals, but it’s vital that you perform a self-assessment in preparation for any board service. Along these lines, here are some crucial steps to expand your board portfolio to ensure maximum success.

Step One: Evaluate your cognitive ability, emotional intelligence, and ethics.

Knowing where you stand on cognition and emotional intelligence and how your use of these abilities align with your personal values and ethics will help you analyze opportunities for board portfolio expansion that fit how you think and work—and can challenge you in new ways. Reflecting on these areas will also reveal your appetite to embrace change management, strategic thinking, and talent development. Here’s how you can perform a self-assessment in these areas.

Cognitive competency. Understand your level of cognitive performance by considering how you execute in areas such as attention, perception, memory, language, judgment, and thinking.

Emotional intelligence. Reflect on how you express empathy for others and manage relationships with coworkers, suppliers, partners, opinion leaders, and media. Know how you score on self-awareness and the ability to be introspective, as well as social awareness, including how you have in the past or would in the future integrate differences in culture, income, education, ethnicity, attitudes, beliefs, and values in the boardroom and when thinking about the workplace more generally.

Values and ethics. Know the personal standards and criteria by which you’ll make decisions, solve problems, resolve conflicts, and mobilize teams. Consider how you would prioritize and apply business values such as integrity, honesty, fairness, accountability, diversity, teamwork, quality, and passion to your board work and encourage your fellow directors to do the same.

This self-reflection can instill confidence and clarity as you assess and present yourself for board opportunities, as well as aid in updating your board profile or resume to attract interest from nonprofit and for-profit board decision makers. Board profiles showcase board experience and achievement, executive experience and skill sets, and special qualifications beyond formal education, including certifications, memberships, appointments, and awards. Think of examples you can include in your profile that demonstrate your cognitive, emotional, and ethical strengths.

Step Two: Identify gaps in knowledge, skill, and experience.

In addition to evaluating your mental strengths, assessing your knowledge, skills, and experience can offer a report card on your professional strengths and opportunities for enhancement.

Knowledge. Rate yourself on a 10-point scale, integrating colleagues’ feedback to pinpoint knowledge of core business competencies, including economics, accounting, finance, marketing, strategy, talent management, technology, and operations. Also assess how much you know and understand about hot-button board and business issues such as diversity, sustainability, recruitment and hiring, cybersecurity, culture, and innovation. Ask yourself how closely your knowledge aligns with a board’s interests and priorities. To what extent would your knowledge influence and impact board deliberations?  

Skill. Document, assess, and evaluate your primary and secondary business skills, including leadership, management, communication, negotiation, problem-solving, conflict resolution, collaboration, and decision-making. Consider how and where you’ve used these skills and the results you’ve achieved. Also reflect on how you could upgrade or refine these skills via training or participation in special projects. Finally, examine how your strongest skill set aligns with the character, personality, and agenda of a targeted board.   

Experience. Review previous resumes and social media profiles to determine the depth and breadth of your experience. Describe where you’ve worked or served in terms of location, industry, size, revenues, and product lines. Synthesize your experience with an “elevator statement” such as the following: “I’m a hands-on marketer and digital strategist with a deep understanding of the issues confronting the food industry. I can help a food and beverage company think strategically, elevate its brand, and meet the evolving needs of customers.” 

Keep in mind that assessing your knowledge, skill, and experience is a journey, not a destination. Try to evaluate where you’ve been and how far you’ve come in terms of new knowledge, skills, and experience. Award yourself points or letter grades for improvements, tapping friends and colleagues for input on your progress.  

In the process of creating your board resume and meeting with decision makers, the best approach is to showcase your strongest, most in-demand skills while revealing how you’ve worked to close knowledge and skill gaps, including through board education programs and joining board-focused organizations such as NACD.

Step Three: Stay open-minded, current, and relevant.

Staying informed and abreast of current issues demands tapping into business publications and websites. In addition to general business newspapers and websites, there are industry-specific publications online and in print that are more in-depth. Social media has a place in keeping up with the news as well and can keep you in touch with brand marketing and stakeholder interests.

As you access business, industry, and social media resources, keep up with board trends by scanning board-focused publications and special reports. Focus on information and analysis within highly sought-after board competencies, such as finance, compliance, strategy, and innovation.

Follow forecasts on issues that continue to rise to the top of board agendas, including sustainability; environmental, social, and governance challenges; digital transformation; cybersecurity; diversity, equity, and inclusion; and talent management in the remote and hybrid workplace.

As you think about transitioning from smaller company boards to larger or public company boards, remember that each board has its own purpose or mission, governance policies, financial focus, CEO selection and evaluation process, reporting relationships, board committees, and size. Each board also has its own board member selection criteria, board meeting frequency, board and board member evaluation process, and director tenure and term limits.  

Pay attention to these differentiators. Evaluating your interests, passions, cognitive abilities, knowledge, skills, and experience will guide you to the best, most fulfilling board opportunities.

Jena Abernathy is a senior client partner and sector leader for health-care board services for Korn Ferry International. She is a partner in the Korn Ferry Global CEO & Board Practice and specializes in C-suite and board-level searches.

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Day of Reckoning: SEC Votes 3–1 to Propose New Climate Disclosure Rules

As a director, do you understand the material risks and opportunities your company faces from climate change? What about greenhouse gas emissions in your company and its supply chain (Scope 1, 2, and 3)? And how is your board equipped and organized to oversee these matters?

On Monday, March 21, with the release of proposed rules on The Enhancement and Standardization of Climate-Related Disclosure for Investors, the Securities and Exchange Commission (SEC) took a decisive step toward requiring all public companies to disclose all such “climate-related” matters in their initial stock-sale prospectuses and their annual reports. Love it or hate it, the new proposal is likely to result in final rules that will have companies and boards scrambling to comply, even as some business groups attempt to challenge the proposal in court.

The newly proposed SEC rules—at 510 pages one of the longest single-topic disclosure rules ever published by the SEC (by comparison, the release describing the conflict minerals rules was only 356 pages)—marks a true turning point for corporate climate disclosures. Although the SEC published guidance in an interpretive release in February 2010, these rules, once final, will be the first of their kind. The 2010 guidance asked companies to disclose risks from legislation and regulation, international agreements, impact of business trends, and physical impacts of climate change. The newly proposed 2022 rules expand this framework considerably: they use the term “climate-related” 1,182 times, making it clear that climate impact is everywhere. If passed in their present form, the rules would be effective as of December 2022, and apply to reports on fiscal years as ending as early as December 2023, with later periods for smaller companies, per page 100 of the release. The proposed rules would require “attestation” (approval by an independent expert such as an audit firm), starting with “limited” attestation at first but eventually requiring “reasonable” attestation—standards explained in the fine print of the rules.

The public now has at least 60 days to comment before the SEC votes on a final rule, either 30 days after publication in the Federal Register, or May 20, 2022, whichever period is longer. (All comments on these newly proposed rules must reference File S7-10-22. Click here to submit a comment.)

Conflicting Commission Views

The three Democrat commissioners supported the proposal, with one dissent from the Commission’s lone Republican. In an SEC press release about the proposed rules, SEC Chair Gary Gensler claimed that the rules were “driven by the needs of investors and issuers,” asserting that it would “provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.” Commissioner Caroline Crenshaw’s statement called the proposed rules “an important and long-awaited step forward.” In her statement supporting the proposed rules, former acting commissioner Allison Herren Lee called the proposal a “watershed moment,” and made several technical points aimed at making the rules as strict as possible, for example, questioning the value of a non-auditor attestor, and questioning the grace period of limited (rather than reasonable) attestation.

When Lee was acting chair of the SEC in early 2021, she issued a February 2021 statement asking the SEC’s Division of Corporation Finance to heighten its scrutiny of climate-related disclosures, as well as a March 2021 statement asking for general comments on climate change disclosure.

In her unique vote of dissent, Commissioner Hester Peirce claimed that the rules favored a consulting sector she called the “climate industrial complex” and argued that, if passed, the sweeping rules would make fundamental changes to the current disclosure regime, “harming investors, the economy, and this agency.” She also warned that the rules could come under constitutional challenge as a violation of corporation free speech.

The Structure of the Proposed Rules

The proposed rules (as described on pages 44–45 of the March 21 release) would require the following disclosures, among others:

The oversight and governance of climate-related risks by the company’s board and management. NACD has been championing this as the US Host Chapter in the Climate Governance Initiative of the World Economic Forum. (More about this later.)How any such risks have had or are likely to have a material impact on its business and consolidated financial statements over the short-, medium-, or long-term, as defined by the company. (The rules release includes a discussion of materiality, emphasizing that any “materiality determination is made with regard to the information that a reasonable investor considers important to an investment or voting decision.”)How any such risks have affected or are likely to affect the company’s strategy, business model, and outlook.The company’s processes for identifying, assessing, and managing climate-related risks and whether or not these processes are part of an overall risk management system. If the company uses scenario analysis, the proposed rules would “require a description of those analytical tools, including the assumptions and methods used” (p. 358).The impact of climate-related events and transition activities on the line items of a registrant’s consolidated financial statements and related expenditures (and disclosures of impacted estimates and assumptions).The extent of owned greenhouse gas (GHG) emissions, whether directly from owned assets (Scope 1 GHG), or indirectly from owned assets (Scope 2 GHG). There will be no safe harbor from litigation if these disclosures are challenged as false or misleading by plaintiffs.Companies will also be required to disclose emissions from indirect non-owned assets (Scope 3 GHG) emissions if they are material, and/or if the company has set a reduction target. Smaller companies are exempt from this last requirement, and there will be a general safe harbor for Scope 3 disclosures.

Details on Board Oversight

For every area of disclosure, the proposed rules offer detailed requirements. Of most immediate concern to board leaders will be the details on the aforementioned area of “board oversight and governance.” Under this category of disclosure (detailed on page 100 of the release), the rules would require a company to disclose this information:

Which board members or board committees (if any) are responsible for the oversight of climate-related risksWhich board members (if any) have expertise in climate-related risks, fully describing the nature of the expertiseHow the board or board committee discusses climate-related risks—and with what frequencyHow the board is informed about climate-related risks, and how frequently the board considers such risksWhether and how the board (or board committee) considers climate-related risks as part of its business strategy, risk management, and financial oversightWhether and how the board sets climate-related targets or goals and how it oversees progress against those targets or goals, including the establishment of any interim targets or goals

Form of Disclosure

The newly proposed rules build on existing disclosure requirements under the two main regulations for public companies: Regulation SK (Code of Federal Regulation, Part 229, covering all nonfinancial disclosures) and Regulation SX (Code of Federal Regulation, 17 CFR Part 210, covering all financial disclosure). Accordingly, the proposed rules explain how a company should provide the climate-related information in the registration statement or annual report (which may be by reference from other sections mandated by Regulation S-K, such as Management’s Discussion and Analysis) and how to provide financial information as mandated under Regulation S-X, via notes to the financial statements. The proposed rules require companies to electronically tag both kinds of disclosures (narrative and quantitative) in Inline XBRL. The proposed rules specifically require that the disclosures must be “filed rather than furnished.”

Likely Response to the New Proposal

Many organizations will be building on comments they have already conveyed to the Commission over the past year in response to the March 2021 request by then acting chair Lee. While most of the 6,000 responses received were form letters (following one of the SEC’s four model forms), more than 700 were unique. Most of the letters were from climate groups urging greater disclosure. A small percentage of the unique letters were from corporations or their representatives (such as the is 2021 Business Roundtable letter) or similar letters from the US Chamber of Commerce and National Investor Relations Institute (NIRI). All these corporate letters urged safeguards against liability. For example, the NIRI comment made three key recommendations aimed at reducing undue liability for directors: flexibility of approach, a safe harbor similar to the one for forward-looking financial statements, and the status of “furnishing” rather than “filing.”

This last point is particularly important because any time a financial statement is filed with the SEC it is vulnerable to lawsuits under securities laws. Also requesting furnished rather than filed statements was an early comment from the CEO of the nonprofit XBRL, which develops protocols for SEC electronic filings to make them easily searchable and comparable.

An investor perspective no doubt helpful to the SEC staff in writing the rules came from a BlackRock comment last year. BlackRock recommended working with the leading standard setters, citing the Task Force on Climate-Related Financial Disclosures (TCFD) a protocol developed by GRI, VRF, and others. The 2022 proposed rules are based explicitly on this model as well as on the Greenhouse Gas Protocol for measuring GHG.

Likelihood and Timing of Passage

Judging from the supportive comments and votes of the three Democrat appointees on the four-member Commission, majority approval of final rules is likely before the end of the year. The Commission may have felt some pressure from Congress. In a February 9 letter to Chair Gensler, Sen. Elizabeth Warren noted that the late start in proposing climate rules will cause delays, which are “unwarranted and unacceptable.” Commissioner Lee is leaving the Commission in June 2022, and while she is likely to be replaced by someone with similar views, there may be an effort to fast-track the rules before she leaves.

In responding to the proposed rules, many organizations will be building on comments they have already made in response to a previous SEC call for comment, made March 15, 2021, by then acting chair Allison Herren Lee. As of today, more than one year later, nearly 6,000 individuals and institutions have sent in comments on climate change disclosure to the SEC, in response to Commissioner Lee’s 2021 request. While most of these were form letters (following one of the SEC’s four model forms), more than 700 were unique, with most of these urging greater disclosure. Most of these were from environmental advocacy groups (such as the Sierra Club) that are not themselves issuers of financial statements or investors in corporations.

Will the Rules Be Challenged in Court? A Matter of Precedent

The US Chamber of Commerce and the Business Roundtable have both sent early comments in 2021 supportive of the general goal of disclosure, but also asking the SEC to make the standard “furnished” rather than “filed” to lessen potential liability risk under US securities laws. They are likely to challenge the proposed rules on this point, and, if it becomes final, to challenge it in court. There may be a parallel action from the Energy and Environment Legal Institute, a conservative group that challenges climate-related rules (as this past petition for rulemaking shows).

In recent years, the Supreme Court has heard a number of challenges to regulatory power over corporations—that most recent one being now argued in court: West Virginia v. United States, argued February 28, 2022, challenging the government’s authority to compel environmental standards. The original petition in this case was authored by Patrick Morrisey, who has objected to mandatory climate reporting on this same ground, as stated in this letter to the SEC sent in March 2021. Successful challenges to SEC authority include one challenging conflict mineral disclosure as a First Amendment violation (in Nat’l Ass’n of Manufacturers, Et al. v. SEC, et al., 2014, upheld 2015), and another vacating one of two final proxy access rules (Business Roundtable et al. v. SEC, 2011).

Get Ready

Many in the governance community—especially the many in the climate advisory community—will welcome these new rules. Yet others may protest them in comments or even in court. All boards, however, would be wise to anticipate the emergence of a new climate disclosure regime in some form—and to practice good climate governance in the meantime.

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Director Compensation and Demographic Trends Align Boards with Stakeholders, Report Reveals

Hybrid working environments. The Great Resignation. Supply chain struggles. Inflation. And now, geopolitical uncertainty caused by the war in Ukraine. With the explosion of these new areas of concern, and the additional time board members have had to dedicate to address them, one might think that director pay would increase in kind.

Not so: median total direct compensation, or the total board compensation plus total committee compensation, inched ahead 3 percent year over year. From another angle, this is understandable. At a time when executive pay is seen as outsized, with certain lawmakers and regulatory leaders calling for limitations on such pay, directors must also be vigilant in their approach to their own compensation, especially as the US Securities and Exchange Commission (SEC) and other stakeholders are paying increased attention to director engagement and the board’s role and responsibilities.

This and other director pay metrics were recently published in the 2021–2022 NACD Director Compensation Report, produced in collaboration with Pearl Meyer. Main Data Group collected the data from the SEC filings of 1,400 public companies in 24 industries for the fiscal year ending between Feb. 1, 2020 and Jan. 31, 2021. Across the companies studied, there were approximately 300 businesses each in the micro, small, medium, and large size groups, and 200 businesses in the top 200 (from the S&P 500) size group. Below are further key trends from the report.

The Difference Lies in Size

Although median total direct compensation increased by 3 percent year over year across company sizes, micro-cap companies, with $50 million to $500 million in revenue, saw a 7 percent increase to $133,171 in median compensation and companies among the top 200 saw a 1 percent increase to $309,773. Micro-cap companies saw no change in compensation the year prior, perhaps accounting in part for the largeness of the latest bump.

Micro-cap companies also stand out from the pack as they belong to the only size category that delivers less than 50 percent of director compensation through equity, delivering only 47 percent this way. Small, medium, large, and top 200 companies—often the more established public companies—all offer director compensation in the form of at least 50 percent equity. This is a market and NACD best practice. In recent years, micro and small businesses have been trending toward increasing the ratio of director pay delivered via equity to align the board with the long-term interests of company shareholders.

Board meeting and committee fees also remain more popular at smaller companies than large, with micro-cap firms offering 4 percent of compensation in the form of board meeting fees and 9 percent in committee fees, and top 200 firms offering 1 percent in board meeting fees and 4 percent in committee fees.

Moves Toward Simplification

Overall, the prevalence of board meeting fees has drastically declined over the past decade. In the latest study, only 17 percent of all companies paid directors board meeting fees; in 2011, 61 percent of micro-cap and 31 percent of top 200 firms compensated board members this way. This decline was only accelerated by the onset of the pandemic in 2020 as boards saw increases in the amount of work expected of them and of unofficial meetings and communication between directors outside of board meetings. The prevalence of committee meeting fees saw an overall decline of 2 percent from the prior year’s study, as well. In general, this points to the continuation of a trend of simplification in director compensation programs.

Committee Shifts

Beyond the three standing committees, 23 percent of companies in the study have executive committees and 14 percent have finance committees. When it comes to overseeing less traditional subject areas, 12 percent of top 200 companies have environmental, social, and governance (ESG)-related committees. Only 2 percent of micro-cap firms and 3 percent of small companies have the same. Not all smaller businesses will formalize their ESG oversight by creating a separate committee; they could very well be overseeing such issues at the full-board level or within the scope of a standing committee. However, smaller companies without a dedicated committee and that do not oversee ESG at the board level should not think themselves “too small” to dedicate resources to ESG programs or to consider ESG a top priority.

Meanwhile, across the board, 96 percent of audit committee chairs receive chair-specific pay, 93 percent of compensation committee chairs receive this pay, and only 87 percent of nominating and governance committee chairs do. In addition, median committee retainer compensation is highest for audit committee members ($10,000) and lowest for nominating and governance committee members ($6,000). This may reflect a tendency of boards to add new areas of oversight to the audit committee’s responsibilities under the umbrella of risk and strategy, as well as a general continued emphasis on traditional board responsibilities over newer, more “social” ones.

Board Membership

Director demographics (gleaned from the SEC filings) reveal that there was little change in the median age of directors, which is 64, despite cybersecurity, human capital, and other issues important to the board increasingly demanding that people with such expertise—including sitting executives and younger digital natives—serve on boards. When it comes to gender diversity, however, 41 percent of boards studied have three or more women directors compared to 35 percent a year earlier. In addition, 94 percent of organizations have at least one woman director. This follows on the heels of the SEC in 2021 approving Nasdaq’s board diversity listing rule that mandates board diversity disclosure for companies listed on the exchange and that such companies have, or explain why they do not have, a minimum of two diverse directors. Though listed companies are not required to have, or explain why they do not have, at least one diverse director until mid-2023, the reporting requirements go into effect this proxy season. While boards seem to be migrating director compensation and demographics toward better alignment with stakeholders, the pace of change is slow. Entering a new phase of the pandemic, and given the potential upheaval of the global economy from the fallout of the war in Ukraine, boards must continue to consider flexibility and accountability for new and pressing issues in designing governance structures and director compensation plans.

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