Don't expect anything to clear up anytime soon.
The COVID-19 pandemic created the need for many boards to meet weekly, if not daily, and engage with management in a more hands-on way.
But there has always been a governance best practice to have “noses in, fingers out.” In other words, boards should advise management but should not do management's job for them.
Once the pandemic is over, will directors be able to pull their fingers out? And should they?
Pat McGurn, head of strategic research & analysis and special counsel for Institutional Shareholder Services, says he thinks this isn't only a 2020 issue, but one that's been building over time.
“I think when it comes to investors' views of boards of directors, the old paradigm of noses in and fingers out has gotten significantly fuzzier in recent years,” he says. “And that predated the pandemic. But the pandemic has really pushed it even further out of line, given the expectations of investors. Today it's ears, eyes and noses all in and fingers out mostly, but not entirely, with issues of risk, reputation and resiliency.”
Charisse R. Lillie, a director of Penn Mutual Life Insurance Company, PECO and Independence Health Group, Inc., says Caremark claims that can bring personal liability to directors are another reason boards are leaning in and asking for more information around risk. However, she says, directors need to “police themselves” when it comes to crossing the line.
“We have had situations on my boards where there has been some concern about the board getting too close to the fuzzy line, but it hasn't been around COVID,” Lillie says. “And in each of those instances, I've really been impressed with how management has been willing to say, ‘We think we are giving you the amount of information you need,' but really to say, ‘back off' — in a nice way.”
Lillie adds that the board and management both have a responsibility to “speak truth to power” in their own relationships. That communication was enhanced during the crises of 2020 as robust management reports were circulated to the board farther in advance of meetings so directors could digest the material and didn't have to have it read to them. Real discussion had the chance to take root in meetings.
These insightful discussions will need to continue as the board is being asked, particularly by investors, to examine new issues of human capital; employee health and safety; gender, racial and ethnic diversity; climate change and cybersecurity.
“I guess my advice would be to embrace the fuzzy line between board and management as a new normal,” McGurn says. “I don't think that we're going back to the way that things were before.”