COVID-19 has created unique and very profound challenges. During the COVID-19 pandemic, with organizations facing high-stakes, high speed decision making, the need for good governance and risk management practices has never been felt greater. Just as boards and senior executives settled into new, enhanced governance processes, their operating environments have abruptly changed with COVID-19. The COVID-19 catastrophe has not only posed an unprecedented governance challenge, it has also ushered in a period of great experimentation, a time for boards both to question old habits and imagine new possibilities – from creative approaches to maintaining effective communication in virtual boardrooms to establish new ties with external peers, from diving into operational minutiae to preparing for long-term survival, and from managing financial details to ensuring that the employees are healthy and safe.
The global perspective
In light of the fast changing environment, globally across the spectrum of industries and sectors, it is emerging that the management and boards of directors should continually review their practices to ensure that they are right and relevant for the current environment, and that they are not sowing the seeds of future conduct issues. Elements of good governance and risk management practices are critical for organizations to undertake in order to flourish post COVID-19. Organizations that get this right will flourish post COVID-19, while poor governance could prove to be fatal.
The paradigm shift
- The key highlights of the paradigm shift happening globally can best be summarized as under:-
- Boards are going virtual and managing the challenges of remote work.
- The board chair is in the spotlight.
- The lines between the board and management have blurred.
- Boards are taking the long view & putting people first.
- Sharing learning’s in real-time
- A crisis-ready board has a plan and the right people in place.
- Liquidity and capitalization considerations are being taken care of pro-actively
- Executive compensation matters are a concern.
- Take over defenses and preparedness are prominently figuring in the minds of the directors and managements.
What constitutes the good governance and risk management practices?
Both the private and public sectors are re-defining what constitutes good practice. Navigating the COVID-19 crisis requires careful consideration of a range of issues underlined in the opening sentence under these unprecedented circumstances. This article outlines several corporate governance issues for the board of directors which is charged with overseeing the short-term and long-term health of the corporation and its business prospects to consider as their companies respond to the challenges and risks posed by the COVID-19 pandemic. The balancing act for boards has suddenly become more complex as there are many significant short term impacts arising from the longer-term objectives being pursued by the board of directors and the managements. Some of the constituents of the good governance and risk management practices are listed below:-
- Maintain appropriate board and sub-committee oversight.
- Maintain an appropriate risk appetite, risk framework and metrics.
- Ensure risk information is of high quality and flows freely.
- Adopt an approach to regular, in the moment, self-assessments and review.
- Communicate clearly on purpose, values and culture.
Active steps for Corporate Governance
In light of director oversight responsibilities and as a matter of good corporate governance, some specific active steps for boards to consider in response to COVID-19 include the following:
- Enhancing the company’s existing reporting and information systems that are used by the board to provide oversight. Such a system would help ensure that the board is able to receive relevant information in a timely manner to monitor COVID-19 issues and their potential risks to and effects on the company. Once a system is implemented, a board should be active in its monitoring of significant issues so that it stays informed of material business risks and red flags resulting from the COVID-19 pandemic.
- Forming a committee. A possible tool available to a board to address its monitoring and oversight responsibilities is to create a committee that could be tasked with evaluating and, if necessary, adopting any available preventative and ameliorative measures regarding the impact of COVID-19 on the company’s operations and affairs. Timely and sufficiently detailed minutes and resolutions should document the proceedings of the committee and provide evidence of the activities conducted, matters considered and decisions made by the committee. If, after due consideration, the committee declines to adopt any measure considered, clear, contemporaneous committee records would then be used to support a showing of good faith in the committee’s efforts to evaluate such measure.
- Enhancing communications with company management. A board should consider increased and sustained open dialogue with company management on both the business risks and the workplace health and safety issues posed by COVID-19. Boards and management should review legal and regulatory developments regarding COVID-19 at both the federal and state levels, review the company’s risk-mitigation policies and protocols and adjust such protocols as necessary to conform to developing regulatory circumstances (especially if a particular regulatory scheme relates to activities that are core to the company’s operations) and meet frequently to discuss the foregoing. Boards should be clear in their instructions to management as to the board’s expectations with respect to management’s responsibility to report to the board regarding COVID-19 matters.
- Confirming the feasibility of the company’s disaster plan. The disaster plan should address matters such as employee availability, functionality of IT systems, cybersecurity, communication protocols and legal/ regulatory compliance. Due to the unique nature of COVID-19, the board, as part of its ongoing monitoring and oversight responsibilities, should continue discussing any implementation issues with management and evaluating whether any modifications to the disaster plan are necessary to deal with new issues as they arise.
- Evaluating potential disruptions to operations and business relationships. This evaluation may include ensuring that management is appropriately considering. The impact of COVID-19 on key customers, suppliers, financing sources and service providers, and review of key contracts to identify any potential issues relating to force majeure, triggers for defaults and termination rights and related contract terms. The ability of the company to access any emergency government funds or other programs initiated in the wake of the COVID-19 crisis. The adequacy of the company’s insurance coverage and whether proper steps are being taken to preserve any potential claims.
- Assessing key areas where there is additional risk and probabilities for their occurrence. While the hope is that the COVID-19 crisis will become more manageable by the third/ fourth quarter of 2020, consideration should be given to additional steps that might be required if the impact of COVID-19 is prolonged. The board should also consider the feasibility of implementing these steps under different scenarios given the possibility of fewer resources being available, increased health and safety regulations, supply chain issues, availability of financing sources and customer situations.
- Reviewing board and management succession plans. Key officers of both large and small companies have already fallen ill with COVID-19. Boards should consider implementing a detailed emergency succession plan that takes into account the unavailability of directors, officers and key managers of the company. The board should consider establishing a COVID-19 transition team that serves as the governing body to carry out necessary changes in company leadership. The transition team can help clearly define the responsibilities and roles for acting management and coordinate directors’ supervision and support of persons in acting management roles. In extreme circumstances, boards may consider adopting emergency by laws that would become operative during an emergency. Such emergency by laws can provide a list of officers or other persons designated on a list approved by the board who will be deemed directors for special meetings called pursuant to the emergency by laws.
- Retaining additional advice where needed. Due to the rapidity of developments regarding unique COVID-19 issues and the limitation of internal resources, a board should consider if the company needs additional assistance and retain outside advisors where necessary. An effort to consult with outside advisors can help demonstrate a board’s good faith effort to be and stay informed throughout the COVID-19 crisis.
- Reassessing long-term corporate strategy. Undoubtedly, the COVID-19 pandemic has brought new and unique challenges to most businesses. Focusing on the critical functions of a company certainly takes priority for a board. However, once the critical areas of need are addressed, the board may want to consider the implications for longer-term corporate strategies in light of the changing environment caused by COVID-19. These may include cultivating new alliances, developing more innovation and technology, growing through acquisitions (or disposing of non-core assets or businesses), exploring lower cost financing structures, developing new employee benefit plans and evaluating real estate needs.
The DNA of corporate governance in public and private sector are genetically poles apart. The boards of directors in public sector companies are vested with adequate powers and tools to ensure execution is in line with company policies and regulatory bodies. However, private companies run their organizations in a more of a personalized manner with literally little say to the directors. More or less, it is run like a family business with no accountability and transparency and very little space for empathy towards the welfare of the employees. Corporate governance is not the key word found in their dictionary. PSAs are purely family owned businesses and mostly comprise small and medium enterprises which fall into the same bracket and need no separate deliberation. However, Ministry of corporate affairs has promulgated a number of initiatives to curb this practice to bring in the requisite compliances, accountability and transparency. COVID-19 has hit the belly of both and has put them in a transitory mode to perform or perish.