Corporate Governance

2020_Corporate Governance and Executive Compensation

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Shearman & Sterling LLP 26 | Preparing the Board for Human Capital Management Oversight and Disclosure Preparing the Board for Human Capital Management Oversight and Disclosure Gillian Emmett Moldowan and Maxmilien R. Bradley Insights 1 See Leo E. Strine, Jr. & Kirby M. Smith, "Toward Fair Gainsharing and a Quality Workplace for Employees: How a Reconceived Compensation Committee Might Help Make Corporations More Responsible Employers and Restore Faith in American Capitalism," forthcoming in The Business Lawyer (Winter 2020-2021). 2 Modernization of Regulation S-K, Items 101, 103, and 105, SEC Release Nos. 33-10825; 34-89670 (August 26, 2020). Boards have long focused on executive hiring, leadership transition and compensation as key areas of oversight, but largely have not been tasked with direct oversight of human capital management more broadly, which has historically been viewed as an area of management responsibility. In a recent paper, former Delaware Supreme Court Chief Justice Leo Strine and co-author Kirby Smith argue that the focus of the board should expand. Strine and Smith encourage a "reconceived compensation committee" that "would focus on the company's entire workforce, not just senior management" and oversee workforce pay, benefits, safety, racial and gender equality, sexual harassment, inclusion, training and promotion. 1 In short, a board committee focused on workforce issues at large. Increased focus on human capital management, and the perspective that workforce considerations can be material to shareholders, have also influenced a separate but related change in corporate governance: mandatory human capital management disclosure by public companies. The SEC recently adopted rules that require public companies to describe, to the extent material to an understanding of the company's business taken as a whole, their human capital resources, including the number of employees and any human capital measures or objectives that the company focuses on in managing the business. 2 These changes in corporate governance in the human capital management area are motivated by developments that predate the COVID-19 pandemic. The pandemic has made them all the more germane. The impacts of the pandemic on workforces should have made clear to every company and to every board that there must be at least some aspect of enterprise risk management and long- term strategic planning that focuses on workers outside the executive group. And, clearly, that aspect of human capital management — the issues that form a component of enterprise risk management and long-term strategic planning — is a board issue. But positioning human capital management as a board issue, and expanding board focus from executive compensation to the workforce at large, will, for many boards, require significant change. The first practical step companies can take in implementing this change is the development of a robust body of year-over-year human capital data. Developing this data will allow the board to effectively oversee the aspects of human capital management that fall within its oversight and simultaneously help the company to provide meaningful human capital management disclosure to meet the requirements of the new human capital management disclosure rule.

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