Best Board Practices in a Social Distancing Environment

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During the ongoing coronavirus pandemic, many communities around the world are practicing social distancing to stop the spread of the virus. All the while, companies are trying to safely proceed with business operations, leveraging technology to adapt to the new environment. For public company boards, many of which are preparing for proxy season, this could mean more frequent meetings, the use of a board portal for confidential communications and preparations for a virtual annual shareholder meeting.

“It is crucial for the board to understand the risks to the company and its various stakeholders arising from the pandemic as well as from the widespread economic shutdown that is of uncertain duration,” Wachtell, Lipton, Rosen & Katz’s David Katz and Laura McIntosh wrote in the New York Law Journal published on March 26, 2020.1 “The board can then have the opportunity as a group to discuss at regular intervals—or more frequently as needed—management’s strategies for minimizing and mitigating these risks, which will be constantly developing as the crisis unfolds.”

Companies have already started to make adjustments, asking employees to work from home, altering supply chains, lowering corporate earnings estimates, or even suspending fiscal guidance altogether. Katz and McIntosh also said that boards should be prepared to oversee management’s response to any activist attack and even “consider the threat of unsolicited potential takeovers to the extent a company’s stock price has declined significantly.”

As of early April, however, directors and management teams have only just started to see the devastating economic impact of COVID-19, with 10 million Americans filing for unemployment in two weeks, and a loss of 701,000 jobs, driving the unemployment rate up to 4.4%. With more economic data rolling in, companies are expected to continue evaluating the risks to their businesses and updating their responses to the pandemic.

“We’re talking to directors about what we’re prepared for and where our vulnerabilities are,” said Joan Conley, Senior Vice President and Corporate Secretary at Nasdaq. “We also highlight what we’re doing to remediate it and plan for it, so that’s where you need the offerings of a board portal.”

As directors – often spread across geographic locations – meet more regularly, there has been a surge of interest in board portals amid the pandemic, noted Conley, adding that “this is a time, especially as we approach the quarterly review of financial reports in advance of earnings, when every corporate secretary should take action to utilize a board portal for confidential  communications between management and directors.”

“This is a vulnerable time for the country, and it’s certainly a time when various bad actors can be trying to take down your systems or hack into your systems. THE DDoS attacks continue for everybody, we’re all at risk because we’re all doing things virtually,” said Conley continued. “So, the reason we focus on a board portal is because of the security features it provides.”

On top of the COVID-19-related concerns, public companies’ annual shareholder meetings are quickly approaching, and boards are considering how to conduct the meeting in a manner that protects shareholders from any exposure to the virus. In mid-March, the U.S. Securities and Exchange Commission published guidance providing regulatory flexibility to companies looking to change the date and location of meetings and hold a virtual forum. Notably, two of the most influential proxy advisors, Glass Lewis and Institutional Shareholder Services (ISS), have signaled leniency toward virtual meetings, provided the company issues comprehensive disclosure, according to the law firm Cleary Gottlieb.

“Virtual shareholder meetings are becoming the norm for 2020, requiring knowledge on legal obligations and understanding the position taken by institutional investors and proxy voting firms on virtual meetings,” said Conley.

While each public company will evaluate the risks and come to a decision on how to host an annual meeting, Katz and McIntosh said directors should take comfort in knowing that the business judgment rule applies to informed board decisions taken in good faith.

“Directors who act on an informed basis, in good faith, and in the honest belief that their decisions are in the company’s best interests will continue to have the protection of the business judgment rule,” Katz and McIntosh concluded.

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