A look at Akin Gump’s annual list of hot topics for the boardroom, extracted by CCBJ from the full report and edited for length and style.
1. CYBERSECURITY THREATS
Cybersecurity preparedness is essential, as the risk – and the adverse impact – of breaches continues to rise. The past year redefined the upward bounds of the megabreach, including the Yahoo!, Equifax and Uber hacks, as well as the SEC cyberattack. Boards should learn from others’ misfortunes and focus on governance, crisis management and best practices.
- Ransomware threats increased fourfold in 2017.
- The SEC has recommended companies designate a cybersecurity risk committee.
- The EU’s General Data Protection Regulation (GDPR) goes into effect in May.
- Calls for cybersecurity regulation in the U.S. have increased substantially. At least 42 states introduced more than 240 bills or resolutions related to cyber-security in 2017.
2. CORPORATE SOCIAL RESPONSIBILITY
By embracing CSR initiatives, boards can proactively identify and address legal, financial, operational and reputational risks that can increase company value to all stakeholders – investors, shareholders, employees and consumers. Such initiatives can serve as both differentiating and value-enhancing factors.
- Comprehensive CSR programs can help companies identify problems early and respond effectively.
- Companies with strong CSR practices are less likely to suffer large price declines and tend to have better three- to five-year returns on equity.
- Private equity firms often consider environmental, social and governance standards in the due diligence of potential investments.
- Embedding CSR considerations into day-to-day operational decisions has resulted in cost reductions for a number of leading corporations.
3. MANAGING FIVE GENERATIONS OF EMPLOYEES
With an unprecedented challenge of having five generations of employees in the workforce simultaneously, companies and their boards can help address intergenerational tensions – and benefit from collaboration and innovation – by better understanding employee expectations, encouraging cross-generation mentorship, and setting an example of generational diversity with respect to company leadership and members of the board.
- While older generations expect younger employees to “pay their dues,” younger employees expect to be involved in meaningful work quickly.
- Being open to a broader array of compensation options can result in greater satisfaction and performance.
- The addition of younger members in lead positions at various levels and as board members can make transitions easier.
4. CORPORATE STRATEGY
Strategic planning with a focus on acquisitions should be a high priority, as shareholders expect companies to invest in both long-term growth opportunities and short-term stock enhancement measures.
- Cross-border transactions will likely continue to be attractive options, subject to increased regulatory scrutiny in certain industries and of certain buyers.
- The year will see a continuum of strong M&A activity throughout certain domestic sectors of the U.S. economy, including infrastructure and construction.
5. BOARD COMPOSITION
With board diversity actively considered and encouraged by regulators, corporate governance groups and investors, both in the U.S. and internationally, companies should review the applicable obligations in their jurisdictions and assess their board composition, director search and nomination process, board refreshment practices and diversity policies.
- Companies should prioritize good disclosure and transparency with investors.
- Two of the main approaches governments take to promote board diversity are quotas and disclosure.
6. SHAREHOLDER ACTIVISM
Entrenched in the modern climate of corporate governance, shareholder activists have entered industries that have generally steered clear of such investors, including energy. There is an increased emphasis by prominent investors on challenging transactions, corporate strategy and traditional corporate governance concerns, such as board composition and staggered boards.
- The days of staggered boards seem to be numbered; most companies now hold annual elections for directors.
- Shareholder rights plans and takeover defenses can give the board time to analyze and respond to a hostile approach.
7. INTERNAL INVESTIGATIONS
Boards are increasingly confronted with the possibility of wrongdoing implicating the company or its employees. The decision to undertake an independent internal investigation requires careful consideration and consultation with counsel, since the board’s response will have important implications for the ultimate effects on the company.
- Outside counsel is often retained to build credibility for the independence of the investigation with third parties.
8. SEC REGULATORY RELIEF
The Trump administration and the Republican-led Congress are expected to advance reforms designed to encourage companies toward public ownership and to facilitate capital formation in both public and private markets.
- Smaller companies will likely be the greatest beneficiaries of this approach.
- Many proposals are expected to benefit large public companies by eliminating certain duplicative and nonmaterial disclosure requirements, and by addressing concerns regarding shareholder proposals.
9. SEC ENFORCEMENT
In addition to new SEC leadership, ambitious legislative proposals in Congress and further developments in insider trading law have the potential to impact SEC enforcement, although certain enforcement streams are likely to remain largely unchanged. The SEC’s own cyber breach has brought renewed focus at the agency on information security and the integrity of trading systems.
- The SEC will likely continue to focus on accounting fraud.
- Efforts to repeal Dodd-Frank have advanced.
10. TRADE & SANCTIONS
U.S. sanctions were expanded significantly last year to include complex new restrictions that target transactions with Iran, Russia, North Korea and Venezuela, among others. Additionally, an uptick in sanctions enforcement actions included a continued focus on officers and directors that approve, or engage in, proscribed activities. Boards should understand how these evolving rules apply to the business activities of their companies and management teams.
- Non-U.S. companies should consider blanket recusal policies that require U.S. directors to exclude themselves from engaging in activities that might implicate U.S. sanctions, and wall them off from meetings, discussions, decisions or other dealings related to such activities.
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Published March 2, 2018.