The corporate governance of Coronavirus What boards should consider

The Covid-19 crisis poses huge challenges for the Boards of all kinds of organisations. In some cases, Boards may feel overwhelmed by the speed of events. In others, they may perceive themselves as helpless bystanders who watch on as company management seeks to deal with the myriad daily challenges that the crisis is bringing forth.

This article offers some thoughts for Board members to guide them in their deliberations. Despite the inevitable focus on short-term fire-fighting, it is hoped that Boards will maintain a sense of perspective regarding the longer-term purpose and values of their organisation which will enable them to rise above the need to ensure immediate survival.

General issues for Boards

Let’s start with the basics. What are Boards of Directors actually there to do? They ultimately exist to take legal responsibility for the organisation. The Board hires a management team to run the organisation on a day-to-day basis on their behalf. But at a time of existential crisis, the Board should not forget that it is ultimately responsible. Without getting in the way of management, it may therefore feel that it needs to take a more involved role than in normal circumstances – it is no good holding management to account on a retrospective basis after the organisation has ceased to exist!

The Companies Act 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. In some extreme circumstances, drastic action may be required to protect shareholders despite the impact on other actors, e.g. in the case of making redundancies. But in most cases, the need to maintain the loyalty and motivation of employees, suppliers, customers and local communities will be a crucial consideration for the Board if both the short and long term prospects of the enterprise are to be sustained.

However, such a perspective changes significantly if an organisation can no longer continue as a going concern. If insolvency becomes an unavoidable prospect – and the organisation is no longer able to pay its bills – the Board is required by law to place the interests of creditors at the top of its list of priorities. In such difficult circumstances, the Board members will need to seek expert external advice from an accountant or financial adviser, and consider if the enterprise should continue trading or alternatively be placed into some kind of insolvency procedure, e.g. administration or liquidation.

As they approach this endpoint, the Board should also think very carefully about the appropriateness of accepting new sources of credit or customer orders, even if this might enable them to maintain employment levels for a while longer. What might seem to be the socially responsible thing to do in the current crisis environment may create personal legal and financial problems for individual directors in the longer-term.

The take-up of government-backed loans and guarantees is therefore something that should be evaluated carefully by directors and their advisors, especially if the continuation of trading will ultimately work to the detriment of existing creditors.

Specific issues for Boards

In all but the smallest firms, a company’s management will bear the day-to-day burden of managing the response to the pandemic. The board’s role is nonetheless crucial. The Board is the body with ultimate legal responsibility for the organisation – consequently, it needs to monitor management’s actions, assessing whether management is taking appropriate steps and providing additional guidance and direction where necessary. It also needs to demonstrate accountability to stakeholders – not least governments and the wider concerned public.

In particular, non-executive board members can potentially offer a more neutral and objective perspective on board decision-making than may be possible for management. The latter will be immersed in solving the daily emerging problems. In contrast, NEDs can keep in mind the organisation’s ultimate purpose, its values and the likely impact of decisions on a broad range of stakeholders. These are key qualities in the midst of a crisis.

In order to do this, the Board needs to remain well-informed of developments within the organisation – as well as being attuned to the rapidly changing external situation.

Some of the key issues which Boards will need to oversee and monitor include the following:

Health and Safety

It goes 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.

Financial Impact and cash flow. This is a crucial activity for any Board as it will determine the survival or otherwise of the organisation. The Board should regularly review with management the near-term and longer-term financial impact of the pandemic. Management assumptions underlying any revenue or cash projections should be fully understood and interrogated. Alternative financing arrangements should be explored on an ongoing basis along with ways of restructuring current debt obligations.

Risk Oversight

The Board will oversee management’s efforts to identify, prioritize and manage the principal risks to business operations posed by Covid-19. In such a crisis situation, the Board will almost certainly need more regular updates from management between regularly scheduled board meetings. Depending on the nature of the risk impact, there may be key new roles for one or more board sub-committees. These may be newly formed committees which are specifically targeted on the pandemic or existing committees, like the audit or risk committees. The board’s consideration of, and decisions regarding, Covid-19-related matters should be recorded and justified in meeting minutes.

Business Continuity

The Board should determine if business continuity plans are in place, and if they are still appropriate. These may well relate to:

• Employee disruption. As more employees begin working remotely or are unable to work due to disruptions caused by the pandemic, the Board needs to assess what minimum staffing levels are and what remote work technology will be required to maintain operations.
• Supply chain and production disruption. The risks associated with a disruption in the supply chain need to be assessed. Are there alternative sources of supply? What are the risks that the company will have difficulty in fulfilling its contractual obligations? What are the relevant provisions in customer contracts (e.g., force majeure, events of default, etc) to determine if legal compensation could be available?

(Read the IoD’s factsheet on business continuity planning here.)

Key Person Risks and succession plans

The Board should consider if a succession plan is in place that identifies a person who can step in immediately as interim CEO in the event the CEO contracts Covid-19. Similar plans should exist for other key managers.

The Board’s functioning

The Board should consider if it is appropriately organised to provide guidance and oversight as the threat expands. Are board members able to offer the necessary availability and time commitment as the crisis intensifies? The Board may well decide to replace in-person meetings with conference calls to help limit the threat of transmission.

Communications

The board should oversee the company’s communication strategy. Clear communication will allow the company to communicate internally and externally in a calm and thoughtful manner, which will help build confidence with stakeholders.

Key Person Risks and succession plans

The Board should consider if a succession plan is in place that identifies a person who can step in immediately as interim CEO in the event the CEO contracts Covid-19. Similar plans should exist for other key managers.

The Board’s functioning

The Board should consider if it is appropriately organised to provide guidance and oversight as the threat expands. Are board members able to offer the necessary availability and time commitment as the crisis intensifies? The Board may well decide to replace in-person meetings with conference calls to help limit the threat of transmission.

Communications

The board should oversee the company’s communication strategy. Clear communication will allow the company to communicate internally and externally in a calm and thoughtful manner, which will help build confidence with stakeholders.

Reporting and disclosure

The Boards of publicly-traded companies in particular, but also other kinds of organisations, must consider whether they are making sufficient public disclosures about the actual and expected impacts of Covid-19 on their business and financial condition. The FCA has recently confirmed the importance of complying with the requirements of the Disclosure and Transparency Regime for listed companies.

Remuneration

The Board may need to consider if incentive or bonus plans need to be revised or suspended in light of the circumstances. They should also consider if appropriate behaviours are being encouraged by existing pay schemes. Ideally, remuneration policy during a crisis should encourage everyone to pull together in a highly cooperative manner.

Annual Shareholder Meeting

Given the need to maintain social distancing and avoid gatherings, the Board will need to consider if the AGM can go ahead.  Should it be postponed or – if allowed by the articles of association – can it be conducted as a virtual-only shareholders meeting or a hybrid meeting (that permits both in-person and online attendance)? Virtual AGMs are permitted by UK company law, however in practice very few companies have allowed for the possibility in their constitutional frameworks.

A final comment for Boards relates to company-shareholder relations. Recent declines in share prices may have made some publicly-traded companies significantly more vulnerable to hostile demands from activist funds and corporate raiders. Although there is nothing wrong with viewing a crisis as a time of opportunity as well as a moment of danger, this is not the time for such an adversarial approach to company-shareholder relationships. Investors, companies and other stakeholders will need to work together in a constructive way in order to navigate through the current crisis.

Roger Barker, Head of Corporate Governance

Roger previously served as the IoD’s Director of Corporate Governance and Professional Standards between 2008 and 2016. He is a UK Member of the European Economic and Social Committee (the EU advisory body), Honorary Associate at the Centre for Ethics and Law at University College London and a visiting lecturer at Saïd Business School, Oxford, and Cass Business School, London.

Roger is the holder of a doctorate from Oxford University and the author of numerous books and articles on corporate governance and board effectiveness, including: ‘Corporate Governance and Investment Management: The Promises and Limitations of the New Financial Economy’ (Edward Elgar, 2017), ‘The Effective Board: Building Individual and Board Success’ (Kogan Page, 2010), and ‘Corporate Governance, Competition, and Political Parties: Explaining Corporate Governance Change in Europe’ (Oxford University Press, 2010). A former investment banker, Dr. Barker spent almost 15 years in a variety of equity research and senior management roles at UBS and Bank Vontobel, both in the UK and Switzerland