A Biden Administration can be expected to have a notable impact on corporate governance, both through specific proposals and by how its policies influence state legislation, “best practices” formulation and board conduct.
During the long presidential campaign, progressive candidates floated several proposals with significant potential impact on corporate governance, including the Accountable Capitalism Act, the Ending Too Big to Jail Act and the Corporate Executive Accountability Act. But in the absence of a “Blue Wave” remaking the composition of Congress, the legislative appetite for such aggressive legislation would appear quite slim. That does not mean, however, that some of the related themes won’t find their way into Administration proposals, especially as it seeks to accommodate the progressives at some level.
For example, it is fair to anticipate proposals that establish basic goals (if not baseline requirements) for diversity, gender equality and worker representation in board composition. More significantly, the Biden Administration can be expected to emphasize the concept of “underrepresented communities” in the context of positions of authority—as has already been demonstrated in the composition of the COVID-19 task force and his transition agency review teams.
At this time it seems unlikely that the new Administration will propose a Federal version of California’s mandate of under-represented communities on certain boards. However, that may change depending upon the fate of the new Nasdaq proposal that would require boards to include at least one woman and one director who self-identifies as an underrepresented minority (or publicly explain why they have not satisfied this requirement.) This is especially notable given Nasdaq’s recommendation to the SEC to make diversity disclosure a rule for all companies, as The New York Times has reported.
For those reasons, attentive board nominating committees should consider expanding their perspectives of diverse candidates to include underrepresented groups.
In addition, progressive interest in issues such as corporate responsibility; worker support; “just wage” and “dignified retirement”, and executive pay equity may prompt increased engagement of the board’s audit and compliance, workforce culture, human capital and executive compensation committees, respectively. These are themes which were promoted in the Democratic platform and in the fall campaign, and have resurfaced in the transition process.
Indeed, President Elect Biden recently pledged that labor unions would have “increased power” in his administration. Furthermore, the announced nominees for his economic team appear to prioritize issues of income equality and worker empowerment.
This orientation may make the incoming Administration more sympathetic to European-style proposals for worker representation on the board. However, compensation committees are unlikely to be forced to re-examine compensation structures in response to new executive pay surcharge laws mirroring those adopted in Portland and San Francisco.
Along the same lines, a Biden Administration is likely to be supportive of corporate social responsibility concepts, and other manifestations of what it means to be a “values-driven company”. These initiatives could be subtle at first, such as policies that incentivize boards to more meaningfully leverage their company’s brand in support of their corporate values. Over time this could conceivably evolve into more rigorous expectations that companies pursue a purpose of “creating a general public benefit”. As several observers recently noted, “the bar for corporate conscience could soon get a whole lot higher”.
Of particular note on the corporate social responsibility issue is the early efforts of both the U.S. Chamber of Commerce and the Business Roundtable to acknowledge the legitimacy of the election process and to speak out in support of the President-Elect’s COVID-19 initiatives.
Boards should similarly monitor the extent to which the new Administration responds to the efforts of the recently announced “working group” of United States Senators Elizabeth Warren, Tom Carper, Tammy Baldwin and Mark Warner to develop legislative proposals and conduct oversight focused on fundamentally reforming corporate governance. The stated goal of the working group is to address, through governance changes, income and social justice inequality as corporate profits have surged over the last 30 years.
But perhaps the most immediate, if indirect, governance impact will arise by the force of example, not by law—and that is changed expectations of age as it relates to corporate leadership roles; e.g. board membership and CEO service. As is well known, President-Elect Biden will be, at 78, the oldest President ever to take office. Both he, and his 74 year old predecessor, just completed a grueling three month campaign sprint that would have taxed candidates half their age. The voting public was exposed to the vigor, energy and capabilities of two truly senior citizens.
Corporate governance trends over the last ten years have sought to balance legitimate benefits of director experience with needed focus on matters of director turnover, age diversity and retirement requirements. While leading governance principles have declined to offer any related “best practices”, the average age of corporate directors has slowly moved downward towards the low-60s. Data from the National Association of Corporate Directors shows that the average age of new public company directors is 57; of the independent board chair is 65 and of the lead director is 67.9.
The image of a 78 year old President-Elect performing competently on a highly public stage may prompt board governance committees–and sitting directors approaching retirement mandates—to revisit the wisdom of age-based tenure limitations. Yet as fair as this may be, it also presents an equally important governance challenge. To the extent board composition selections become more generous with respect to seniority of age, the existing tenure of older directors may lengthen. This may lead to reduced board turnover levels which, in turn, would limit the membership opportunities for diverse candidates.
Betting on the policy orientation of a new Administration is rarely a safe play, given the many factors that could impact its direction. But planning for the potential of a particular orientation is often the smart play. In this instance, corporate boards have the advantage of clear policy markers from positions offered throughout the campaign and the transition process as to how the Biden Administration may impact corporate governance, whether directly or indirectly. These markers may project proposed legislation or at least revisions to recognized statements of governance principles. They may also influence direct action by corporate boards acting on their own initiative.
No one can predict the future. But these Biden policy markers should not go unnoticed by corporate boards. Potential pressures on the role, responsibility and composition of corporate governance should begin to receive more serious attention from corporate leadership. Contingency planning in this regard will help provide corporate boards with greater flexibility in terms of time and options should the new Administration make, or provide the impetus for, meaningful change in governance law and principles.
While it is impossible to predict exactly where we will end up, the prospects for some change and challenges for corporations and their boards are clearly in sight.
Michael Peregrine is partner at McDermott Will & Emery LLP, and Charles Elson is professor of corporate governance at the University of Delaware Alfred Lerner College of Business and Economics.