As COVID-19 continues to upend the global economy, pressure is mounting on Boards and management teams to implement swift and meaningful actions to promote stability and ensure business continuity. In a time of social distancing, when business is largely being conducted remotely, existing bylaws and state regulations are being re-examined and traditional means of communication are being tested.
For the past several weeks we have been working closely with clients to think through these challenges. Here is what we are seeing thus far.
The SEC has relaxed its view on companies holding virtual annual meetings; in fact it has even issued guidelines for how to do so. Historically investors preferred in-person meetings, occasionally supporting a “hybrid” approach, or holding a virtual meeting only as a supplement to one held in-person. Of course, in the current environment, a virtual-only annual meeting is likely the only option. As more companies embrace them, general negative sentiment toward virtual annual meetings may gradually shift. Technology companies including Dell, HP and Microsoft, were early adopters of virtual annual meetings and according to ISS, about 8% of the Russell 3000 companies held virtual-only annual meetings as of June 2019. That said, not all companies are permitted to hold virtual-annual meetings as some states prohibit them, which is why boards and management need to understand fully what options they have under their corporate bylaws and in-line with state regulations, so that they can act quickly and decisively on behalf of their corporations.
Regular Board Meetings
What about regular quarterly board meetings? Can a company hold board meetings and vote on critical matters by phone or virtually? In most states the answer is yes, but each state has its own rules, particularly if a vote needs to be taken. Some states require majority written consent to take board action. In other states, the vote count for an action may require unanimous approval. To ensure critical business decisions are made without delay, if they are not already, companies and Boards should be apprised of what the rules are in their state of incorporation to hold board meetings by phone or virtually, and what is required to take an actionable vote.
Investors have long been advocating for succession planning to be one of the highest priority items on a board’s agenda. That sense of urgency has only increased due to COVID-19 as boards need to be able to articulate who in the company can run the business if an emergency occurs and the CEO, CFO, Chairman, or others become incapacitated.
Additionally, since the board demographic still tends to skew older and is therefore potentially most vulnerable to COVID-19, the board itself must consider its own succession. As part of this planning, the Audit committee should ensure that it has experts other than the Chair and the Lead Director who can stand in for him/her in case should they suddenly not be able to conduct their duties.
With extreme volatility in the markets and continued dire headlines regarding the state of business and employment, boards need to evaluate and to discuss with executives their current compensation policies. As a sign of alignment and prudence, executives and directors may want to consider reducing their compensation by a percentage for a finite period or forgo compensation entirely in 2020, until it is determined that the business and the economy have rightsized. Several CEOs in the airline industry have taken similar steps in recent weeks, including Delta, Southwest, JetBlue, and United Airlines. This commitment, if made, will help companies pre-empt potential backlash this annual meeting season related to relatively high levels of compensation already published in FY 2019 proxy materials. Executives and directors who take this route will most likely be regarded favorably for it long after the dust settles.
During this unprecedented and uncertain time, investors are looking for a sense of business stability and continuity. Boards and management can play a key role in conveying that sense by planning for a wide range of potential scenarios and helping to create an effective and efficient construct by which to make decisions and implement needed actions, to the benefit of all stakeholders.