Reshaping Corporate Governance in the New Normal

COVID-19 continues to disrupt the way business is being conducted globally. It is critical then, that corporate leaders, to cope with these disruptions, reconsider their strategies when encountering hard decisions. It is expected that the conduct of corporate boards – their actions and inactions – will be scrutinized threadbare, in hindsight, by various stakeholders when the dust settles. In such situations, corporate boards must demonstrate compassion and conform to the highest levels of governance. The board’s conduct must reflect a balancing act between several opposing forces, arriving at a result that is beneficial for the company and satisfactory to regulators, pacifies its workmen, presents a positive image to the society and also builds shareholder value.

Here, I consider first the tough decisions boards will have to make, and second, criteria to determine whether boards are equipped to make these decisions – and if not, what’s necessary to make that happen.

Choices

Revenues vs. Safety

The immediate dilemma for decision-makers is whether to completely restart operations at the first opportunity or to wait it out until things are “safer.” The former may be very tempting, given the compelling financial implications, but more so given the uncertainty regarding the duration of the pandemic. However, operating while under the threat of COVID-19 has its own risks and potential liability – mainly concerning the health and safety of personnel. Boards will have to adopt mitigation measures, being consciously aware of the limit of the risks that can be taken. Following governmental guidance is a starting point, but boards should not hesitate to bring in more best practices if needed. Mitigation measures may be infeasible if there is already a financial crunch.

Get Leaner vs. Remain Loyal

A possible benefit arising out of the lockdowns imposed by governments is that employers have realized that it may be possible (and better in the medium term) to operate with a leaner and more agile workforce. Although not universally applicable, these benefits are more pronounced in the services industry. Therefore, in the long run, companies may have to decide whether to reduce workforce, scale back investments and become leaner as organizations or whether to return to the earlier system. This crisis has made boards re-evaluate their business philosophy and core operating principles. Whichever option one chooses, it will have costs (economic, people, reputational and operational).

Globalize vs. Localize

A globalized economy means that supply chain and markets of the world are intrinsically interconnected. The high transmission rate of COVID-19 effectively compelled every supplier to shut down operations rapidly, which led to localized chaos. Disparate government responses have had an asymmetric domino effect on supply chains and customer management in different parts of the world. For instance, certain German industries that had plans to restart their operations post lockdown were unable to do so, as their Indian suppliers were still shut down. As a result, companies having a global presence are now considering possibilities of having localized supply chains and even in-sourcing certain critical components. A lot of global companies will probably consider moving out of high-risk countries, such as China and high-risk zones, such as urban population centers.

Executive Pay vs. Workmen Pay

When the pandemic initially hit, governments advised and even mandated against the reduction of wages, waiver of employee benefits and even the termination of employment contracts. Some countries have provided meaningful economic relief to companies in order to enforce this. These relief measures are believed to be necessary to mitigate economic ruin of the vast majority of workmen on the bottom rung of the economic ladder. However, some countries were unable to put in place any measures or simply provided inadequate measures. In such situations, boards should seriously evaluate their response in a holistic manner, keeping in mind not only economic necessities and legal compliance, but also humanitarian and reputational fallout. A number of companies have announced pay cuts at the top level but continued to pay at the middle and lowers levels without any abatement for the time being. However, a prolonged period will test the resolve of the board and force them to prioritize. Any choice will come with its pros and cons – none perhaps starker than redundancies and wage cuts.

Shareholder Value vs. Social Responsibility

The age-old tussle of creating shareholder value while at the same time contributing to societal welfare is heightened in the present scenario. Issues concerning COVID-19 relief measures outside the organization, contributions to funds and realigning assembly lines to produce COVID-19 relief material demonstrate instances where the cost of corporate responsibility will add to the already burgeoning cost base. Boards will have to weigh all considerations, including what their long-term goal is, and then decide their immediate spending and cost-control measures.

Maintain Status Quo vs. Issue Revised Guidance

In many instances during this crisis, boards are faced with classic force majeure decisions. Despite well-documented SOPs on business continuity and disaster management, there is very little they can do to control this crisis. Boards rarely encounter a situation where they have negligible control. Usually, contingencies are accounted for and supported by procedures. Given that this situation stands in sharp contrast, boards will be scrutinized for their response to the crisis in terms of communication, planning and mitigation, all the while keeping to the highest standards of governance. Examples of some of the criteria for scrutiny would include whether they assessed well in advance revenue impact, impairment of assets, loan covenants and contractual defaults. Further, questions will be asked about the actions taken in the form of corrective measures such as revised guidance, provisioning, renegotiating loan terms, mitigating contractual defaults and if required, recasting the balance sheet. What will also be probed is whether they planned for different scenarios while taking inputs from industry experts on recovery trends.

Tools

A board can deflect any questions raised against its conduct during the pandemic by demonstrating that they acted with due care, skill and judgment with the information available at the time. Therein lies the catch: availability of information. While business has shifted to the virtual medium, the restriction on physical mobility and interaction has affected the quality of communication. In many places, corporate systems are still dependent on physical exchanges of information, communication, hard-copy reports and documents, and so on. That is not to say that information is not available. Most companies have some variation of an ERP tool, used to run their supply chain, inventory, sales, production, etc.  However, it may need physical interventions to give the overall picture of the health of the company. Support functions such as HR, finance, legal, audit, tax, insurance and facilities may exist on different platforms that cannot be immediately integrated. Further, companies may not have comprehensive incident management strategies to combat possible risks including cyber breaches, corporate noncompliance and audit shortcomings.

An abrupt shift to conducting business online can preclude the seamless online integration of physical processes used to record and share information. In this scenario, boards may rely on outdated or incomplete information or misread information, miss information, not ask the right questions or not spot a developing crisis within the organization. To mitigate the risks stemming from lack of or improper information, boards will have to use certain tools already at their disposal effectively and efficiently. Below are some pointers on steps that can be taken using said tools:

• Work with the assumption that you have limited or no control over the COVID-19 situation and that information flow has been disrupted. This self-awareness is the first step which will help you heighten governance standards by asking more questions than usual and verifying information from multiple sources.
• Set up a specialist cross-functional team with the specific mandate to share information between departments, divisions and verticals. Ensure that one board member is overseeing this flow of information.
• Your IT systems and network will now play a disproportionately important role in your organization. Get your IT team to stress-test the system, have a disaster recovery plan, ensure systems backup, ensure security measures are taken and train your employees to be sensitive to cyber threats.
• Get your IT head to report to a board member on a regular basis. They will be able to provide updates on whether the IT systems are withstanding increased demands, whether the ERP is performing to scale, whether there have been any cyber threats and whether the information is processed by relevant departments or verticals.
• Ensure that department heads are available in every board meeting and that they submit a cross-functional report prior to the meeting.
• Be aware of any situations that may become crises. Appoint board members to each high-risk department who can keep themselves apprised of any such situations.
• Be acutely aware that code of conduct rules (financial, HR and others) should be scrupulously followed by “approvers” and other system gatekeepers. Any exceptions due to exigencies should be approved in a board meeting.
• If operations have been restarted and the threat of infection is still present, put in place special safety measures to prevent, contain and mitigate the spread of infection. Have one or more board members monitor this with the safety officer submitting a daily report on the implementation of the safety measures.
• Engage with your workmen, suppliers and other key insiders on a regular basis, keeping them informed of your actions to monitor and mitigate risks.
• Engage with your internal auditors very closely to monitor treatment of assets and liabilities and ensure that the decisions are taken on a timely basis. This will facilitate the process of external auditing.
• Engage with your lawyers and accountants on a proactive basis in cases where you see that contracts and other assets are under the threat of impairment.
• Be aware of opportunistic raids – employees, corporate, contracts – by competitors. Identify and keep a close watch on your “crown jewels.”
• Engage with your top clients and customers on a regular basis. Have key account managers report to you on a regular basis and specifically highlight any concern areas.
• In circumstances where you are compelled to take difficult decisions, ensure that there is full legal compliance.
• Be aware of implications while taking decisions that can have consequences across jurisdictions.
• If due to reasons beyond your control, keeping the company as a going concern is not possible, act promptly so that at the very least, a controlled exit can be executed.
• If you are in the enviable position of looking at this crisis as an opportunity, this might be the time to clean house and look at restructuring with a view to emerge stronger at the end of this crisis.
• This is also a useful time to enforce fiscal and operational discipline on partners and management. Additional fund infusions and new business plans can be tied to new standards of behavior. Refocus and prioritize the (limited) resources on what is actually important (pension fund coverage vs. golf club memberships).
• If the situation is significantly restored to normality, prepare a priority matrix that you and your officers can use to decide which matter is to be dealt with first.

The recovery period post-pandemic is going to be long-lasting, and the added uncertainty of when the “post-pandemic” era will begin contributes further to the complexity of the journey ahead. The only way corporate leaders can deal with this situation is to evolve a way of doing business that is agile and in keeping with the mantra “change is the only constant,” which is more applicable than ever in the current scenario. This means that governance must evolve, and decision-making must be accurate. This is easier said than done, but there is hardly any other choice.