Corporate Governance

2020_Corporate Governance and Executive Compensation

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Shearman & Sterling LLP Governance Amid Crisis – How 2020 Changed the Boardroom | 11 related to the broader workforce in terms of layoffs and furloughs, as well health and safety issues. For many companies, the executive teams performed exceptionally in the face of unprecedented challenges presented by the COVID-19 pandemic, which should be recognized, but the COVID-19 pandemic's impact to workers across the country should be considered as compensation decisions are evaluated. Tricky questions are sure to arise, such as whether grants should be increased to offset lower current values, or how to compensate engaged employees are key to the company's success and the creation of shareholder value. Satisfied and loyal customers will continue to drive the company's business and increase shareholder value. Companies that ignore the communities in which they operate rarely prosper. In this respect, the Business Roundtable may have put into words what many successful companies have been doing all along. Reconciling stakeholder governance with the shareholder primacy requirement embedded in corporate law, and the board's determination that it is ultimately acting in the best interests of shareholders when considering the interests of broader constituencies and communicating that effectively is becoming an important task for boards of U.S. companies. As an interesting case in point, five Getting out in front of 2020 executive compensation disclosure will be an important challenge given the existing focus on income inequality and the impact of the COVID-19 pandemic on company performance and on workers. Early development of a consistent and cogent message around executive pay will be essential, including clarity on what steps were taken during the crisis in terms of salary cuts, pay restoration and how executive compensation actions were made in light of decisions While stakeholder governance may provide boards with more investor support for taking a long-term view and doing the right thing by their employees and communities, it also presents challenges in balancing the competing interests of those stakeholders and ensuring that the board's actions are consistent with its fiduciary duties and ultimately will lead to creating long-term shareholder value. Unlike in many European jurisdictions, for most U.S. public companies, shareholder primacy continues to be a legal requirement for a corporate director as a fiduciary. That does not mean that a director should not or cannot take interests of other stakeholders into account. Highly motivated, well-trained and at a company that has negative returns but outperformed its peer group. Compensation committees will need to be thoughtful about how they approach pay that may seem higher than strictly dictated by financial performance. Recognition of strong executive leadership and decisive action can clearly be taken into account, but other factors will need to be considered, and coherent and specific messaging will be essential. shareholder proposals were brought in the 2020 season at financial services companies who were signatories to the Business Roundtable statement requesting a report on changes to governance documents in light of the statement. Companies should be engaging in a holistic review of their businesses, including their interactions with key stakeholders, to ensure consistency with this new sense of corporate purpose. This includes consideration of external activities and relationships with broader social implications that can no longer be separated from a company's core business activities. Public and employee perceptions have become key risks as they can have an immediate and significant business impact. Executive Compensation Practical Implications of Stakeholder Governance Continued on next page

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