April 17, 2020

Board Oversight of Covid-19 Response & the Business Judgment Rule

Last fall, John blogged about “stakeholder governance” and the business judgment rule and noted that in Delaware, the business judgment rule provides protection for directors who conclude in good faith that considering the interests of other stakeholders may be helpful in maximizing long-term shareholder value.  A recent memo from Wachtell Lipton says boards will need to understand Covid-19 related risks not only to the company but also to its various stakeholders.  The memo also serves as a good reminder that despite all of the challenges from Covid-19, boards should fulfill their oversight responsibility as best they can and know the business judgment rule will be applied to board decisions.

The memo discusses director oversight along with management’s role in handling the day-to-day operations, including concerns relating to external obligations, including debt and regulatory requirements, liquidity, compensation and strategic threats and opportunities.  Here’s an excerpt:

The decisions facing companies at this time are terribly difficult and painful. It will be crucial for the board and the management team to maintain an atmosphere of respect and shared concern in order to promote effective decision-making in this period of great stress. The board should be careful to resist any temptation to usurp the role of management in running the company’s day-to-day business and addressing the challenges resulting from the COVID-19 pandemic. Corporate America finds itself now in uncharted territory, and the ramifications of the crisis and the nationwide response are unknowable factors. While there may be substantial second-guessing once the COVID-19 crisis is past, directors should take comfort that the business judgment rule applies to board decisions regardless of how they appear in hindsight. The board is called to fulfill its oversight role to the best of its ability. Directors who act on an informed basis, in good faith, and in the honest belief that their decisions are in the company’s best interests will continue to have the protection of the business judgment rule.

Rulemaking Petition Seeks to Allow Electronic Signatures Under Reg S-T

In what could be a big step forward for the SEC, a rulemaking petition from Wilson Sonsini, Fenwick & West and Cooley asks the SEC to amend rules under Reg S-T that would permit companies to obtain electronic signatures for documents filed with the SEC.  The rulemaking petition acknowledges the Staff’s recent statement providing flexibility regarding manual signatures during the current crisis and then encourages the SEC to go further.

In this day and age, electronic signatures seem to be more the norm and routing manual signatures to hold in a dusty, over-crowded file cabinet somewhere seems somewhat archaic – this change would be a nice improvement for many.  Here’s an excerpt from the petition:

We acknowledge the Staff Statement: Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (March 24, 2020) (the “Staff Statement”) and appreciate the added flexibility it provides regarding manual signatures in the current extraordinary environment.  We believe, however, and many of our clients have also informed us, that obtaining and retaining manual signatures in compliance with the Staff Statement remains a significant logistical burden.  We and many of our clients believe the Staff Statement could be of greater effectiveness to registrants, with no compromise to the integrity of the document signing process, if registrants were permitted to use existing, proven electronic signature processes with respect to filing documents with the Commission.

Improvements in electronic signature software technology make it possible to confirm (with at least equal confidence to the collection of manual signatures) who has signed a document and when it was signed (and, indeed, far better accuracy as to the timing of execution), and make recordkeeping and storage of such signatures seamless and secure.

More Women on Boards Helps Ensure Consumer Safety

It’s been well documented and we’ve blogged about studies showing how increased board gender diversity may lead to better ESG and business performance.  A recent abstract describes an academic study that looked at the influence female directors had on product recall decisions.  The study found that as boards add female directors, product recall decisions change.  The abstract says as boards add female directors, “firms make faster recall decisions for the most serious defects that are high in severity and dangerous for customers, highlighting the increased stakeholder responsiveness from adding female directors.”

This blog from Lehigh University provides further discussion of the study.  Some basic stats cited in the blog include:

Compared to firms with all-male boards, firms with female directors announced high-severity product recalls 28 days sooner

The number of women on boards also impacted high-severity recall outcomes – only boards that had at least 2 female directors improved timeliness of severe product recalls and when there were 3, recall decisions moved along even more quickly

For low severity recalls – where executives have greater discretion, boards with female directors announced 120% more recalls compared to firms with no women directors

Lynn Jokela