Reports in recent months of pervasive sexual misconduct in American industry have been unsettling to anyone who serves as a board member. The #MeToo movement has revealed behavior that, if it occurs at your company, could create legal exposure for your company, put your company’s reputation at risk and drive away shareholders, investors and customers. This begs the question: As a director, what should you be doing right now to fulfill your fiduciary responsibilities? There are a number of proactive steps to consider.
Request a report from the company’s legal and human resources personnel at the next board meeting. Among the items to address: (1) Are there any active sexual harassment allegations at the company and, if so, what is being done to investigate and address those issues?; (2) historically, what sexual harassment risks have faced the company, including any prior settlements or any allegations against the officers of the company?; (3) does the company have sufficient resources to ensure a quick and appropriate response to sexual misconduct allegations?; (4) what policies and procedures are in place to prevent and identify harassment, including any anonymous reporting avenues, and are these policies and procedures compliant in every state in which it has employees?; (5) what training has the company done on sexual harassment and workplace misconduct and has it been effective?; and (6) what steps does the company take to prevent retaliation against complainants?
Employment Practices Liability Insurance is available to cover losses arising from sexual harassment claims. Ask what coverage the company has and assess whether that coverage is suitable in the current environment.
Now is a good time to revisit succession plans designed to address the unexpected departure of a senior executive. While sexual harassment certainly is not limited to powerful men in the C-suite, the media has targeted just those men. If a succession plan does not exist or the plan is stale, ask the company to revisit the process.
Ask whether the company has a relationship with a crisis communications firm. If it does, the board can reach out to discuss the consultants’ experience responding to these matters. If it does not, identifying a firm that can provide those services, if needed, is an important step. Interview and select a communications specialist before a problem surfaces so you can rest assured that they will answer your call when it does.
Many boards are not expressly included in the company’s policies and often no training is provided on these topics to the board. You might consider taking the company’s training to ensure that everyone understands the company’s expectations. In addition, to the extent that the company has an executive chair, not an independent chair, the board might appoint an ombudsman to whom any concerns about misconduct in the C-suite can be reported, circumventing the executive chair.
www.stblaw.com/client-services
Alexis Coll-Very is a Litigation Partner at Simpson Thacher & Bartlett LLP, focusing on internal and government investigations, shareholder litigation, and complex commercial disputes. Her clients primarily are technology companies, both public and private, and investment firms that fund technology companies. Since becoming a Simpson Thacher partner in 2003, Alexis has been recognized by numerous publications.
For many years, companies designed their compensation plans to capture the maximum deductibility under tax laws requiring performance-based criteria for the compensation of the CEO and three other top executives over $1 million annually. Now, with the loss of that deductibility under the new tax law, will companies abandon performance-based criteria in their bonus and long-term incentive plans? That seems unlikely. Most companies are expected to continue with performance-based compensation, provided those plans are well-designed from a governance perspective.
In the short term, little change in compensation plans is expected because companies have invested significant time and energy into designing their performance-based bonuses and incentives not only to capture deductibility, but also to meet the outside scrutiny of institutional shareholder advisory groups. Bonus plans typically take a formulaic approach that can be easily calculated when presented to shareholders for approval. Long-term incentives either use stock options, which, in our view, by their nature are performance-based, or performance-vested equity with shareholder-approved goals.
Over time, there could be changes in the design of bonuses and long-term incentives. While good governance weighs on the side of maintaining high standards for these programs, now that companies no longer will have to meet IRS deductibility criteria, they may use more discretion in these plans. A little flexibility is good, because financial metrics alone don’t always tell the full performance story.
With more discretion in how they establish performance criteria, board compensation committees will be able to devise and implement plans with the right levers to incentivize performance, using metrics and measures that are in the best interest of the company and its stakeholders.
Over time, without having to default to IRS deductibility criteria, companies may want to revisit their compensation plans. But to maintain good governance, the process around creating a performance-basis for bonuses and long-term incentives will continue.
https://www.kornferry.com/haygroup/
Irv Becker is Vice Chairman of the Executive Pay & Governance business, based in the firm’s New York office. Irv partners with boards and senior executives to create sustainable organizations, enhancing the effectiveness of the board/CEO relationship. He works with groups to design and develop reward programs, aligning executive efforts and results with the success of the company. His clients range the spectrum from Fortune 50 companies to pre-IPO start-ups. He has worked with companies involved with initial public offerings, mergers, acquisitions and divestitures, as well as helped organizations develop new reward philosophies and approaches to support a major change in business direction.
Georgeson recently published its 2017 Annual Corporate Governance Review (ACGR) in partnership with Proxy Insight. The 2017 report provides a comprehensive review of S&P 1500 relevant corporate governance issues, a detailed analysis of shareholder proposal voting patterns and an extensive list of Say on Pay results. The following topics, highlighted throughout the ACGR, played a prominent role in the 2017 U.S. proxy season and will likely be prominent topics for the 2018 proxy season.
Significantly, during 2017, a number of prominent institutional investors—including BlackRock, Vanguard and Fidelity—changed their voting policies on climate change matters and are now more supportive of certain shareholder-sponsored proposals on this topic. Partially as a consequence of these changing investor attitudes, this year climate change shareholder proposals received majority support at three companies.
In 2017 there was additional governance focus and heightened media attention on board diversity. This year, investors voted on nine proposals related to board diversity, which represents an increase from previous years—four in 2015 and five in 2016. Also of note, in one instance in 2017, the shareholder proposal received majority support, while no such proposals received majority support in prior years. We believe this issue will receive considerable additional attention in 2018.
Proposals to enact proxy access decreased from 2016 to 2017, while “fix-it” proposals within the S&P 1500 increased over the same time, from two to 23. Due to pressure from investors, an increasing number of companies have adopted proxy access rules, which has led to less demand for proxy access proposals. However, some shareholders believe the company-adopted proposals are unnecessarily restrictive. Consequently, some investors have sponsored measures to fix or modify the company-adopted proposal to make it more shareholder-friendly. In contrast to certain other types of shareholder-sponsored proposals discussed above, individual shareholders are often the sponsors of the fix-it proposals, rather than institutional investors.
http://www.georgeson.com/us
Brigid Cremin Rosati is a Director of Business Development at Georgeson, pursuing strategic opportunities and cultivating key relationships for the firm. She consistently develops programs to generate awareness around the importance of effective proxy solicitation strategies. Brigid also works directly with clients to manage and optimize shareholder engagement programs, focusing on the ways improved investor relations and communications help companies meet business goals.