As COVID-19 wreaks havoc on our world, important shifts in corporate governance practices continue to emerge, especially as companies are forced to create new business models and tackle novel problems in order to stay afloat.[1] Boards of directors are increasingly, and necessarily, called upon to enhance existing risk and cash management efforts as companies face unparalleled challenges with employee health, social distancing requirements, and supply chain disruption.[2] It is important to note that many of these governance shifts are not solely the result of the COVID-19 pandemic;[3] rather, shifting corporate governance strategies arise in both historic instances of market unrest, in recent international trade uncertainty, and in other pre-virus social trends like sustainability efforts. [4] For example, one notable pre-COVID-19 trend is the recent emphasis on stakeholder and shareholder capitalism as embodied in the Business Round Table Principles announced in 2019; these Principles focused corporate purpose more broadly to include all stakeholders (i.e. customers, employees, suppliers, etc.), as well as shareholders.[5]
One thing is clear, however: regardless of when corporate governance shifts began or for what reason, no company can possibly escape the current health crisis unchanged; thus, most companies must accelerate governance modification and board practices in order to successfully combat any lasting effects of this eighteen plus month disaster.[6] This article, at its core, suggests that in an age of crisis, high level responses from corporate boards are necessary in order to keep companies afloat and employees healthy. After all, while “good governance is relevant in all types of weather, boom or bust,” there is “no better way to observe the effectiveness of governance than in a crisis.”[7]
Who is to Blame?
Regardless of what was said in the introduction above, many people may be asking, shouldn’t boards have been more prepared for a disaster like this? This so-called “blame game” creates a scrutinization of risk preparedness practices while simultaneously calling into question the perhaps too forgiving Caremark standard promulgated by the Delaware Court in 1996.[8] As many people familiar with corporate law know, the Caremark doctrine arose out of the famous In re Caremark International Inc. case.[9] This case focused on the high bar of director liability claims when a board has successfully implemented an oversight program to monitor corporate risk.[10] Even though Caremark’s standard was recently called into question in two 2019 Delaware Supreme Court decisions, the Caremark doctrine still remains strong.[11] Essentially, while these 2019 cases suggested that the existence of a compliance program may not be enough to satisfy a director’s responsibility for oversight,[12] at “no point did the court suggest that it was changing the standards applicable to Caremark claims.”[13]
Even so, one may start to wonder, if these two cases, when viewed in light of the current pandemic, will prompt courts to lower the Caremark bar further to accommodate frightened shareholders and affected companies.[14] Interestingly, many corporate scholars believe that Caremark’s legacy will continue to remain strong especially with regards to companies that maintain “attentive and well-advised board[s].”[15] Essentially, even if the 2019 cases highlighted the importance of vigilance and the lack of one-size-fits-all approach to oversight methodology, they did not overturn the Caremark doctrine. After all, Caremark was never designed to “be invoked simply because a company finds itself in financial distress.”[16] (i.e. arguably what is happening to companies now because of the pandemic).
While it seems that those stressing the infallibility of Caremark may be correct, I am simply highlighting that the current pandemic is an unprecedented event. After all, if 2020 has taught us one thing, it is that nothing is ever certain. As the section below highlights, diligence in preventing a need for Caremark revision may be the best move to at least mitigate any potential claim for director liability resulting from pandemic related events.
What can a Board do Now?
The current crisis is emphasizing stakeholder dependence on corporate boards as they look to boards of directors to “address the impacts of the coronavirus.”[17] Taking a step back, it is important to note that, as different circumstances arise, boards must shift their priorities to balance the needs of all stakeholders while also focusing on the long-term sustainability of their business.[18] During a crisis, for example, boards are faced with addressing concerns such as trade-offs for stakeholders; in the present crisis, trade-offs include working from home initiatives or altering product offerings (i.e. making hand sanitizers instead of alcohol or ventilators instead of engines).[19]
Additionally, it has become clear that directors may need to take a more active role, compared to their role during pre-pandemic times, in order to maintain or build additional shareholder trust.[20] For example, if the company wasn’t adequately prepared for a crisis before, a board may need to take charge and ensure adequate damage control now. Specific steps that a board can take include increased disclosure, immediate response time for decision making, and continued support of virtual meetings allowing for the preservation of shareholder voting on a digital platform.[21] Interestingly, independent directors have already started to interface more with shareholders as the concept of corporate stewardship has expanded beyond the annual general meeting season.[22] However, as the virus continues, some companies may go further to stay afloat by implementing new strategies such as decreasing executive compensation or adjusting compensation plans in order to show support for struggling workers, [23] temporarily halting layoffs, and suspending dividends.[24]
These ideas simply scratch the surface of what companies may do to continue to survive, and hopefully thrive, during this crisis. These strategies may also help to prevent any legal fallouts by shareholders claiming inadequate oversight during a time when oversight is arguably needed the most. Essentially, companies would be wise to take a look at their current programs and ensure that oversight duties adequately addressing employee concerns and changing business risks during a very volatile time. This way, regardless of Caremark’s durability, a board is ready and prepared to survive.
[1] Lynn S. Paine, Covid-19 Is Rewriting the Rules of Corporate Governance, Harv. Bus. Rev. (Oct. 6, 2020), https://hbr.org/2020/10/covid-19-is-rewriting-the-rules-of-corporate-governance.
[2] See, e.g., Responding to Covid19: The rules of good governance apply now more than ever!, OECD.org, http://www.oecd.org/governance/public-governance-responses-to-covid19/ (for a general look at response suggestions for a sustainable recovery).
[3] See Paine, supra note 1.
[4] See Erik Norland, Trade War Costs to Consumers, Companies and Nations, CME Grp. (May 13, 2019), https://www.cmegroup.com/education/featured-reports/us-china-trade-war-the-perils-of-escalation.html. The trade wars predating the pandemic created a need for a closer look at corporate governance. Id.
[5] See Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’, Bus. Roundtable (Aug. 19, 2019), https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans [hereinafter Business Roundtable]. “Stakeholders” include customers, employees, suppliers, communities, and shareholders. Id. By focusing on this large group, rather than simply shareholders, corporations are “investing in their workers and communities because they know that it is the only way to be successful over the long term.” Id.
[6] Aaron Bertinetti, Glass Lewis’ Approach to Governance in Times of the Coronavirus Pandemic, Harv. L. Sch. Forum on Corp. Governance (Apr. 1, 2020), https://corpgov.law.harvard.edu/2020/04/01/glass-lewis-approach-to-governance-in-times-of-the-coronavirus-pandemic/.
[7] Id.
[8] Michael Peregrine, Pandemics, Preparedness And Corporate Governance: Boards Should Anticipate ‘The Blame Game’, Forbes (Mar. 25, 2020), https://www.forbes.com/sites/michaelperegrine/2020/03/25/pandemics-preparedness-and-corporate-governance-boards-should-anticipate-the-blame-game/?sh=2d670fd6e093.
[9] 698 A.2d 959 (Del. Ch. 1996).
[10] Michael Peregrine, New Pressures on Corporate Directors to Recognize Red Flags, Forbes (Oct. 23, 2019), https://www.forbes.com/sites/michaelperegrine/2019/10/23/new-pressure-on-corporate-directors-to-recognize-red-flags/?sh=6d9d97ef140e.
[11] Id.
[12] See Holly J. Gregory et al., Board Oversight in Light of Covid-10 and Recent Delaware Decisions, Harv. L. Sch. Forum on Corp. Governance (May 26, 2020), https://corpgov.law.harvard.edu/2020/05/26/board-oversight-in-light-of-covid-19-and-recent-delaware-decisions/ .
[13] Kotler et al., Recent Delaware Court of Chancery Decision Sustains Another Caremark Claim at the Pleading Stage, Harv. L. School Forum on Corp. Governance (May 25, 2020), https://corpgov.law.harvard.edu/2020/05/25/recent-delaware-court-of-chancery-decision-sustains-another-caremark-claim-at-the-pleading-stage/.
[14] See Edward Micheletti et al., Reevalauting the Board Risk Oversight Process: Complications of Marchand and Other Recent Developments, Skadden (Mar. 23, 2020), https://www.skadden.com/insights/publications/2020/03/takeaway-reevaluating-the-board-risk-oversight.
[15] See Arcano et al., Thoughts for Boards of Directors on the Covid-1`0 Crisis, Skadden (Mar. 20, 2020), https://www.skadden.com/insights/publications/2020/03/thoughts-for-boards-of-directors-on-the-covid-19.
[16] Id.
[17] Peter Dey & Sarah Kaplan, Pandemic should force corporate boards to think beyond the bottom line, Corp. Knights (Mar. 26, 2020), https://www.corporateknights.com/channels/leadership/pandemic-should-force-corporate-boards-think-beyond-bottom-line-15852170/.
[18] See id.
[19] See id.
[20] See Paine, supra note 1.
[21] See id.
[22] See Cydney Posner, Trends and Practices in Director Engagement with Shareholders, Cooley Pubco (Jan. 7, 2020), https://cooleypubco.com/2020/01/07/trends-practices-director-engagement/; see also Thomas Milburn, Stewardship in Business: Navigating the Storm, Corp. Citizenship (June 25, 2020), https://corporate-citizenship.com/2020/06/25/stewardship-in-business-navigating-the-storm/.
[23] Jack Kelly, CEOs are Cutting Their Own Salaries in Response to the Coronavirus, Forbes (Mar. 30, 2020), https://www.forbes.com/sites/jackkelly/2020/03/30/ceos-are-cutting-their-own-salaries-in-response-to-the-coronavirus/#28f8053d3e91. For example, both the United Airlines CEO and President announced that they will give up their salaries through the end of June. Id. The chief executive officer of Disney will be taking a 50% pay cut and Lyft cofounders are donating their salaries to in need drivers. Id.
[24] See Mark Kolakowski, Disney (DIS) Continues Suspension of Cash Dividend, Investopedia (Nov 17, 2020), https://www.investopedia.com/disney-dis-continues-suspension-of-cash-dividend-5087903. Disney is one such company that suspended cash dividends due to the “ongoing impact of COVID-10.” Id. Companies today are increasingly under shareholder activism focused on corporate shareholder responsibility rather than simply activism focused on shareholder primacy. See Business Roundtable, supra note 5.
