Corporate governance - Vigil

Advanced preparation and optimal board personnel are key if you want to avoid a cyber crisis. We exist in an age of heightened data sensitivity, but that is the price of doing business in an increasingly globalized and digitized world. Connectedness is the reward; hyper vigilance is the price. For companies large and small, this means cybersecurity can no longer be outsourced. Instead, it must be internalized within an organization’s DNA. No corporate board wants to find itself negotiating with a hacker who holds the integrity of the company’s data in their fingertips. The only way to keep pace with increasingly sophisticated cyberattackers is to dedicate resources to cybersecurity. To accomplish this, boards must prioritize hiring of highly skilled IT employees, upskilling current employees on cybersecurity tactics and creating an internal cyber wall of defense.

(Bloomberg) -- Microsoft Corp.’s planned $69 billion purchase of computer games developer Activision Blizzard Inc. faces an in-depth probe in the UK after regulators said the deal could hamper competition. The Competition and Markets Authority said it decided to kickstart a longer review after Microsoft turned down the chance to offer remedies to address its concerns. “Microsoft informed the CMA that it would not offer such undertakings,” the regulator said in its decision. The move was expected after the CMA previously flagged concerns the deal could lead to a substantial lessening of competition in the gaming console, subscription and cloud markets. The regulator now has until March 1 to come to a final decision. 

Increased scrutiny from investors, regulators, the media, and other stakeholders is pressuring public companies to refresh their boards of directors to achieve greater diversity. Shareholders have sued at least a dozen public company boards since mid-2020, accusing them of failing to diversify. From July 2020 through June 2021, investment manager BlackRock voted against more than 1,800 directors at close to 1,000 companies for insufficient action to increase board diversity. [...] Despite increased board refreshment — the addition of new directors with an eye toward ensuring that the board has the necessary expertise and breadth of perspective — many companies still struggle to appoint directors who are women, people of color, or members of other underrepresented groups. Our interviews with board directors (see “The Research”) revealed that corporations go through the motions of refreshment but ultimately accomplish little, replacing an outgoing director with someone similar rather than with a person who has a different professional background, identity, or perspective.

We’re living in an era of unforeseen events that give rise to risks, including geographic conflicts and a “black swan” event—something so unpredictable that it’s not on anyone’s radar—a global pandemic with far-reaching economic and social consequences. While a company can’t always anticipate what might be around the corner, strong risk oversight by the board can help the company respond with more rigor and agility. The number and types of risks the board oversees continue to grow, even as their nature changes. Some become more likely as businesses are more interconnected. Some are likely to impact just a certain area of the business. Others could severely impact the entire brand.

Lawyers for conservative groups argued in federal court Monday that Nasdaq Inc.’s push to set diversity targets for listed companies amounts to an illegal racial and gender quota. Two right-leaning groups sued the Securities and Exchange Commission last year, setting up a battle over the hot-button issue of corporate diversity and how far regulators can go to foster it. The groups sued the SEC because the agency approved Nasdaq’s listing rules, acting in its capacity as the stock exchange’s regulator.

A compensation committee is the portion of a corporate or nonprofit board that selects and reviews salary and other forms of compensation. It must balance the organization’s financial realities with investor expectations and ultimately create competitive retention strategies. Compensation committee responsibilities include advising the board and strategically selecting what to include in a compensation package. What is a compensation committee? A board of directors’ compensation committee is a set of independent directors who set pay rates for senior management. But a compensation committee oversees more than just the number on a paystub. It is responsible for all the pieces that make up overall compensation, like profit sharing, bonuses, stocks, and so on. It must use these to predict and stay in line with an organization’s future goals. 

It seems almost impossible that the complex and cluttered risk landscape that public and private companies must navigate every day could get any more challenging. But the emergence of ESG (environmental, social and governance) risk has risen rapidly to become the global interconnected and all-powerful set of challenges to a company’s standing with everyone from employees to shareholders, investors, and the board. The announcement in March 2022 of new SEC guidelines1 to frame consistent guidelines for disclosures and ESG reporting is now only serving to spotlight the increasing significance of ESG factors and turn up the temperature for all executives on an all-ready white-hot risk landscape. [...] So much so that we’ve now reached a point where no company, regardless of size or public or private status, can view developing resilience to ESG risk as an optional matter or a can that can be kicked down the road. We cannot simply check the box on ESG as we consider risk management strategies: this must become a No. 1 priority.

California may soon require nearly all employers hiring in the state to begin listing pay on job postings, a move that could affect many of the biggest U.S. companies. A bill passed by the California legislature mandates that all organizations with 15 or more employees include the hourly pay or salary range on job listings in the state. It also calls for companies to disclose more information to the state on the wages of existing workers. It now heads to the desk of Gov. Gavin Newsom, a Democrat. Representatives for Mr. Newsom declined to comment.

Cybersecurity is getting increased scrutiny from boards across industries, as the threat of breaches and other online security-related issues pose significant risks. According to IT Governance, 95 security incidents around the globe compromised almost 66 million records in the first month of 2022 alone — impacting organizations across the industry spectrum, from banks and retailers to schools and hospitals. Meanwhile, geopolitical tensions have raised the specter of government-sponsored cyber incursions on private-sector companies, which may find themselves in the middle and at risk. Regulatory bodies are taking notice, recognizing the materiality of cyber risk (and the risk to investors) wanting to ensure that boards and leadership teams are giving it proper oversight. For example, a recent proposal by the Securities and Exchange Commission (SEC) would require companies to disclose their oversight of cybersecurity as well as the cybersecurity expertise of their board members, which the SEC defines as prior work in cybersecurity; certification or a degree in cybersecurity; and/or knowledge, skills or other background related to cybersecurity.

On August 25, 2022, the Securities and Exchange Commission (“SEC” or “Commission”), in a 3-to-2 vote, adopted final rules implementing the pay versus performance disclosure requirement called for under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The final rules require proxy statements or information statements that include executive compensation disclosures to include a new compensation table setting forth for each of the five most recently completed fiscal years, the “executive compensation actually paid” (as defined in the final rule) to the company’s principal executive officer (“PEO”) and the average of such amounts for the company’s other named executive officers (“NEOs”), total compensation as disclosed in the Summary Compensation Table for the PEO and the average of such amounts for the other NEOs, total shareholder return (TSR), peer group TSR, net income and a company-selected financial measure that represents the “most important financial measure” used by the company to link compensation actually paid to company performance.

The European Central Bank (ECB) is set to tilt its monetary policy strategy towards corporate bond issuers with “better climate performance.” That’s a laudable but challenging goal to implement. While simple decision rules may seem useful, we think investors need a holistic understanding of climate issues to address the causes and effects of climate change. Last month, the ECB announced an official start date of October 2022 for building climate change into its monetary policy operations. The climate policy tilt will include not only the ECB’s corporate bond-buying programs but also the bank’s disclosure policies, risk assessment and collateral framework. Under the plan, the share of assets on the Eurosystem’s balance sheet issued by companies with a better climate performance will be increased compared with that by companies with a poorer climate performance. That sounds straightforward, but there are formidable practical difficulties around this plan.