Preparation for an economic downturn is among the issues that will dominate the attention of corporate boards of directors in 2020, according to law firm Akin Gump Strauss Hauer & Feld’s annual look at top board matters.
“Certain challenges commonly associated with economic downturns, such as a reduction in access to public and private capital markets, may be difficult for corporate boards to fully hedge against,” the Akin Gump report says.
Directors should familiarize themselves with any limitations on the company’s ability to raise capital, such as those arising from agreements with lenders or shareholders, the law firm counsels.
Additionally, debt covenants should be continually reviewed “to provide warning signs regarding defaults or thin cushions and/or prompt early negotiations” in the event of changing financial conditions.
Directors also should understand that a weak economic environment “may enlarge the group of shareholders with standing and motivation to bring a derivative claim for breach of fiduciary duty,” the report says.
Here are some of the other priorities for boards this year.
While diversity and inclusion can provide a competitive advantage and enable growth, the proportion of women and minorities serving on boards still doesn’t reflect the makeup of the general population, Akin Gump notes.
Diversity has been a top concern for boards for several years because it’s also a focal point for such stakeholders as investors, employees, and customers. Yet at the same time, 72% of male directors believe that investors are too focused on diversity, according to a 2019 survey by PricewaterhouseCoopers that the report cites.
Statutes imposing quotas on public-company boards are still being implemented. But, the report notes, it’s too soon to gauge whether they will have a meaningful impact on improving diversity.
For one thing, mandated quotas could end up being interpreted as violating the Equal Protection Clause of the U.S. Constitution as well as state constitutions.
Further, “quotas are not necessarily supported by members of the business community, even women. They have been criticized as micromanaging business and adding ‘token’ women to boards over other qualified candidates.”
The Internet has, of course, made it possible for anyone to falsely attack a company’s products, brands, leadership, and overall integrity.
Unfortunately, as found by a recent Pew Research study, 45% of Americans today get their news from a single social media platform.
False attacks “can now originate on an obscure electronic bulletin board — and be ‘trending’ on social media in a matter of hours. From there, Internet news providers, with none of the checks and filters of the mainstream media, can give an online media assault legitimacy that would have been unimaginable a generation ago.”
Boards should monitor the electronic marketplace. “Dealing with false allegations before they expand into a broader forum and threaten real harm requires a high level of vigilance,” Akin Gump says.
Also, allegations that begin to circulate online may be offensive and seem fundamentally unfair but basically true, the report stresses. “When the facts are bad, go to work on fixing the underlying problem and make no secret of what you are doing.”
Recently enacted state and local laws aim to eliminate pay differences according to gender and race. Determining a company’s vulnerability to equal pay claims and making adjustments where needed is one way to mitigate risk and create a positive public narrative, the report advises.
Aside from litigation risk and negative publicity, perceived pay inequality and lack of transparency create problems within companies, according to the report.
“Employees may feel undervalued, which can decrease productivity, stifle innovation, increase turnover, and create a toxic us-against-them culture,” the report says. “As the workforce struggles, a company’s bottom line also suffers.”
Before undertaking a pay equity analysis, a company should cloak the effort as attorney-client privileged, Akin Gump counsels. “Deliberately document the study as centered upon obtaining legal advice about vulnerability to equal pay claims — not simply to review current pay and make adjustments.” That helps avoid creating discoverable evidence that could be used against a company in future litigation.
Also, companies should seek to make pay adjustments without alerting anyone to the fact that they may have been underpaid.
“Consider a situation where a company performs a pay equity study and identifies that some women are paid, on average, 18 cents less than per dollar than men in substantially similar positions,” says the report. “If no action is taken and an Equal Pay Act lawsuit is filed, companies may be unable to avoid an automatic doubling of back pay as liquidated damages.”
In such a case, closing the pay gap might not require immediately raising the women’s pay by 18 cents. However, a short-term and long-term action plan will need to be developed that ultimately aims to close the gap through merit-pay increase cycles and adjusts starting pay for those hired or promoted, according to the report.
This has been increasingly on boards’ radar screens in recent years, and for good reason. In addition to the potential for vast reputational damage as a result of security breaches, the European Union’s General Data Protection Regulation imposes penalties of up to 4% of worldwide revenue for non-compliance.
The new California Consumer Privacy Act is not as onerous, but it does impose penalties of $2,500 per negligent violation and $7,500 per intentional violation.
“However,” the report states, “the likely game-changer is the private cause of action: Individuals now can sue for certain data breaches where companies did not have ‘reasonable security,’ with statutory damages of $100 to $750 per incident, per customer.”
In addition to staying current on cybersecurity compliance, boards should insist that companies step up the use of internal controls to stop wire fraud and seek cyber insurance to mitigate risk, Akin Gump advises.
Since today’s business environment is largely driven by technology, boards must continually harness strategic innovation to stay competitive.
Akin Gump expects that in 2020 companies will add directors with meaningful technology-related background and experience, so that the board can fully understand the risks and benefits of adopting emerging technologies and an innovation mindset.
An emergent best practice for boards involves regular updates from the company’s chief information officer or chief technology officer, the report notes.
“While many boards initially focused on the need for director technology expertise in the context of evaluating cybersecurity and data privacy risks,” Akin Gump observes, “some companies are starting to appreciate [that] tech-savvy board members [can] assist not only in protecting against risks but also in guiding innovative strategies and opportunities that positively impact the company’s business.”
Rounding out the list of top concerns for boards in 2020 are the presidential race and impeachment proceedings; international trade deals expected to launch or be negotiated this year; and environment, social, and governance (ESG) issues.