Top 3 Corporate Governance Issues For Fall Board Meetings

By Kevin Bolan and Ira Raphaelson
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Law360 (July 15, 2020, 4:39 PM EDT) --
Kevin Bolan
Kevin Bolan
Ira Raphaelson
Ira Raphaelson
As boards plan for third-quarter meetings amid the continuing uncertainty resulting from the COVID‑19 pandemic, we identify at least three agenda items for those meetings. Each focuses on overlapping legal, compliance and reputational risks that the pandemic has amplified.

To give context to the three agenda items we recommend below, we start with two, separate, bedrock principles under Delaware corporate law; first, the long-standing business-judgment rule[1]; second, a director's duty to monitor, which requires a director in good faith to confirm that an adequate system of information-gathering and reporting exists concerning the corporation's compliance efforts.[2]

The Delaware Chancery Court, in its 1996 Caremark decision, described the business-judgment rule as "director-protective,"[3] which should provide directors some comfort.

Though Caremark stood as a protective bar to most shareholder derivative claims against directors for more than 20 years, in 2019, the Delaware Supreme Court set forth circumstances that satisfied the pleading standard in Marchand v. Barnhill.

In Marchand, the court revived allegations that a company's directors had violated their duty to monitor by failing to establish (1) a committee to oversee, (2) a process to address, and (3) a protocol to ensure management reporting them on an essential, mission-critical issue — in the company's case, food safety — whose deficiencies had resulted in three customer deaths.[4]

Shareholders may well consider a company's ongoing pandemic responses mission critical no matter what the business actually does. There may even be other essential operational issues that might trigger enhanced board oversight obligations for a given business.

Regardless, we suggest that prudent directors ask management at least the following three questions[5] this board cycle.

1. As businesses reopen and workers return to the office while the pandemic continues, how will management protect employee and consumer health?

This broad question has many necessary subparts. Will, or has, management reviewed and implemented guidance on reopening from the Occupational Safety and Health Administration, the U.S. Equal Employment Opportunity Commission and other relevant governmental sources?

Will businesses test employees for COVID‑19, but avoid antibody testing as the EEOC has forbidden?[6] What requirements concerning masks, social distancing, cleaning offices and retail spaces will businesses propose for employees and customers?

What are the legal — and, perhaps more importantly — reputational risks of seeking back-to-work waivers? Should businesses enhance employee health care benefits, including sick leave?

If Marchand were to apply to reopening or returning to the office or plant floor, the board that asks these questions, receives sufficient answers and documents its dialogue with management will more effectively defend its business judgments than the board that does not.

And a board that can only demonstrate that management reported generically on operational issues might struggle to defend properly pleaded Caremark claims, at least in their early stages.[7]

2. What is management's plan for responding to the DOJ's June changes to guidance on evaluating corporate compliance plans?

Earlier this month, the U.S. Department of Justice tweaked its nonbinding evaluation of corporate compliance programs for the fourth time during the Trump administration.[8] None of these revisions adds much to existing governance and compliance wisdom.

However, the DOJ's latest tweaks do identify three concepts that previous guidance included but likely merit board-level discussion now. Is the company's compliance program:

  • Dynamic — that is, constantly reevaluated and enhanced;[9]
  • Adequately resourced;[10] and
  • Able to access, and does it actually use, data as part of routine monitoring?[11]

The DOJ guidance is part of global law enforcement efforts to standardize criteria for leniency in both civil and criminal law enforcement, even as it emanates from the DOJ Criminal Division.[12]

Board oversight of management decisions regarding compliance, particularly during ubiquitous budget pressures caused by COVID‑19 business interruptions, should satisfy obligations to monitor compliance in a prudent manner and consistent with the evolving standards.

3. What role should ESG principles have in the company's operations?

For some time, boards and their advisers have been discussing highly publicized pronouncements about promoting stakeholder governance.[13] This is a potentially revolutionary concept. Yet under the Delaware General Corporate Law, which governs the majority of U.S. companies, "no constituency other than stockholders is given any power," as no less a commentator than then-Delaware Supreme Court Chief Justice Leo E. Strine Jr. has written.[14]

Yet it is undeniable that addressing environmental, social and governance, or ESG, principles is becoming almost-necessary diplomacy for publicly traded companies. Some commentators have described the COVID‑19 pandemic itself as "fundamentally an EESG event," with the extra E for employee concerns.[15]

BlackRock Chairman and CEO Larry Fink's annual letter for 2020 stated, in bold type, that "a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders" on issues such as climate change, workforce diversity, supply-chain sustainability, and consumer-data protection.[16]

The U.S. Securities and Exchange Commission continues to consider potential rules concerning environmental and climate-related disclosures.[17] And the European Union is actively developing ESG operational and disclosure standards of its own.[18]

To the extent a company sees sustainability and ESG principles ultimately as a means of promoting stockholder welfare,[19] articulating policy around those principles and assessing the company's progress in achieving them is a worthwhile board exercise. To the extent that a company does not embrace those principles, the board should understand why. Either way, disclosure of the policy and achievements will likely be a part of the next 10K.

Conclusion

The COVID‑19 pandemic's scope and impact is unprecedented and ongoing, presenting both short- and long-term risks. Thus, along with the core responsibilities of corporate governance and as companies enter the third quarter of 2020, boards should focus most on management's handling of worker/customer safety, the vitality of the corporate compliance program, and whether and what ESG disclosures may be part of the corporation's long-term strategy.



Kevin Bolan is a partner at White & Case LLP.

Ira Raphaelson is senior counsel at the firm. He also serves as lead independent director at Inspired Entertainment Inc., and is an adjunct professor at Northwestern University Pritzker School of Law.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Aronson v. Lewis , 473 A.2d 805 (Del. 1984).

[2] In re Caremark Int'l, Inc. Derivative Litig. , 698 A.3d 959, 970 (Del. Ch. 1996).

[3] Id. at 967.

[4] Marchand v. Barnhill , 212 A.3d 805, 809, 822, 824 (Del. 2019).

[5] Though all 12 items flagged in our previous article with J. Mark Gidley and Michael Kendall merit discussion (https://www.law360.com/articles/1266705/the-road-back-to-business-as-usual-12-steps-for-cos-), we flag these three for particular consideration.

[6] U.S. Equal Employment Opportunity Comm'n, What You Should Know about COVID‑19 and the ADA, the Rehabilitation Act, and Other EEO Laws (updated June 17, 2020), https://www.eeoc.gov/wysk/what-you-should-know-about-covid-19-and-ada-rehabilitation-act-and-other-eeo-laws.

[7] See, e.g., Marchand, 212 A.3d at 823-24.

[8] U.S. Dep't of Justice, Criminal Div., Evaluation of Corporate Compliance Programs (updated June 2020), https://www.justice.gov/criminal-fraud/page/file/937501/download.

[9] Id. at 3.

[10] Id. at 2, 9-10.

[11] Id. at 3, 12, 16.

[12] Ira Raphaelson, On the Road to Comprehensible Standards, Lexis-Nexis Int'l Rev. of Compliance & Bus. Ethics (Fall 2019).

[13] See, e.g., Business Roudtable, Business Roundtable Redefines the Purpose of a Corporation to Promote "An Economy That Serves All Americans" (Aug. 19, 2019), https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans.

[14] Leo E. Strine, Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761, 766 (2015) (hereinafter "Strine").

[15] David A. Katz & Laura A. McIntosh, Corporate Governance Update: EESG and the COVID‑19 Crisis (May 31, 2020), https://corpgov.law.harvard.edu/2020/05/31/corporate-governance-update-eesg-and-the-covid-19-crisis/.

[16] Larry Fink, A Fundamental Reshaping of Finance (2020), https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.

[17] See, e.g., Jay Clayton, SEC Chairman, Statement on Proposed Amendments to Modernize and Enhance Financial Disclosures; Other Ongoing Disclosure Modernization Initiatives; Impact of the Coronavirus; Environmental and Climate-Related Disclosure (Jan. 30, 2020), https://www.sec.gov/news/public-statement/clayton-mda-2020-01-30.

[18] European Secs. & Markets Auth., ESAs [European Supervisory Authorities] consult on environmental, social and governance disclosure rules (Apr. 23, 2020), https://www.esma.europa.eu/press-news/esma-news/esas-consult-environmental-social-and-governance-disclosure-rules.

[19] Strine at 768; see also id. at 771 (interpreting Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. , 506 A.2 173 (Del. 1986)).

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