Through the COVID-19 pandemic, organizations have had to improvise aspects of their businesses practically overnight to ensure that operations continue to run smoothly despite stay-at-home orders and social distancing requirements. This includes how boards operate, and because of these transition efforts, virtual board meetings are no longer a futuristic idea.
With any quick shift in protocol, some important considerations might appear on the board’s radar for the first time. Here are five matters that board members may want to think about prior to their next virtual or socially distant meeting:
- Technology requirements. Every board member has a different comfort level when it comes to technology. Therefore, it is important to use a platform that is compatible with multiple computer systems. It also is important to weigh the use of video against the use of a conference call. On conference calls, there is often a delay in speech or continuous interruption from fellow board members as a result of this delay and not being privy to physical cues. While video calls do not eliminate these issues, problems generally are reduced when participants have the ability to virtually raise their hand before speaking and when fellow board members can see one another. This may help maintain a more cohesive meeting and generally inspire engagement. Plus, looking directly into the camera sends a friendly message that a director is focused on what others are saying.
- Safety and privacy restrictions. There are opportunities for bad actors to create security and privacy problems within a preferred virtual meeting platform, especially when working from home. Keep in mind that as security issues arise, many videoconferencing companies update their software with patches and fixes. It is important that directors regularly allow for software upgrades from the developer only. Do not open unexpected or unknown videoconference invitations or act on suggestions to upgrade software. As coronavirus fears and uncertainty persist, hackers will continue to use this uncertainty to try to break into computer systems for their own nefarious uses.
- State tax consequences. Holding virtual directors’ meetings involves several state and local tax issues. One is whether holding a virtual board meeting will create nexus for tax jurisdiction purposes. In some states, the presence of a director attending an in-person board meeting may create nexus, while many states expressly say this does not. If nexus is established for virtual meetings, there could be significant consequences for income and sales tax liability. Meanwhile, the Interstate Income Act of 1959, or Public Law 86- 272—the federal safe harbor prohibiting a state from imposing a net income tax on a seller’s business activity if it is limited to the solicitation of orders for sales of tangible personal property—would not apply to such meetings.
Organizations should be aware that state laws governing nexus issues are in flux as a result of the economic crisis. Some states have issued guidance on remote employment and related issues, and more states are expected to do so. Companies contemplating holding virtual board meetings should understand the nexus consequences in each of the states where their directors are located, and should be aware of the ways they might mitigate any nexus-related risks.
- State law compliance. Many states have issued executive orders or other temporary regulations to allow corporations, including those that are publicly traded, to hold virtual meetings where it was not previously permitted. To confirm compliance, it is important to check with legal counsel regarding your state’s rules. Additional protocols that may be required in a virtual board meeting could include, for example, taking attendance of the online members or having all attendees confirm that they can hear the discussion. It also is critical to understand state law with respect to recording the meeting.
- Articles and bylaws. When and how a board meets is often governed by an organization’s formation documents, articles, and bylaws. It is important to check with legal counsel regarding the required format for meetings and potentially allowable workarounds.
As companies continue to contemplate and transition to new ways of doing business, the use of virtual board meetings may become more permanent, or at least a more viable option—even in postpandemic routines.
Article originally appeared in NACD's Directorship magazine June/July 2020 issue.
