Rethinking Board Committees
It’s time to rethink the current board committee structure and reimagine the board’s committees in a stakeholder-driven way.
[This post was originally published on the Skytop Strategies Business Intelligence Hub on July 7, 2020.]
2020 has been a year that has forced the entire world to undergo changes in how we live and interact with one another. Some of those changes are logistical in nature due to the COVID-19 pandemic – working from home is the most immediate example for white-collar workers and others who rely mostly on laptops and other mobile devices to do their job. Others have been societal changes, the prime example that comes to mind is the #BlackLivesMatter movement that has been dramatically and powerfully thrust into the national dialogue by the death of George Floyd at the hands of abusive police. As these developments have unfolded, there has been a lot of talk about “rethinking” the way we have traditionally done things.
Rethinking Corporate Governance
Rethinking corporate governance had already started before the COVID-19 pandemic. The business, investor, and legal communities spent the past few years rethinking the purpose of a corporation and whether corporate boards of directors should return to the stakeholder model of corporate governance, which was the predominant school of thought during the 1940s, 50s, and 60s. This collective discussion was triggered by statements from BlackRock Chairman/CEO Larry Fink, the Business Roundtable, US Senator Elizabeth Warren, and others about whether “shareholder primacy” is best serving the long-term interests of society.
The common understanding of stakeholder governance is that, when advising and monitoring management as they fulfill their fiduciary duties, boards must deliberately consider the interests of not only their company’s shareholders, but also their company’s customers, employees, and communities. Many commentators point to the model of the Johnson & Johnson Credo, originally written in 1943, which goes so far as to say that the proper order in which companies should think of their stakeholders is customers first, employees second, communities third, and shareholders at the end.
A Board Committee for Each Stakeholder?
This renewed thinking of balancing the interests of four key stakeholders should prompt us to look at how boards accomplish this. One mechanism that is ripe for examination is the committee structure. If the board’s job is to look out for four key stakeholders, shouldn’t there be a board committee dedicated to each one?
For the past 18 years, the committee structure for public company boards has been dictated by the Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated thereunder. Those rules and regulations essentially mandated all public company boards to have the “big three” committees: audit, compensation, and nominating. Some boards also created (or already had) other specific committees for oversight of finance, risk, public affairs, technology, and sustainability, just to name a few. However, the big three committees largely address matters that directly relate to the interests of the company’s shareholders with the other three stakeholders being indirect beneficiaries. This required structure was appropriately coming out of the corporate failures of the early 2000s and fitting when maximizing shareholder value was still seen as the end-all, be-all. However, it may not be well-suited to a new era when boards are committing to place firm value in the context of a broader set of constituencies.
In an ideal world (where the current big three committees are not required), rethinking a board’s committees would start with a blank slate. The board would write down each of its annual agenda items, both those discussed by the full board and those covered in committee. It would then map each item to one or more of the four key stakeholders. Based on that exercise, the board would assign each item to one or more of four new stakeholder-focused committees and/or the full board, and it would adopt charters for each reflecting the end result. One of the many outcomes of creating committees this way would look like this:
Customers Committee: Focus on sales of products and services, go-to-market strategy, customer satisfaction, product safety, R&D, and innovation.
Employees Committee: Focus on the company’s overall workforce, health and benefits, compensation, labor relations, diversity and inclusion, talent development, recruitment and retention, training, employee engagement, and corporate culture.
Communities Committee: Focus on regulation, legal, compliance, tax, government affairs, public policy, sustainability, corporate social responsibility, philanthropy, community relations, and corporate reputation.
Shareholders Committee: Focus on financial and non-financial reporting, ESG disclosure, corporate finance, M&A, capital allocation, enterprise risk management, corporate governance, board composition, investor relations, and shareholder engagement.
This is a rough conception of taking everything a board and its committees currently do and reallocating it into a new committee structure created by a different governance philosophy. Certain topics of the board agenda items would be identified to be covered at the full board level. The board could name these committees however it wants.
Boards would not be limited to these committees. If a board would be more comfortable with having a traditional audit committee to monitor accounting, financial reporting, internal and external auditing, and certain other related items, it should do that. If it feels that everything related to sales of products and services should go on the full board’s agenda, and a better use of a customer-focused committee would be a product safety, R&D, or innovation committee, then it should do that.
This process may bring into contrast certain gaps in how it treats one or more stakeholders. It would force the board to think more deliberately about what it places on the full board agenda than the current method of copying whatever was done in past years. Even if a board were to end up with the same committees it historically had, it would get there in an intentional way, and in doing so may identify stakeholder interests that deserve some more attention.
The final step would be assigning directors to serve on the new committees and appointing chairs for each. Once the board has gone through the exercise of reimagining its committees in a stakeholder-driven manner, deciding on how to staff each committee may raise interesting questions about board composition, highlighting where the board is short in certain areas of background and experience and how it may need to be refreshed and rebalanced. In short, rethinking board committees may lead to rethinking board composition.
Not Entirely Original
If rethinking and overhauling board committees sounds like a concept totally out of left field, it’s not. Boards have been creating new committees (sometimes as a result of government mandates, litigation, shareholder proposals, and other outside pressures), dissolving ones that had outlived their usefulness, and tweaking the scope of existing committees for years.
Recovering from self-inflicted wounds, a reconstituted General Electric board established a new Finance and Capital Allocation Committee at the end of 2017 to “assist in the oversight of significant M&A activity and other capital allocation decisions, such as investments (including R&D), buybacks and dividends.” The GE board dissolved that new committee less than two years later, reallocating its responsibilities to the full board and the audit committee. During the same period, the GE board also decided to phase out its legacy Technology and Industrial Risk Committee, which oversaw “technology & product risk, cybersecurity, software & innovation strategies, investments/initiatives and, R&D” and reallocate its oversight responsibilities to the full board and other committees.
Former Delaware Supreme Court Chief Justice Leo Strine recently proposed a “reconceived compensation committee” to “help make corporations more responsible employers and restore faith in American capitalism.” Chief Justice Strine and his co-author wrote that expanding the compensation committee’s perspective beyond executive compensation would make the committee think about the “company’s workforce as a whole” and “result in directors who have a better grasp on how human talent matters for the company’s business strategy and operations.”
In this way, the reconceived compensation committee will become the subset of the board most deeply engaged in all aspects of the company’s relationship with its workforce, and inefficiently ensuring that the company has a sensible plan for retaining and motivating human talent to achieve its business objectives.
This follows a slow, but existing trend. Realizing that the scope of their compensation committees was too narrowly focused on the senior-most executives, some boards have already expanded the scope to include talent development beyond the executive suite and company-wide human resources.
Last year, Chief Justice Strine proposed a slightly different version of this. He proposed that boards be required to create “workforce committees” to “address workforce issues,” including “ensur[ing] quality wages and fair worker treatment.”
These workforce committees would be focused on addressing fair gainsharing between workers and investors, the workers’ interest in training that assures continued employment, and the workers’ interest in a safe and tolerant workplace. These workforce committees would also consider whether the company uses substitute forms of labor, such as contractors, to fulfill important corporate needs and whether those contractors pay their workers fairly, provide safe working conditions, are operating in an ethical way, and are not simply being used to inflate corporate profits at the expense of continuing employment and fair compensation for direct company employees.
In 2015, Bill McNabb, then Chairman/CEO of The Vanguard Group, suggested that boards consider creating a “‘Shareholder Liaison Committee’ as one possible means to promote better and richer communication between shareholders and boards… [S]uch a committee can provide an appropriate structure for communicating with significant shareholders” (emphasis added). The board of CACI International Inc., a NYSE-listed company with FY2019 revenues of $4,986 million, actually maintains an Investor Relations Committee to “oversee management’s IR activities and IR related communications with existing, potential and former shareholders of CACI as well as members of the broader financial community.”
In January of this year, Airbnb announced:
[W]e will be establishing an official Stakeholder Committee on Airbnb’s Board of Directors… responsible for advising our Board regarding our multi-stakeholder approach and the impact of our company on our stakeholders, the steps to institutionalize this approach into our company’s governance, and the application of our corporate governance principles to shape the future of our company.
This type of committee would be well-suited to carry out the above-described exercise of making sure the board and its committees are structured to ensure the board places sufficient focus on each key stakeholder. And, it only needs to be a one-time special committee that dissolves once the work is performed because at the end of the day the real “stakeholder committee” should be the board itself.
Rethinking corporate governance should be part of the current rethinking movement. While current legal and regulatory requirements would need to be amended, it is time to rethink how boards create and delegate their advisory and oversight responsibilities to committees in a way that reflects its commitment to considering the interests of its key stakeholders: customers, employees, communities, and shareholders. Similar to the debate between the superiority of the shareholder primacy and stakeholder governance schools of thought, a reimagining of board committees and how they are structured may result in something very similar to what we have today, but it would arrive there through a more current thought process.