June 12, 2020

“Offboarding” to Achieve Optimal Board Composition

Rather than thinking about how to refresh the board when directors approach mandatory retirement ages or term limits, a recent opinion piece in Forbes suggests “offboarding” as an alternative method to change board composition.  Some might think “offboarding” is a nice way of saying “removal” but here’s what the author says about it:

For many reasons, it is critical for the board’s governance committee to take a closer look at what “offboarding” might achieve as a governance tool. Director offboarding is a focused board process to achieve a structured separation from certain directors without prompting controversy or ill will. It’s intended to allow the board to achieve necessary turnover more quickly and expansively than through term limits or mandatory retirement age, and more gently than through removal.

As defined by NACD and others, “offboarding” processes are grounded in a shared understanding amongst all directors of why an individual was appointed, and of the board’s expectations of performance. From the beginning of board service, directors are ideally made aware of the potential that they may be asked to leave the board before their term has formally concluded. It also involves an ongoing evaluation by the governance committee of the skillsets needed by the board, and conversations on whether individual director backgrounds continue to meet those needs.

The author attributes several factors as leading to more interest in offboarding, the first being that board composition doesn’t change all that fast and governance matters relating to how companies have responded to the Covid-19 pandemic, economic disruption and social unrest are leading to increased focus on board composition.

One effect of the Covid-19 pandemic has been increased concern with director bandwidth.  Earlier this year, State Street was the latest asset manager to update its director “overboarding” policy – here’s Sidley’s memo about that.  Maybe some directors will scale back board commitments and focus their efforts elsewhere. That’s what Reddit’s co-founder Alexis Ohanian did when he announced he was stepping down from Reddit’s board – he took things a bit further by asking the company to replace him with a black board member – and this week the company did by appointing Michael Seibel, CEO of Silicon Valley startup accelerator Y Combinator.

Aside from concerns about overboarding, the author says many companies will emerge from the pandemic with different competitive footprints and economic models. Although Reddit’s Ohanian may not start a trend and traditional board refreshment methods will certainly persist, maybe increased focus on board composition as a result of current events will lead more boards to consider offboarding as an option for bringing new ideas and perspectives to the boardroom.

Tips for Moving Forward with ESG Reporting & Disclosures

A recent Covington memo provides 7 “what to do” and “what not to do” tips for companies starting down the path of voluntary ESG reporting and disclosures.  As investor focus on ESG disclosures sharpens, if companies haven’t already done so, the memo suggests companies start charting a path forward for these disclosures.  Covington’s memo notes that despite investor interest, there’s risk courts could find voluntary ESG disclosure materially false or misleading.   The recommendations are a good source of helpful tips, here’s what it says about bringing a “securities lawyer eye” to the effort:

– Include forward-looking statement disclaimers and/or other hedging language to clarify that the standards or goals described in the ESG disclosures are not guarantees or promises, as well as the factors that could cause material deviations from these standards or goals

– Frame ESG goals in aspirational language, using words such as “seek,” “expect” or “strive” and avoid making unqualified commitments, using words such as “shall” or “will”

– Challenge comparative and qualitative statements regarding ESG performance such as “best,” “most,” “largest” or “first” and assure that the company has adequate back-up for such statements

– Define in plain English any jargon or terms that lack well-understood definitions that are associated with ESG disclosures

– Cross check the company’s SEC filings against ESG reports to avoid inconsistencies in facts or degrees of emphasis

Resource Explaining ESG Jargon

Keeping up with the latest ESG terminology is nearly impossible as a lot of jargon can be industry specific.  That’s why it’s nice to see Latham & Watkins “ESG Book of Jargon” explaining many current ESG-related terms and acronyms.  If you’re wondering what something might be referencing, check it out – it’s 151 pages and covers lots of terms and phrases.

– Lynn Jokela