New survey results show that most U.S. public company boards have stepped up their efforts in the initial phase of the COVID-19 pandemic, but shutting down businesses may have been the easy part. Boards face a growing list of urgent priorities in reopening their businesses; fixing vulnerabilities in crisis management and executive succession planning; and addressing the sharp divide in corporate America over the pandemic’s impact on corporate sustainability efforts. Smaller companies face the greatest challenges of all.
The Conference Board, Debevoise & Plimpton, Russell Reynolds Associates, and ESG analytics firm ESGAUGE surveyed corporate secretaries, general counsel, and investor relations officers at more than 230 US public companies from April 9 through May 8. Respondents weighed in on the various corporate governance challenges amid COVID-19, and how their organizations have responded. Insights from the new report – based on the survey results – include the following:
After ramping up their efforts in the “shutdown” phase, boards now need to expand and shift priorities.
- 59% of companies held special board meetings, 53% communicated with their board at least weekly, and 81% designated a director to serve as the key liaison with management, on COVID-19.
- The issues identified most frequently as the top three for the board’s attention at companies of all sizes and across industries were: liquidity, employees, and operations.
- The issues mentioned least frequently among the top three: customers, cybersecurity, and corporate social responsibility.
- The least-cited issues will likely become greater priorities for boards in the next stage of this pandemic:
- As businesses plan to reopen, consumer-facing companies will need to ensure their customers feel comfortable.
- As companies collect more medical and other personal information to ensure employees can return to work, protecting that data requires proper cybersecurity.
- Amid the fallout, a shift in the priorities of many companies will cause investors, customers, and employees to more intensely scrutinize their corporate social responsibility
“Boards stepped up in the ‘shutdown’ phase of the COVID-19 crisis, focusing on the health and safety of employees,” said Paul Washington, Executive Director of The Conference Board’s ESG Center. “As companies reopen, boards face an even longer list of issues – while providing sustained transparency about their efforts to investors, employees, customers, regulators, and others during an unprecedented and uncertain time.”
Boards need to update their executive succession plans and strengthen emergency planning efforts.
- 63% of respondents considered their business continuity plans inadequate (and only about half have updated them thus far); 60% stated that they had not reviewed or updated their CEO and executive succession plans; 28% did not have a C-Suite-level crisis management team.
- Of those that do have crisis management teams, two functions are often nonexistent:
- Just 47% include someone from human resources.
- Only 34% have the risk management function represented.
- “During this crisis, some CEOs and leaders have demonstrated strong leadership skills while others have not performed well,” said Rusty O Kelley, Co-leader of the Board and CEO Practice at Russell Reynolds Associates. “Boards must begin reviewing emergency, medium- and long-term succession plans and determine where the executive leadership needs to be strengthened.”
Survey respondents are sharply divided over COVID-19’s impact on sustainability.
- 30% see the pandemic as having a negative impact on sustainability efforts.
- 12% think it will decrease the overall emphasis on sustainability; 10% think it will increase the overall emphasis.
- 19% think it will put sustainability efforts on hold.
- 38% expect a shift in the priorities of those programs.
- “To avoid a collision with institutional investors and other stakeholders, who are continuing to press forward on their ESG agenda, boards and senior management will want to carefully assess the impact of the pandemic on their sustainability initiatives, and promptly communicate any updates to their sustainability strategy to stakeholders,” said Matteo Tonello, Managing Director of ESG Research at The Conference Board.
This pandemic has made small public companies especially vulnerable.
- 47% of small surveyed companies didn’t have a C-Suite-level crisis management team, compared to 11% of large companies.
- 28% didn’t have a disaster preparedness plan, compared to 3% of the large surveyed public companies.
- 35% communicated with their boards about the crisis at least weekly, compared to 62% at large companies.
- 29% of small companies have had to postpone their annual meeting to prepare for a virtual meeting, compared to fewer than 16% of large companies that have faced that dilemma.
- 77% of small companies haven’t discussed managing – and possibly closing – insider trading windows, nearly twice the rate of 40% of larger companies that haven’t addressed the topic.
- “Left unaddressed, these vulnerabilities may increase the risk of smaller companies, in particular, becoming the target of shareholder activism,” said Paul Rodel, a partner at Debevoise & Plimpton. “Preventing that will require promptly addressing the governance challenges posed by this pandemic.”
Most companies have withdrawn or revised their earnings guidance, creating a potential investor relations vacuum.
- More than 60% reported their decision to withdraw their earnings guidance since the start of the crisis.
- 6% have done so for their quarterly guidance.
- 24% have so for their annual guidance.
- 40% have done so for both.
- “This situation could offer an opportunity for companies to engage with their investors on a wider array of firm performance indicators,” said Paul Hodgson, Senior Adviser at ESGAUGE. “Such metrics could include timely areas of concern, including employee health and safety, customer satisfaction, and investment in R&D and innovation.
Companies are moving cautiously in changing the performance metrics used for executive bonuses and performance-based equity grants.
- To date, 12% of companies have reported cuts to base salaries, and 39% expect the crisis to affect their executives’ bonuses.
- But 70% are not planning changes to equity grants, and nearly two-thirds are not expecting changes to cash incentive programs.
- Compensation committees will want to make sure they have a full picture of the impact of the crisis on the company, and to gauge the potential reaction from investors and other stakeholders, before adjusting performance metrics or equity grants. Doing so would help avoid a backlash from investors in next year’s say-on-pay votes and prevent damage to the company’s reputation.
Note: Survey findings were analyzed by the 11 business sectors of the Global Industry Classification Standard (GICS) and three company size groups: small companies (with annual revenue under $1 billion), mid-sized companies (reporting revenue between $1 billion and $9.9 billion) and large companies (with annual turnover exceeding $10 billion). The size of the participating companies in the financial services and real estate sectors was also separately analyzed by the reported value of their assets.
This post comes to us from The Conference Board. The results of the survey were released on June 4, 2020, and the online visualization of the survey findings and the full report are available here.