<I>Lauren Boehmke</I> and <I>Matt Hurd</I> explain the key role general counsel can play in helping boards and management address issues raised by the pandemic
Even as public companies continue to navigate the effects of Covid-19, they are also confronting longer-term risks brought into sharper focus by the pandemic. Strong oversight and leadership are critical to mitigating and addressing risks, while also positioning the company for long-term success and value creation.
The general counsel has a central role to play in managing corporate risk by catalyzing a company’s business continuity planning, substantiating its strategic planning, strengthening its corporate governance practices and serving as the linchpin between the board and other company executives.
The general counsel is best positioned to help the board minimize risk and demonstrate satisfaction of directors’ fiduciary duties. The general counsel’s responsibilities for co-ordinating board-level briefings and information distributions are anything but perfunctory, and his or her role in ensuring that directors obtain the information they need on a prompt basis goes to the heart of the directors’ duties to exercise their oversight function and guide the company’s strategy.
The general counsel can add significant value by identifying and focusing other company executives on key risks, leading strategy sessions on proposed solutions for addressing those risks and then managing the preparation of cohesive, holistic and complete board materials. Of course, the general counsel cannot be an expert in all areas of business risk and strategy, but the limitations of his or her role highlight the importance of working collaboratively with other members of senior management and engaging outside advisers with relevant expertise when appropriate.
In the complex and turbulent market environment brought on by the Covid-19 pandemic, a company’s business continuity and strategic plans will necessarily evolve as events continue to develop. Although directors need not take on the responsibilities of day-to-day management, the best time to use the talents of individual directors and give them freedom to discharge their oversight duties regarding business continuity and strategic plans is before they are implemented.
The general counsel must determine, in consultation with the CEO and the board chair or lead independent director, the appropriate time to present a developing plan to the board and how best to update the board on future developments. The key is to facilitate an open and constructive dialogue between the directors and management. Although we are focusing primarily on the general counsel’s role in managing the company’s planning processes and board relations, it is also essential that he or she remains involved in the execution of the firm's plans in order to provide a legal perspective and mitigate litigation and compliance risk.
There is significant benefit in preparing for and engaging in communications with the company’s stockholders, employees, customers, regulatory agencies and other key stakeholders during and following a crisis, and the general counsel can serve as the backbone of communications plans implemented by the investor relations (IR) and public relations (PR) teams.
Continuity of human capital The pandemic has underscored the importance of robust succession planning, not only for the CEO but also for the entire senior leadership team. Inadequate succession planning for senior executives can lead to a more prolonged and expensive executive search process and be a contributing factor in stock-price headwinds.
In light of these risks, some institutional investors, proxy advisers and other stakeholders are increasingly calling for companies to implement and publicly disclose a succession planning process for key executives, which may identify interim chains of command and potential successors. Some companies are also finding that, having reviewed their pipeline, emerging talent needs to be refreshed or the company is in need of managers with skill-sets different from those it has historically sought.
The general counsel is well positioned to help lead these succession-planning and talent-management discussions internally and also update the board on modifications to the company’s talent management approach to take into account lessons from the pandemic.
Board succession planning Similarly, boards are engaging in scenario planning to identify directors who can succeed to board leadership positions if the need arises. Boards are also enhancing their succession process for identifying potential replacement board members, taking into account overboarding concerns as a result of the additional time being spent on board service as well as the heightened focus on gender and racial diversity in the boardroom.
The general counsel can assist the board in co-ordinating its succession-planning efforts, including by handling the logistics of engaging director search firms and interviewing potential candidates when appropriate.
Office and HR protocols Some management succession plans continue to take into consideration whether and how to bring senior management teams back into the office. For example, companies may contemplate phased re-entries or alternating schedules to limit density and potential illness in the C-suite.
The general counsel should be aware that the board of directors may ask management to keep directors informed of key aspects of the company’s return-to-work plans, particularly to the extent those plans could have implications for PR, IR or earnings per share.
Separately, many boards and management teams are continuing to discuss the company’s plans for managing personnel and facilities to ensure the safety of their employees and customers, both during and after the pandemic, including through compliance with guidelines issued by the Occupational Safety and Health Administration. These discussions may go beyond the condition of facilities to other human resources issues, such as the extent and cost of healthcare and insurance coverage for employees, implementing safety protocols and revisiting business travel policies.
Compliance and technology infrastructure The pandemic has heightened compliance risks for many companies due to the unprecedented strains placed on employees and boards, and the changing legal and regulatory landscape. Data privacy risks have come into particular focus as the risk of data breaches has increased with employees, management and boards working remotely over an extended period.
Data protection regulations have not been eased during the pandemic and, as such, companies should continue to review their cyber-security and data protection compliance profile. The general counsel is typically at the forefront of designing this profile, working in conjunction with appropriate advisers and addressing instances of non-compliance and remediation.
Supply chain management The pandemic has highlighted new and existing vulnerabilities in many companies’ supply chains. For example, some industries discovered that a heavy reliance on Chinese suppliers worked to their detriment when China was one of the first jurisdictions to experience shutdowns due to the coronavirus pandemic.
Although cost will continue to be an important consideration in procurement decisions, some companies may also review concentrations in their existing supply chains and the effects of just-in-time delivery requirements to ensure continuity of supply. Management teams may work to develop supply disruption contingency plans, and the general counsel may be asked by the board to meet with senior management to discuss the pros and cons of diversifying supply chains and holding higher inventories of key inputs.
Refreshing strategic plans One of the board’s most important functions is to oversee the company’s strategy and development. Management teams typically lead an annual strategic review and planning session with the board, often with input from outside legal counsel and financial advisers. During the Covid-19 pandemic and its aftermath, it may be prudent to refresh the company’s short and long-term strategic plans with the board on a more frequent basis to assess whether those plans are still expected to drive long-term value in light of the changing market and business environment.
The recent market volatility may also present new opportunities for companies to evaluate and pursue potential value-enhancing transactions, including potential acquisitions, which companies should monitor and be prepared to execute. The general counsel has a pivotal role in guiding and co-ordinating this strategic review.
Liquidity considerations The pandemic has put a strain on many companies’ liquidity positions, particularly in highly affected industries. In an effort to hedge against potential liquidity crunches, many companies have drawn on their revolvers and amended their credit facilities to shore up their cash positions. Even as the immediate crisis eases, the general counsel may want to discuss adding to the board’s strategic planning discussions a review of the company’s available liquidity, capital allocation policy (including with respect to dividends and share buybacks) and compliance with financial metrics rules and policies.
Activists and hostile acquirers Although shareholder activism has fallen sharply following the onset of the pandemic, companies should remain vigilant in preparing for potential activists and hostile acquirers. The general counsel is best positioned to spearhead the company’s advanced planning efforts, which include:
We expect to see activist activity resurge and for activists to increase their critiques of companies’ responses to the pandemic once the height of the crisis has passed.
Review of governance documents During the winter months, the board and committee chairs may ask management, particularly the general counsel, to review the company’s governance documents with outside legal counsel to assess whether any amendments are warranted, particularly in light of the Covid-19 pandemic and other recent events.
For example, many companies are revising their bylaws, corporate governance guidelines and committee charters to ensure they are able to operate fully remotely, including by adopting emergency bylaws and explicitly allowing for virtual or hybrid stockholder and board meetings.
Providing guidance to investors As a result of the uncertainty created by the pandemic, many companies dispensed with quarterly guidance in the short term. Over the medium to longer term, boards and management teams may need to discuss whether they want to resume their historical approach.
Although some investors are likely to be critical of an outright termination of guidance, the pandemic may provide an opportunity to refine both investors’ and companies’ views regarding which metrics companies should use to guide the market. On the other hand, the SEC and investors have stressed the increased importance of robust disclosure regarding the historical and expected impact of the pandemic on the company’s business, operations and financial condition.
The general counsel, working with outside disclosure counsel, should stay up to date on relevant SEC guidance and disclosure best practices to guide the company’s public disclosure.