With so much focus on the impact and changes brought by the coronavirus pandemic, it is important that boards remain aware of the more “routine” developments impacting the banking industry. Below are some of the recent trends and developments we have seen in our practice and client base.
ESG’s Growing Importance
The dominant trend in corporate governance has been adherence to environmental, social and governance (ESG) principles. While loosely defined and measured, ESG generally focuses on a company’s environmental commitments and leadership on social issues with customers, communities, employees and vendors. There’s a growing desire to invest in companies that abide by these principles, with assets under management in ESG-oriented funds surpassing $1 trillion for the first time in June 2020. And customers, employees and other stakeholders have begun demanding more ESG leadership and incorporation of ESG credentials into their choices for service providers.
Some larger bank holding companies have recently unveiled their commitments to environmental and social matters, including becoming carbon neutral in their operations. In response, regional and community banks may feel investor pressure to focus more on ESG.
Developing an understanding of your organization’s existing practices, resources and exposure to ESG-related issues is a critical first step. Successfully navigating what can be delicate territory may require new strategies and approaches. Many smaller companies are proactively highlighting their actions in corporate communications.
Governance leaders, elected officials and regulators have implemented several policies aimed at improving boardroom diversity. Illinois, California, Massachusetts and Pennsylvania have all enacted board diversity legislation. Under a recently proposed policy, proxy advisory firm Institutional Shareholder Services would recommend that shareholders vote against the chair of a company’s nominating committee if the company has not identified any racial or ethnically-diverse board members. If adopted, the policy will become effective for annual meetings in 2022.
Regardless of your organization’s size, it is important that your board understands the developing trends and investor expectations for gender, racial and ethnic diversity.
Fiduciary Duty Litigation
Shareholder litigation has continued defining the scope of directors’ fiduciary duties over the past year.
Effective Recusals. When the board is called to act upon a decision where a director has a conflict of interest, most directors understand that they should disclose the conflict and recuse themselves from acting on the transaction to avoid potential violations of the duty of loyalty. However, recusal from voting may not be sufficient, according to a recent Delaware case.
In the case, titled In re Coty Inc. Stockholder Litigation, stockholders alleged the director defendants breached their fiduciary duties in connection with a transaction involving a controlling stockholder, among other things. Several director defendants had ties to the controlling stockholder and recused themselves from the board’s vote to authorize the transaction, but were present at the board meeting, discussed the transaction and expressed their support prior to recusing themselves. The court dismissed the defendants’ motion to dismiss, noting that the directors did not fully abstain from the transaction and thus it could be found that they breached their fiduciary duties.
Duty to Monitor. There has been an increase in cases alleging that a board failed in its duty to monitor material risks to the company, as well as more of these cases surviving the motion to dismiss stage. Previously, it was rare to see such cases succeed, because a plaintiff generally needs to show that directors failed to monitor the risks at issue and/or knowingly failed to address red flags. These are fact-specific cases, but the plaintiffs in them used board documentation to support their claims. It is important that the board’s minutes accurately address the actions taken by the board in its oversight and monitoring function.
Trends in Bank Litigation
There were several trends in bank litigation in 2020. The year saw class actions regarding overdraft fees that challenged multiple overdraft or return fees on a single item; Paycheck Protection Program-related suits brought by borrowers and prospective borrowers, including the eligibility for loans, forgiveness of loans, agent fees and default on existing debt; employee and customer suits alleging unsafe conditions at bank facilities with respect to Covid-19; and continued ADA litigation regarding bank websites and mobile banking applications. It is important that the board continues to oversee management in its mitigation of risks involved in these possible lawsuits.