Although the focus of directors is constantly changing, the construct of boards should stay the same. The best boards are always, in no particular order: competent, responsible, transparent, accountable, experienced, balanced, insightful, visionary – and diverse.
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Governance Articles & Podcasts
As companies review their executive compensation program designs and related corporate governance policies, it can be helpful to review current market practices and recent trends in order to inform discussions in the boardroom.
The survey summarizes market practices at 200 large publicly traded companies across all industries (referred to herein as the “Meridian 200”). These companies have median revenues and market capitalizations of $22.2B and $41.7B, respectively, making them a representative sample of the S&P 500.
In the September 2023 issue of Sidley’s quarterly “Sidley Perspectives on M&A and Corporate Governance,” we keep you current on the most important legal developments involving M&A and corporate governance matters.
This quarter’s newsletter includes analysis on board responsibility in regards to the use of artificial intelligence, the latest judicial developments in the Delaware Supreme Court and Delaware Chancery Court, considerations for corporations in light of the SEC’s final cybersecurity disclosure rules for public companies, and more.
In all economic cycles, engaged public company boards and management teams do their homework on the wide range of potential strategic opportunities. In the current market environment, however, we have observed that an increasing number of companies and their boards are actively progressing (or taking steps to formulate a plan for exploring) multiple alternatives at the same time. The goal? To maximize the speed and likelihood of executing a successful strategy all while maintaining optionality – and often working against liquidity constraints or other factors necessitating a tight timetable.
SEC Adopts ‘Clawback’ Rules for Executive Compensation
On October 26, 2022, the Securities and Exchange Commission (SEC) adopted rules directing the national securities exchanges to create listing standards requiring listed companies to develop and implement policies that obligate such listed companies to recover, or “claw back,” incentive-based compensation “received” by their current or former executive officers as a result of materially incorrect financial statements.
The Evolution of ESG Disclosure for Biotech Companies
To help guide small public biotech companies on their ESG disclosures in a rapidly-changing environment, we’ve published The Evolution of ESG Disclosure for Biotech Companies, a follow-up to our early-2022 report Biotech’s ESG Crossroads. It includes more recent trends in ESG reporting and suggestions for how biotech companies can initiate or enhance their efforts.
Pearl Meyer conducted a subsequent Quick Poll at the end of the year to see what changes were taking place as organizations finalized their 2022 budgets, and learned that nearly all respondents were planning base salary increases for the coming year and those increases were expected to be higher than normal. This Quick Poll was conducted to understand if and how those expectations have been implemented. Pearly Meyer released a report on 2022 Implemented Base Salary Increases to include the following findings:
Pearl Meyer Data Show More Companies Than Expected Have Increased 2022 Salaries
Welcoming the Universal Proxy
On 17 November 2021, the US Securities and Exchange Commission (SEC) adopted new Rule 14a-19 and amendments to existing rules under the Securities Exchange Act of 1934 to require the use of ‘universal’ proxy cards in all non-exempt director election contests at publicly traded companies in the US.
The universal proxy is explained in the article Welcoming the Universal Proxy by Kai H. E. Liekefett – Partner at Sidley Austin LLP and Co-Chair of the firm’s Shareholder Activism & Corporate Defence practice.
How boards are strengthening their self-assessments and related disclosures
For the fourth consecutive year, the EY Center for Board Matters (CBM) reviewed proxy statements filed by Fortune 100 companies to identify trends in board evaluation practices and disclosures. More boards are evaluating individual directors along with board and committee assessments. These evaluations can help identify opportunities to adapt and advance board leadership, structure, dynamics, decision-making processes, operations, information practices, and education opportunities. Making disclosures about the rigor of these board evaluation programs can foster investor confidence.
We convey our findings in this new report. How boards are strengthening their self-assessments and related disclosures | EY - US
Goal-Setting: The Fundamentals Haven’t Changed, But Judgment Matters
Setting performance goals for incentive compensation is always a challenge and never more so in the COVID economy, with workforce and supply chain disruptions, as well as the broadening definitions of performance that increasingly include environmental, social, and governance issues.
Transitioning From Stock Options to RSUs
Many growing life science companies reach a point in their maturity when they consider incorporating restricted stock (RS) or restricted stock units (RSUs) as a long-term incentive for employees to either supplement or replace stock options, which tend to be the traditional vehicle for companies in their early stages.
Data Show Boards Are Taking Steps on Diversity, Equity, and Inclusion
We are in a state of evolution when it comes to tracking, reporting, and goal-setting for diversity, equity, and inclusion (DE&I) measures.
A recent Pearl Meyer On Point survey (to be published at the beginning of October) asked more than 400 directors and c-suite executives if and how they are tracking and reporting DE&I factors, and to what degree DE&I goals are reflected in the executive incentive plans.
In the Headlong Rush to Put ESG Metrics into Incentive Plans, We May Need a Speed Bump
Environmental, social, and governance-based incentive metrics are continuing their meteoric rise. Investors are asking about the link between ESG and executive compensation in shareholder outreach calls, meanwhile you can’t attend a compensation committee meeting without talking about ESG.
Pearl Meyer: Quick Poll: Human Capital Management Disclosure
Our Quick Poll was designed to assess whether the new SEC requirement to disclose material information related to Human Capital Management (HCM) has spurred additional disclosure beyond the Annual Report/10-K and if so, through what channels and on what topics. This study focuses on 125 participant responses from a mix of publicly traded companies and private for profit and not-for-profit organizations.
Pearl Meyer: Compensation Peer Group Development in an ESG World
COVID-19, a polarized political environment, social unrest and the Black Lives Matter movement, climate change and increased weather volatility. The impact of these developments on humans over the last year has been profound.
Developments across the Environmental, Social, and Governance or “ESG” landscape focus on understanding and quantifying the various factors, like those noted above, that directly and indirectly affect our lives.
Pearl Meyer: Revisiting Business Strategy and Compensation Alignment in Light of COVID-19
COVID-19 and the ensuing pandemic produced the largest global economic shock and business transformation period of our lifetimes. And while there were some companies that benefitted from the situation, for many others, the virus painfully exposed material weaknesses in their business.
We’ve experienced wholesale changes in how work gets done. For workers who could, there was a pivot to working from home. (In fact, a recent survey found that the work from home model may become more permanent for many companies. Respondents indicated they expect a third of their total US-based workforces will continue to work remotely.) An interesting lesson here is just how quickly—and seamlessly for many—this pivot was executed; it happened in a fraction of the time most of us would have thought possible.
Pearl Meyer: COVID-19 Retrospective: Adjustments to Incentive Plan Outcomes and the Shareholder Response
The COVID-19 pandemic was something of a perfect storm in 2020’s annual compensation planning cycle. When reports of the virus’s spread were far from US shores, boards and compensation committees were approving annual operating plans and incentive plan goals as per usual.
Only a few weeks later, as the world was upended, these freshly-approved goals were either disconnected from reality or no longer in line with more pressing strategic priorities.
Four opportunities for enhancing ESG oversight
Many directors view ESG largely as a compliance matter and 21 percent say they don’t believe ESG materially impacts business value.
Directors are confident about shareholder expectations when it comes to governance, but are less so in regard to environmental and social factors.
Nominating and governance committees are increasingly taking on environmental and social oversight responsibilities.
Technology Education for Board Members
Dr. Timothy Chou, Stanford Lecturer and Board Director brings you these six lectures were originally designed for a business incubator in Brazil. The focus was on giving a non-technical person the key ideas of five fundamental technologies: cloud computing, 5G, Internet of Things, edge computing and artificial intelligence. The sixth lecture brings all of these five together in a project to transform children's healthcare globally. As the lectures were praised in Brazil and Portugal, we decided to make them available and encourage board members to watch them to better understand the technologies, which will reshape your competition.
How Aon is redefining the value of intellectual property
It wasn't long ago that a company's value was predominantly determined by the tangible things it owned, like equipment, real estate, or inventory. Today, as businesses become more technology and innovation focused, there's another kind of asset that's boosting valuations: intellectual property (IP).
When the office can be anywhere, where are taxes paid?
The article addresses the rise in downsizing office footprints and what the tax implications of a widespread workforce may be for businesses. It is specifically geared around how boards and audit committees should be considering the “work anywhere” trend.
SPAC Insurance: Litigation Concerns Constrain Coverage Options
SPACs have become a popular way for companies to go public, but their ambiguity has caused litigation concerns and insurance coverage challenges. SPAC is the acronym for Special Purpose Acquisitions Company. These companies have no commercial operations of their own – they are created specifically to raise capital through an initial public offering (IPO) in order to purchase an existing private company. This provides the private company with a streamlined path to going public. However, the company that will be acquired is not announced at the time of the SPAC’s IPO. For this reason, SPACs are sometimes called “blank-check” companies.
Our 2020 Annual Corporate Directors Survey highlights some ways directors are rising to the moment. From facing areas that institutional shareholders have emphasized in recent years, like environmental, social, and governance (ESG) issues and shareholder engagement, to tackling company culture and thinking more broadly about issues like company strategy and executive compensation, the crisis presents opportunities that many directors are embracing.
Following a year like no other, compensation committees have kicked off 2021 facing many of the same questions they have been dealing with for months. Most companies can’t yet declare a turning of the page, and while vaccine availability and the beginnings of a rollout is very welcome news, it is still an unknown variable to add to the mix, along with new variants, unclear economic indicators, a new administration, and more.
Despite the upheaval of 2020, M&A activity remains strong. For companies with a 2021 transaction on the horizon—and for those with deal possibilities in the not-so-distant future—understanding change-in-control (CIC) provisions is a must.
The SPAC phenomenon is showing no sign of slowing down. With trends and best practices still emerging, engaging those familiar with the process is a must. A neutral party that can remind each side to consider numerous unintended consequences can help better the chances of success. When there is urgency to close a deal, by failing to prepare, you might be preparing to fail.
Environmental, Social, and Governance (ESG) issues are some of the most prominent facing Corporate
America: shareholders and other stakeholders have significantly increased the focus on a corporation’s social responsibilities, including promoting a fair and diverse workplace, providing employees with a living wage, and improving the environment.