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Understanding the Legalities: Balancing Short-term Fire-fighting With Longer-term Recovery

23 Jun 2020
Understanding the Legalities: Balancing Short-term Fire-fighting With Longer-term Recovery

We are in uncharted territory.

At such a pivotal and disruptive time, it is important to remember the moral and legal need for good corporate governance and strategy.

The Covid-19 crisis is posing huge challenges for directors of all kinds of organisations. There is a myriad of daily struggles as boards balance short-term fire-fighting to ensure immediate survival with a longer-term recovery and growth strategy.

Boards of Directors have the ultimate legal responsibility for an organisation. Government and regulatory bodies have taken several steps to help businesses sustain corporate governance through the crisis, but the Companies Act still defines a number of basic legal duties for company directors.

The most prominent amongst these is section 172: that Directors should promote the best interests of the company, and that the best interests of the company should be conceived as synonymous with the interests of shareholders. How shareholders will be affected by decision-making will therefore be a key reference point during the crisis – at least for the directors of private companies.

However, section 172 also requires Directors to go beyond a mere focus on the short-term financial performance. It asks them to pay regard to the implications of decisions for employees, suppliers and other stakeholders. It also states that they should consider the impact on the company’s reputation and long-term prospects. These are not empty demands – the Board may well have to evidence their consideration at a later date, both in corporate reporting and if directors were ever required to legally justify specific decisions by shareholders or regulators.

Hence, the appropriate practical mindset for Boards during this crisis is to direct the organisation in a way that works for all of the important stakeholders. It should also go without saying that during a health crisis like the Covid-19 epidemic, the Board should ensure that it sets the right tone at the top.  Communications and policies should be in place to protect employee wellbeing and act responsibly to slow the spread of the virus. It has a duty to both the company and to society as a whole to closely monitor the guidance and requirements of government and the authorities, and ensure that they are fully complied with at all levels of the organisation.

Here at IoD Wales, we understand that Directors are facing unprecedented challenges. We are here to support you with the resources you need to help you continue to lead your organisations through this difficult time to ensure long-term success and business continuity.

Robert Lloyd Griffiths OBE, National Director IoD Wales

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