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Chartered Director

Governance Perspective: Preserving cash at a time of crisis

26 May 2020

Protecting businesses has been a priority for policy makers through this pandemic. Across Government it’s been well understood that with a lack of cash, millions of firms would have been left to fail taking  countless jobs with them.

Of course in normal times, some businesses fail and  such failures are an inevitable part of  economic life. These failures allow for finite resources to be put to better use, to be reallocated to more efficient parts of the economy. However, under lockdown, demand has been artificially suppressed therefore firm failure at this point in time suggests little about the efficiency or otherwise of any particular business and any resources are unlikely to be redeployed.

Politicians and regulators have engineered a number of ways to encourage businesses to preserve cash. For the largest businesses tapping into State support via the large business loan scheme, the Government has mandated restraints on executive pay and a stop to dividends. The Bank of England has called for financial institutions under its watch to do likewise. Of course, many firms have also suspended or significantly reduced dividends without any prompting. Many boards have taken steps such as negotiating property savings, cutting investment, cancelling stock and marketing. Meanwhile, incoming changes to insolvency law will help protect firms against creditors over the course of the pandemic.

As Government policy has sought to protect businesses through generous support schemes, it is important that business leaders demonstrate prudence. Whilst some schemes such as the aforementioned large business loan scheme come with conditions other measures actually involve removing the usual guardrails including changes to insolvency. In ordinary times, laws around insolvency protect all manner of stakeholders against misconduct and give lenders confidence.

With some insolvency law provisions suspended over the course of the pandemic, Directors will have to demonstrate the highest ethical standards or else these regulatory interventions will look ill-judged in hindsight. The IoD has previously called for Code of Conduct for Directors similar to ethical codes that exist for other professions such as the medical and legal professions.

We believe that such a code would give greater confidence to our regulatory apparatus that business leaders can be trusted. Policy makers have already demonstrated a high degree of confidence in directors to do the right thing – from choosing employers as the best vehicle for delivering income support through to trusting firms to conduct their own health and safety risk assessments.

It would be wrong to say that businesses need to prove their value over this crisis – they already have. From the supermarkets that have maintained our food supply to the eateries that have pivoted to takeaway and the garment manufacturers that have turned to making PPE. However, as we begin to  emerge from lockdown, firms must continue to preserve cash and demonstrate that they will invest in creating new jobs, employing people, and keeping their customers safe.

Carum Basra is the IoD's Corporate Governance Policy Adviser 

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