Nathaniel Wendling, Senior Partner and Head of Strategic Advisory of G5 Partners
Levindo Coelho Santos, Senior Partner of G5 Partners
One of the central roles of the Boards of Directors is to monitor and enhance the performance of management. This requires an in-depth understanding of the company’s activities and strategy. The coronavirus pandemic (COVID-19) has had a dramatic impact on companies through sudden and unprecedented disruptions of the business environment. In this uncertain and turbulent scenario, the role played by Boards of Directors becomes even more critical as board members are inevitably held to very high standards of responsibility.
We propose to identify and discuss some of the ways in which Boards of Directors can support management during the challenging periods imposed by the crisis. We also will make some suggestions on how to adapt to a new modus vivendi that will likely emerge after the pandemic.
The initiatives listed in this article are organized in three sections: operational, structural and strategic.
Crisis Committee. Establishing a crisis committee that reports directly to the Board of Directors may be necessary. Such committee’s main mission would be to understand the impact of the crisis on the company’s operations, strategy and financial situation.
This committee would naturally be responsible for preparing and monitoring the implementation of any emergency plan approved by the Board of Directors in response to the crisis.
During this process, the Board of Directors should maintain a direct and efficient communication channel with the crisis committee, remaining closely involved and engaged.
Health and Safety. The Board of Directors should review the existing health and safety policies and consider additional measures as necessary to ensure the well being of its employees. Such review should reflect the direct and indirect impact of the COVID-19 virus both on its employees, direct families and surrounding communities.
New measures would include the close monitoring of suspected cases and provide for immediate treatment of employees that require it. Additionally, a home office working model framework should be designed with minimal required physical presence.
To the extent that on location presence is required, such presence should be well thought out with shifts and appropriate employee protection measures.
Typically, these organizational changes require strong IT support as well as patience and time for refinement and adjustment.
Production, Supply and Logistics Chains. In order to mitigate the risk of operational disruptions, the Board of Directors should be made aware immediately of any issue as soon as they may appear.
Problems can occur anywhere in the system including for example, production and supply chain and various logistical bottlenecks may surface unexpectedly. Any area of concern should have a contingency plan in place that has been previously reviewed and approved by the Board.
Client Communication. The company should communicate with its clients in a clear and transparent way, always taking into consideration the risks that may arise from the crisis. Client relationships must be monitored and preserved.
Disruptions within the company, with its client base or with outside suppliers may affect the reputation of the company. Any decision taken need to consider the long term impact on the reputation and brand.
Typically in moments of crises and disruptions, digital and online channels can be exploited and improved significantly for the long term benefit of the company. Such opportunities should be studied, understood and executed on.
Controls, Systems and Key Professionals. The Board of Directors should assess whether the COVID-19 crisis could jeopardize the company’s internal controls and management systems. Investment requirements to expand and strengthen data processing and remote communication systems must also be determined. Additionally, the Board of Directors should request management to develop an emergency succession plan, identifying individuals who can immediately step up to replace key professionals who may be forced to be absent for health reasons.
Disclosure of Information. The Board of Directors of any publicly listed company must ensure that its management team is making appropriate public disclosures regarding the actual and expected impacts of the COVID-19 pandemic on the company’s corporate and financial conditions. Such disclosure of identified issues should always be accompanied with a disclosure of a plan to deal with the issues. The goal should not be to be unduly alarmist as this itself may create unintended negative effects such a as an example a losing clients or placing unnecessary pressure on creditor relationships.
It is a fine balance that the Board needs to strike constantly. It hinges on being appropriately informed of what is happening, being transparent without being unduly alarmist and always having a suitable contingent plan in place.
Guidance on Results. Publicly traded companies, in particular those who provide guidance to the market, should make assessments on how to measure the impacts that the crisis will bring to the company’s future results, in addition to reviewing the guidelines reported to the market prior to the crisis. Due to the increase in corporate volatility within this scenario, the Board of Directors may consider suspending guidance until the market stabilizes once again.
Insider Trading. During times of uncertainties, when companies are required to implement new measures to adjust the normal course of their businesses, volatility in share prices normally increases. The Board of Directors is responsible for closely monitoring and, if necessary, restricting all trades of company shares by insider parties, defined herein as anyone who may have access to relevant and confidential information on the impacts caused by the COVID-19 pandemic, in addition to demanding additional and specific training, blackout periods or enhancing pre-authorization procedures.
Financial health. The Board of Directors should assess, along with the company’s management, the short and long-term financial impact (including the company’s ability to meet its obligations) of the COVID-19 pandemic on the company. Within this context, the Board of Directors should consider, for example, the need and feasibility of obtaining new funding through the issue of public or private primary capital or debt, new financing lines or the sale of assets deemed non essential. The Board of Directors should also consider renegotiating payment terms of existing financing instruments and, in more drastic situations, request a judicial reorganization process.
Shareholder Relationships, Activism and Hostile Situations. The Board of Directors should monitor the company’s communication with the market, keeping a close eye on the concerns identified by relevant shareholders and monitor changes in shareholder structure.
The Board of Directors of companies with diluted capital must monitor changes made by well-capitalized and active investors, anticipating opportunistic initiatives that may not be aligned with the company’s best long term interests.
The same applies to unsolicited public offers for the purchase of company shares launched by strategic investors. In such cases, the Board of Directors should assess the impacts and benefits for the company and its shareholders arising from said offer and, if necessary, prepare to put defense mechanisms and other available plans into place.
Finally, a close monitoring of market conditions and the company’s share price may result in the decision to launch a share buyback program or even close the company’s capital.
Strategic Opportunities. The Board of Directors should discuss with the company’s management all strategic opportunities that may arise as a result of the disruptions. Monitoring the performance of competitors is critical for many reasons including to understand if there may be acquisition opportunities.
Obviously, any strategic decision such as an acquisition should always be analyzed properly by a Board with the assistance of external financial and legal advisors. In times of crisis, a additional conservative bias should apply when considering such steps.
For instance, it may be ill advised, in times of uncertainty, to consider acquisitions or other strategic initiatives that deviate materially from the core strategy of the company or result in less than prudent increase in leverage.
The New Normal. Finally, any Board of Directors will need to think through carefully which changes that have taken place as a result of the crisis are clearly short term in nature and which are more long term and may reflect a permanent shift of paradigm.
Such changes may happen across the board and be macro or micro in nature. Macro issues such as political, fiscal and monetary policy, exchange rates, interest rates and macro credit availability are critical.
These broader macro issues, combined with health policy issues may clearly affect client behavior for more than short term. Not only, thought should be given to new workplace realities, permanent changes to supply chain, logistics and production and most importantly the inevitable acceleration of shift to a digital world. Boards should encourage management, while to focus on the immediate impact of the crisis, also to be proactive about the long term permanent changes and be prepared for them.
In the current scenario, we encourage boards to revisit article 153 of the Brazilian Corporations Law, which addresses the responsibilities of a company’s management team – noting that the same principles also applies to the Board of Directors. The article states that: “a company’s management must employ, in the exercise of their functions, the caution and diligence that every active and honest individual would employ in the management of his/her own business”. Paragraph 1 of the same article also states: “management is not responsible for the unlawful acts of other executives, unless he/she is condescending, neglects to gain awareness of such acts or if, gaining awareness, fails to act to prevent its occurrence”.
The topics discussed briefly in this article are meant to provide an overview of a framework for Boards to think through on how to act to deal with unprecedented short term and long term challenges imposed by this health crisis. We encourage board members to engage in discussions with your close legal and financial advisors on these topics for further guidance.