CLS Blue Sky Blog

Wachtell Lipton Discusses Board Development and Director Succession Planning

The intensifying spotlight turned on boards of directors and management teams by investors prompts a fresh look at how public companies approach board development, director succession planning and refreshment in advance of an activist attack, shareholder unrest or a crisis that results in heightened scrutiny. As the New Paradigm of corporate governance takes hold, the major index fund asset managers, many actively managed funds and the two largest proxy advisory firms have each formally incorporated questions relating to board quality and practices into their direct engagements with companies, voting policies and how they evaluate a proxy contest to remove or replace existing board members and CEOs. In addition, activist hedge funds will re-frame matters of corporate strategy and performance into referendums on board quality, questioning whether the board had the right skillsets and practices in place to oversee important business decisions. Accordingly, public companies are increasingly being called upon to consider and prioritize the following:

Examples of renewed investor and proxy advisor interest in such matters include:

Federal and state legislation and regulatory mandates are also beginning to target board-related topics, including with respect to board diversity and disclosures concerning board quality and practices. These areas have also been a focus of important third-party initiatives, including those by Focusing Capital on the Long Term (FCLT), the Coalition for Inclusive Capitalism’s Embankment Project, the Investor Stewardship Group (ISG), the World Economic Forum International Business Council’s support of the New Paradigm, the Commonsense Principles and the Business Roundtable.

Accordingly, company practices are evolving to meet the expectations of more vocal and engaged investors and ensure that the board itself continues to be a strategic asset to the company and the management team. In this new environment, companies may wish to consider some of the considerations and emerging practices outlined below when developing or updating board development and director succession plans, taking into account their own needs, circumstances and investor feedback:

When engaging with investors on these matters and considering proactive disclosures, companies should: (1) explain why the company believes the board includes the right set of directors; (2) outline the company’s approach for identifying and addressing material gaps in board composition; (3) carefully explain procedures for ensuring that directors possess the skills required to oversee and direct the course of the company with management; and (4) proactively share how directors contribute, are integrated into strategic planning, guide and oversee the company’s strategic choices and assessment of risks, and test and challenge with management business strategies and execution.

Failing to plan ahead on matters of board practices and composition increasingly exposes public companies to opportunistic activism and creates other vulnerabilities. Effective board development and director succession planning holds the promise of facilitating the thoughtful evolution, over time, of board composition and board practices during periods of “peace” rather than stress.

Taking a fresh look at these matters, including associated disclosures, will also help companies strengthen their relationships with major investors and increase the likelihood that investors give the board the benefit of doubt on matters of complex business judgment or where patience is needed before business initiatives bear fruit.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Board Development and Director Succession Planning in the Age of Shareholder Activism, Engagement and Stewardship,” dated June 6, 2019.

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