Corporate Governance Panel Question: What are major issues/challenges boards are facing in the next year or two?

Question

What are major issues/challenges boards are facing in the next year or two? They seem to be facing numerous difficult issues including:

• Political issues, e.g. Disney and Florida; crisis in the Middle East
• Marketing issues, e.g. Budweiser marketing campaign involving a transgender influencer
• More “mundane” issues: AI, cybersecurity, lots of questions about the future of regulatory regimes, role of institutional investors on corporate boards.

Answer

1. Cybersecurity. As the frequency and complexity of cyber threats continues to grow, boards are coming under increasing pressure from regulators and litigation (such as Caremark claims) to ensure cybersecurity. Accordingly, board members need to make safeguarding their organization's digital assets and customer data a top priority. This entails consistently assessing and enhancing cybersecurity strategies, allocating resources to establish resilient systems, providing comprehensive training for employees, and ensuring adherence to data protection regulations.
2. Risk management: Cybersecurity is a sufficiently important risk to deserve its own category. But the general problem of risk management remains an important part of what boards must do. Board-level systems designed to monitor and oversee mission-critical functions play a crucial role in showcasing the board's fulfillment of its Caremark duties. This was evident last year when the Delaware Court of Chancery allowed a Caremark duty-of-oversight claim to advance against Boeing Company directors. The court's decision was based on allegations of insufficient board involvement in safety matters and the absence of a dedicated committee with direct oversight responsibilities. Nevertheless, it's worth noting that two subsequent cases, Hamrock and SolarWinds, have underscored the necessity of establishing bad faith rather than merely proving gross negligence for a Caremark claim to succeed.
3. Shareholder activism. The ongoing fluctuations in equity values, characterized by both volatility and a general decline, have brought vulnerabilities to the forefront for many companies while also opening up opportunities for activist investors. This trend is expected to continue into the coming year. What particularly piques my interest is the potential impact of the recent SEC rule mandating the use of universal proxy cards in director election proxy battles. This innovation is poised to streamline the proxy contest process, reducing the costs and efforts associated with activists nominating and seeking proxies for board member elections. Consequently, this change may shift the focus in proxy battles towards assessing the track records and skill sets of individual directors, as opposed to evaluating the overall performance of the company or board as a whole. With the introduction of universal proxy cards, shareholders will gain the ability to selectively choose individual directors from both the company's and the activist's competing slates.
4. Political risks. Boards need to pay attention both to how the corporation engages with politics and how politics affects the corporation. As to the former, activists are paying attention to issues like corporate political spending. As for the latter, the runup to the 2024 presidential election will require boards to assess possible changes in the presidency, Congress, and the membership of the SEC.