Board Directors’ Playbook Offers a “Crash Course” on Today’s Issues

An extensive new report from law firm Cleary Gottlieb brings to bear the breadth of issues boards encounter today. Eighteen different topics are addressed in a “crash course” for board members to get up to speed on any particular topic.  

Why it matters. Many topics are in the purview of the CHRO along with the Compensation Committee, so we’ve highlighted some of the key challenges, “cautions” and considerations for business leaders and boards from the playbook.

• Shareholder Activism in 2024.
  
  
  • Universal proxy rule requirements gave rise to increased litigation with activists as companies challenged the validity of director nominations. In some cases, businesses adopted stricter nomination requirements under their advance notice bylaws - which were challenged by activists. Some lawsuits resulted in settlements in which the company agreed to appoint a portion of the activist’s slate or allowed their nominees to stand for election. Cleary Gottlieb contends that while management teams should maintain strong defensive tactics with an activist, a proactive and pre-emptive approach is best. Concentrate on board evaluation and refreshment practices as well as the disclosure of director qualifications because activists will be on the lookout for vulnerabilities.
    
    
• A New Season for Executive Compensation Disclosure.
  
  
  • PVP. Most companies reported the bare minimum in their inaugural Pay for Performance disclosures. Year 2 will likely follow suit, but with greater attention on compliance with the rule. For example, the SEC may examine the process by which companies select their “most important measure,” comparing how much pay is tied to that measure vs. others (such as TSR). Glass Lewis has also noted that for 2024 it will pay attention to this disclosure in its primary pay for performance analysis.
    
    
  • Clawbacks. Cleary Gottlieb suggests companies adopt internal governance structures on the specific actions that will need to be taken for any financial restatement. Many companies have added an executive acknowledgement of the company’s right and obligation to a clawback to award, severance and executive agreements. Companies may consider requiring deferral of a portion of incentives, or longer stock ownership periods, in case a clawback becomes needed.
    
    
• Meeting Fiduciary Duties when Speaking Up.
  
  
  • As pressure mounts on companies to take a stand on social matters, keep primary fiduciary responsibilities in mind. The report provides a useful framework for decision-making, including how to manage stakeholders, benchmark market practice, speak to core values and handle backlash. Make use of a leader with a strong background in the company’s history and brand to craft authentic messages that align with the company’s current values.