Emerging Corporate Governance Considerations for the Post-COVID-19 World
COVID-19 has upended life and the corporate world almost without exception. Pervasive business closures, credit defaults, and contract breaches have caused enormous personal anxiety and challenges for executive management. Governments too are responding with unprecedented measures—wage subsidies, credit guarantees, and stimulus programs.
Much remains uncertain, nevertheless, as we prepare for the ‘new normal’, some issues are emerging that will likely be the focus of boards of directors, governance professionals, and business leaders.
Board charters, if they don’t already, will need to cover global pandemics, including COVID-19, as one of the risks that directors should oversee. Given the on-going impact, companies will want to consider the timing of updated duties and responsibilities. While risk governance frameworks are generally updated annually, some may not want to wait and revise as soon as practicable. For instance, earlier this month The Home Depot Inc. added COVID-19 pandemic and related risks to the areas of the board's risk oversight. Boards are also likely to weigh-up obtaining coverage for pandemic risk insurance, perhaps like the prescient Wimbledon managers.
Compensation committees will have to consider whether metrics used in executive compensation plans should take into account material drops in share prices and earnings in 2020. Although these decisions will be reviewed in the 2021 proxy season, boards may provide advance disclosure of such changes. Proxy advisory firm Institutional Shareholder Services Inc., has already indicated that while it generally does not support midstream changes, it will assess amendments if an adequate explanation is provided. Alternatively, if metrics are adjusted less aggressively and the share price recovers, directors will have to evaluate if the executives stand to receive a windfall gain.
Many management teams are facing an uphill task of providing guidance regarding the impact of COVID-19 on operations, revenues, and risks. The challenge is that even the best forward-looking disclosure may need to be revised due to pandemic-related factors outside of their control. Not surprisingly, many public companies have withdrawn or revised their previous earnings guidance. To quell this uncertainty in the US, the Securities and Exchange Commission (SEC) issued a statement urging companies to provide fulsome forward-looking information, including expectations regarding operating conditions and resource needs. The SEC also asked companies to avail safe harbours and noted it would not second-guess good faith attempts at providing forward-looking information.
After the crisis, expect more focus on comprehensive succession planning policies that contemplate different scenarios, beyond a mere CEO transition, and changeover in non C-suite positions. These could include more defined temporary incapacity assessments and consequences of prophylactic requirements. Boards will need to ensure that the policies provide for multiple candidates for key roles. While many public companies have robust emergency CEO succession plans, few contemplate situations where key executives are affected simultaneously. Last month, when Altria Group Inc.’s CEO tested positive for coronavirus, his successor and other members of the leadership team had to quarantine as they had contact with him.
With record low share prices and a dismal earnings season on the horizon, a number of once formidable companies could be vulnerable to unsolicited acquisition proposals or takeover attempts. If directors and executives expect their company to be susceptible to strategic and financial threats, they should implement appropriate responses. This may include (a) strengthening relationships with principal shareholders, (b) profiling possible strategic partners and alternative transactions, (c) observing market activity in options, derivatives, and corporate debt to promptly detect stealth accumulations, and (d) adopting defensive strategies. The spectrum of possible defensive actions depends on the jurisdiction. At least in the US and Canada, a shareholder rights plan will be a crucial device to help a target’s board discharge its fiduciary duties, deter opportunistic control block acquisitions, and maximize negotiating leverage.
Environmental and Social Governance (ESG)
Many severely impacted companies will be focused on ensuring financial survival. Many more boards will have to be cognizant that the post-pandemic environment will provide fertile grounds for ESG-focused investors to press on preparedness for, and disclosure of, non-financial risks. As the former Governor of the Bank of England Mark Carney recently noted, ‘when it’s over, companies will be judged by ‘what they did during the war,’ how they treated their employees, suppliers and customers, by who shared and who hoarded’. Management may want to convey that while pandemic has shifted short-term priorities, ESG efforts are ongoing, and highlight progress where possible. They should consider approaches for issues that will be areas of sharpened interest such as dividend payments, stock buybacks, and employee treatment.
Companies, investors, and stakeholders are likely to emerge from this crisis chastened by the just-in-time, multi-step, and globally dispersed supply chains that dominate production today. Board-level oversight for supply chains, increased management engagement with critical suppliers, and nimble contingency plans for future disruptions will likely become market standard. Executives will also be encouraged to demonstrate knowledge about suppliers—not just tier 1, but also tiers 2 and 3—and to be prepared to trade elements of cost-efficiency for redundancy. Diligence reviews will be expected to cover resiliency across the board and stress-test scenarios that may have been considered too remote in the past.
Directors and executives of companies who seek government support will have to carefully manage competing public and private interests. Once the state wears the dual hats of a shareholder and an investor, conflicts of interest often arise. COVID-19 interventions are unlike previous crises where government investments were ad-hoc measures targeted at specific industries, like banking and finance. Current measures offer broad-based long-term financial support with limited prospects for near-term divestitures. Governments could re-interpret the definition of ‘strategic assets’ to add new industries (eg agri-business) and act proactively to prevent foreign takeovers. Enhanced government influence could also lead to growth in cross-border competition amongst state-supported firms that will increase trade and political frictions.
Governments across the globe are sketching plans to fund ‘shovel-ready’ infrastructure projects to rebuild economies. This desire to kick-start projects immediately will need to be weighed against long-term viability. Staffing numerous projects concurrently with boards sufficiently knowledgeable, diverse, and experienced to oversee project delivery through to completion will be challenging. Mechanisms for periodic governance reviews will have to be built in. Investments in digital infrastructure that will likely involve private sector partners will need to include clear governance standards for data collection, use, and storage.
All told, there are a plethora of COVID-19 related governance issues, some discussed here and more to come, any one of which has potentially significant ramifications for directors, executives, and their organizations. There is, though, fledgling optimism that COVID-19 will be a scare of such a magnitude that business planning and preparedness will forever afterwards be more rigorous.
Ravipal S Bains is an associate at McMillan LLP.
The views and opinions expressed in this blog are those of the author and do not necessarily reflect the official views and opinions of McMillan LLP, nor do they constitute legal advice
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