We always hope that our judiciary branch is balanced and doesn’t decide to legislate from the bench. We really want our courts to implement the law, not make the law. The recent decision out the Delaware Court of Chancery gives me pause.
In the recent court case a class action suit was brought on behalf of shareholders claiming that TeslaTSLA -3.4% CEO, Elon Musk, was awarded too large a compensation package. The allegation said the board was not independent. There were allegations of too close a collegial set of relationships with other areas where board members were investing in other businesses together. This is nothing new in Silicon Valley. In fact, this is quite standard. The most important and critical fact is that 80% of the shareholders ratified Musk’s comp package. Further, his comp package is 100% performance driven – compensation is only earned where the company’s performance hits financial thresholds that rewards all shareholders.
When the comp package was given the market cap of Tesla was $57.44B. Current market cap is $596.47 B. The case was brought 3 years ago when the market cap was $1.061 T. Clearly shareholders benefited. The shareholders approved the compensation package. The compensation was earned based on performance achieved. There is alignment of interest. It looks like an example of judicial overreach based on a judge’s perception of what is “fair” based on personal views as opposed to the law.
As we look ahead to 2024, several corporate governance trends are likely to continue evolving and will be front and center.
For corporate boards, navigating this uncertain landscape demands a keen eye on not just economic indicators but also emerging trends in the realm of corporate governance.
1. The Political Pendulum and its Economic Sway: 2024 marks a watershed moment in the United States. The presidential election poised to send impact through the economic landscape. Depending on the outcome, boards must prepare for potential shifts in regulatory priorities, trade policies, and fiscal spending. Increased government intervention in areas like climate change and social welfare could significantly impact boardroom discussions around stakeholder engagement and ESG commitments. Conversely, a more deregulatory stance could favor business interests, lower taxes and capital investment incentives. Understanding the potential outcomes and their implications for the company’s industry and markets will be crucial for boards to formulate strategic plans and mitigate risks.
2. Data Privacy Takes Center Stage: The specter of stricter data privacy regulations is no longer a distant threat but an imminent reality. Stringent laws like Europe’s General Data Protection Regulation (GDPR) are setting the global standard. The United States are expected to follow suit. This heightened emphasis on data privacy will necessitate robust data governance frameworks within companies. Transparency and accountability in data use will be paramount to avoid reputational damage and potential legal repercussions. Furthermore, the potential for increased regulation around AI algorithm drift, where AI models deviate from their intended function due to biased data or changing environments, will require boards to actively monitor and audit AI deployments to ensure fairness and prevent discriminatory outcomes. Creating a data policy is a good idea for management and board review.
3. The Great Reshuffling: From Globalization to Reshoring: The tides of globalization are receding, revealing a new emphasis on regionalization and reshoring. The disruption of global supply chains witnessed in recent years, coupled with rising geopolitical tensions, is prompting companies to reconsider their outsourcing strategies. Boards can expect increased pressure to move operations closer to home or diversify suppliers across more friendly regions. This “Nearshoring” or “Homeshoring” trend will necessitate careful evaluation of production costs, talent pools, and logistical hurdles. Companies successfully navigating this shift will not only mitigate supply chain risks but also potentially create new jobs and strengthen local economies. Additionally, the ongoing trade relationship with China will need to continue for most businesses. Addressing concerns over supply chain visibility and human rights issues, will demand new reporting compliance.
4. Activism in the Age of Inflation: The threat of inflation will continue in 2024. In this environment, board activism from shareholders is likely to rise. Investors will demand that boards demonstrate clear strategies for cost-cutting, efficiency improvements, and maximizing shareholder value. Pressure to right-size businesses, divest non-core assets, and optimize operations will increase. Boards must be prepared to engage with shareholders proactively, transparently explain strategic decisions, and deliver convincing evidence of their commitment to long-term value creation. If your company is performing in the lower quartiles vs. peers expect activist attention and unwanted scrutiny.
I believe these trends will shape the corporate landscape of 2024. Boards that adopt a forward-thinking approach, embrace agility, and prioritize a stakeholder-centric mindset will be best equipped to navigate the coming year ahead. By understanding the drivers of these trends, anticipating their impact, and proactively implementing sound governance practices, boards can help their management teams future-proof their companies.
As the world grapples with a multitude of economic and geopolitical challenges, corporate governance has never been more crucial. In 2023, the interplay of rising interest rates, inflation, supply chain disruptions, and global conflicts has created a complex and demanding landscape for businesses. Against this backdrop, corporate governance practices have come under increased scrutiny, with regulators, investors, and stakeholders demanding greater accountability and transparency from companies.
Before the year closes out and everyone shifts their view to 2024, I thought it would be valuable to take a backwards forensic look at some
As companies prepare to go public and draft bylaws, there is an opportunity to put in place a series of provisions that can give newly public companies significant degrees of autonomy from their shareholder base. This is a “golden window” of opportunity when companies can include specific language in their bylaws that are advantageous to the founders/management, which gives the company more maneuverability.
As election season approaches, companies must increasingly think about how they approach the social and political issues that will undoubtedly resurface.
“I think it’s very important that companies reflect on what the core of their business is,” Betsy Atkins, chair of Alphabet’s (GOOG, GOOGL) Google Cloud and board member at Wynn and GoPuff, told Yahoo Finance at the 2023 Milken Global Conference (video above). “Is it building a fantastic product, a fantastic service, or is it about trying to reshape the world? When companies decide that social and political issues are their most important thing, that’s when they get into trouble.”
Silicon Valley Bank (SVBVB +2.7%), known as the tech industries go to financial institution (and the 16th largest US bank), collapsed. This is the second-largest bank failure in US history.
More than half of US tech start-ups banked with SVB.
The collapse of the famed bank happed swiftly:
– On Wednesday March 8th SVB announced that it had sold some assets at nearly a $2 billion dollar loss.
Increasingly Directors are engaging more and more with their largest shareholders. Often, it’s about 12-15 shareholders that make up 70% of a companies’ ownership. Many of these big owners are passive investors as opposed to active ones.
Many of the passive investors are becoming increasingly detailed in their requests for information from companies’ and boards relating to oversight and disclosure.
The role of the board has expanded significantly from the 1970’s traditionally less engaged oversight model where directors provided “rubber stamping” of management recommendations. A modern board must be a competitive asset and an accelerant for the business.
Directors must not only perform oversight, but they must add a perspective that helps move the company forward.
As a new director, you may be wondering how you can quickly come up the learning curve so you can begin contributing and adding value.
Increasingly corporations are being asked to comment on social and political issues. This raises a host of questions that the company needs to purposefully think about.
There are many constituencies who are asking a company’s CEO and leadership teams to comment on a wide array of issues.
Employees, customers, and investors may or may not want insight on a company’s philosophy and stance on high visibility issues.
The social concept of a corporation really came to the forefront with the death of George Floyd as well as subsequent major issues. This triggered deep focus on DEI and forced companies to focus and ask themselves if they really understood the black American experience.
Another recent issue has been the war in Ukraine, companies were expected to take a stance by employees and other stakeholders and publicly state whether they would continue to do business with Russia.
Another hot button topic corporations have had to contend with is Roe v. Wade.
Boards have to ask themselves what the upside of opening Pandora’s box of political division by commenting on highly charged social /political issues is?
It is more important than ever to take the time to have a deep internal discussion with the CEO, leadership team and boards to create a framework and policy on when and if the company will comment. This allows for a thoughtful approach without the emotion of feeling like you must respond the moment there is a big issue in the news cycle.
When considering whether to comment on a particular topic, ask yourself:
– Is this core to your business?
– Which constituencies are most activated / impacted by this issue?
– Is this an issue that pertains to company policy, employees, customers, investors, or some material aspect of the business? Or is it an issue of personal politics?
– How divisive/polarizing is the issue?
– Is it mandatory or optional to comment?
Companies such as AmazonAMZN -1.4%, Yelp, JPMorgan, Dell have responded to Roe V. Wade by quickly expanding healthcare benefits for employees. Some companies are upgrading insurance plans to cover contraceptives and allowed for Flexible Spending Accounts to pay for reproductive health procedures.
Interestingly, according to the Conference Board, only about 10% of companies have taken a public position on this issue whereas about 51% of companies surveyed made an internal announcement. Companies need to think carefully about which issue requires an external public announcement vs an internal statement to employees.
Consider, is there more upside vs downside if your company were to comment on an issue? Create a balanced view of your different constituencies: customers, employees, investors.
Certainly, since the Business Roundtable 2018 landmark statement by the largest fortune 500 companies that they were moving from shareholder centricity to stakeholder centricity, the role of the corporation has been evolving.
However, may be wise to remember that pioneers often get the arrows in the back. Being a fast follower may be an alternative strategy to being out front. You must be mindful about what is appropriate for your company’s brand when considering whether to make a public or internal statement.
Silicon Valley companies who are often well-known names and are always in the news cycle are uniformly highly communicative on taking positions on social issues as they are deeply focused on their employee cohort who is highly energized around social issues…but keep in mind that the mandatory need to give a response for a Silicon Valley company may or may not be an appropriate reaction for your company.
There really is no clear absolute right answer but having the discussion before there is a hot button issue that arises and clarifying the parameters for when and if the company will comment in any way is important.
One of the most difficult things in this highly engaging discussion is to separate your own personal politics, preferences, and passions, from what should be a corporate policy.
When in doubt, go back to your company’s initial statement of values and remind yourself of the mission, vision, and purpose of your company.
Betsy Atkins, board member for Wynn Las Vegas and Volvo Car Group, explores prominent risks for corporate boards.
Cybersecurity is a major risk area right now for public company boards. Perhaps it’s time to look at increasing the budget for cyber and adding external services to augment internal company monitoring capabilities. Also think about rotating regular boutique cyber penetration testing to mitigate risk. Another major challenge is attracting, engaging and retaining talent in a hybrid work environment.
One of the best ways to think about company risk preparation is to have a meeting dedicated to reviewing what management identifies as their top ten risks. For example, if you were a restaurant company, your risks might include tainted food supply/food poisoning, loss of consumer credit card information, a mass shooter onsite, etc. Go through the top ten risks and ask management what their plan is for each. One of the best exercises is to ask the CEO and company spokesperson to go through social media and video practice sessions, actually recording and practicing responses to risks. Identify your social media resources, along with traditional crises management consultants.
A less obvious but really impactful risk (especially longer-term) is the threat of new, more innovative startup interlopers. Nobody wants to wake up and find our they’re Blockbuster or Borders. Purposefully request an outside-in look at new competitive entrants and what different business models or go-to-market channels are emerging. For example, although it may not be obvious now, how are you thinking about web 3.0 or the metaverse and how this could possibly affect your business directly or in some adjacent way? What if the CEO is unexpectedly ill or has a personal crisis, or there are negative events surrounding your CEO and the CEO needs to be rapidly replaced? Who is the successor? How ready is your successor?