Board oversight during the COVID-19 pandemic: A checklist for directors
The global COVID-19 pandemic and its rapid evolution has placed enormous pressure on organizations as they seek to adapt to the situation and communicate their response. It is crucial that boards and management collaborate to find the best way forward for the organization.
Management has the principal role in navigating this storm, by taking steps to safeguard the organization’s people and resources, executing on a crisis response plan and addressing the organization’s day-to-day needs. The board is responsible for overseeing management’s work in these areas and monitoring its progress. One of the greatest governance challenges for both management and board is appreciating and respecting their respective responsibilities during a crisis. In order to assist boards in doing so, we offer this 12-step checklist for directors, as well as potential questions for boards to ask.
1. Focus on the top priority: health and safety
The health and safety of employees and their families, customers, suppliers and the community in which they live and work must be the first priority of the organization. Directors need to monitor management’s efforts to support containment of COVID-19 and satisfy themselves that planning and execution of those plans is sufficient. This topic should be on the agenda of every board meeting, and the fact that this is a board priority should be emphasized and communicated internally within the organization as well as outside to other stakeholders.
2. Stay informed
Directors need to be vigilant in understanding the “facts on the ground” on the pandemic’s evolving impact, both in the broader social, economic and political environment as well in the context of the business specifically. In order to respond effectively to changing circumstances, directors need to be equipped with all relevant information. Management can assist through regular updates and reporting to the board on new developments. And directors should track reports on the effects of the pandemic in other jurisdictions and share knowledge from the own experience and the experiences of others.
3. Assess and reassess financial resources
The COVID-19 pandemic is having a profound impact on business operations. Travel has halted, many small businesses are unable to operate and customers have curtailed spending. Even essential businesses face much higher operating expenses as they strive to maintain a safe environment for their employees and customers. As the situation continues, organizational survival will depend on the financial resources they are able to access to support their continuing operations and their ability to operate in a post-pandemic world. The rate of change during the current crisis has been faster than most expected. Conversely, the recovery may be much slower than hoped.
4. Review crisis response plans
The COVID-19 pandemic is a crisis. The organization will need to take swift and deliberate action in response to changing circumstances and the need to protect the long-term viability of the organization. The organization’s crisis response plan should:
- highlight the responsibilities and contact details for key team members, both internal and external
- address responsibility for communications, including a media spokesperson and leadership internally for employee communications
- require careful prior review of public statements about the organization’s decisions to minimize the risk that they may be misconstrued
- require consideration of the potential impact on affected stakeholder groups, including contact information for communicating with key stakeholders
- include a business resumption plan to get things back on track as quickly and efficiently as possible.
The board should review and understand the crisis management plan and any changes made in light of the COVID-19 pandemic and satisfy itself that the appropriate persons have been identified and have the ability and judgment to address the crisis in a manner that balances the competing needs of preserving corporate reputation and minimizing legal liabilities.
The board also needs to engage in a meaningful discussion with management regarding vulnerabilities that may not have been fully considered by management in preparing the crisis response plan and identifying and managing the principal risks of the organization.
5. Oversee and assess management’s assessment of risks and its plans to manage them
The board should review with management the principal risks to the organization and assess and monitor management’s efforts to identify, prioritize and manage them. During the pandemic, key risk areas include:
- Supply chain risk – We live in an interconnected world, with fast transportation and even faster communications, resulting in supply chains that are geographically dispersed and long. The closing of borders and forced lockdowns of regions across the globe have tested these arrangements and exposed the frailty of the network. The board needs to know if the organization has mapped its key suppliers and their underlying suppliers through all the links in the chain, and whether alternatives have been identified to continue to support operations.
- Technology risks – Social distancing and the need for isolation has accelerated the adoption of technology to permit remote access, often at the expense of norms for rigorous assessment and mitigation of the risk inherent in any such move, and has increased our dependency on third-party service providers. The board needs to understand where critical data is held or accessed through third-party services and whether they are adequately protected against cyber breach or governmental interference. This sudden transformation is a perfect opportunity for those looking to exploit weaknesses in security practices, including laxity by employees working from home and using personal devices to access core IT systems.
- Regulatory/legal – The rules are changing, often on a daily basis, and those changes can have substantial long-term impacts. Governments have exercised broad emergency powers with a view to enforcing social distancing and addressing the needs of afflicted individuals, including power to force closing of businesses and repurpose assets to address urgent needs. Regulators are gradually re-examining and adjusting their requirements. Although changes can be implemented quickly, any redress for any harm caused will come slowly, if at all.
- Cash flow – With very few exceptions, revenue generation has fallen (in some cases to zero) as operations are reduced or shut down, affecting retail operations, landlords and business support services. For those still operating, expenses needed to protect the workforce and conduct safe operations will increase. It will be necessary to prioritize those operations likely to generate higher positive cash flows sooner and defer investments and reduce expenses.
- Internal controls – Existing control systems were not designed for as rapid a transformation to remote operations as businesses have been experiencing. It will be more challenging to maintain a control environment with appropriate accountability.
- Human capital – There is a heightened risk that key employees may become incapacitated, perhaps for an extended period of time or at the same time, which puts extreme pressure on succession planning for key roles. Facilities may be at risk of closing if a significant proportion of the workforce is afflicted or unwilling or unable to go to work. Employees will be concerned about loss of employment and salary reductions. The impact of the decline of stock prices on the value of employee holdings of company stock and long-term incentives will reduce incentives and increase retention risk and performance measures used for setting short-term and long-term incentive compensation will need to be adjusted.
- Business continuity/contingency risk – Existing business continuity plans need to be periodically reassessed and adapted in light of the speed at which change is occurring.
6. Assess management’s communications strategy
An effective communication program with an organization’s shareholders, employees, customers and regulators and the communities in which it operates can help build and maintain trust as well as the organization’s reputation and credibility. In the current crisis, maintaining honest, thoughtful and clear communications can reinforce those attributes and provide the organization with the space it needs to deal with the evolving situation. In contrast, one of the fastest ways to lose trust is to overpromise and underdeliver by providing assurances on matters outside the organization’s control or that the organization subsequently is unwilling or unable to satisfy. The board needs to be comfortable that management has a plan for communicating its response to the COVID-19 pandemic in a fair, balanced and timely manner.
7. Oversee management’s handling of the crisis
Board members want to help the organization, especially in a time of crisis. But having satisfied itself as to management’s current plan and capabilities for handling the COVID-19 pandemic, it is important that the board gets out of management’s way and lets management handle the day-to-day issues which arise during the crisis.
Where the board can add value is by being a resource to management and providing an opportunity for sober second thought by:
- considering and asking probing questions regarding management’s plans;
- considering the long-term implications of decisions that are being made in the heat of the moment;
- helping management find the right balance for communications;
- assessing and advising management on its handling of the crisis; and
- helping management prepare for the eventual transition back to the new reality
8. Help safeguard the organization’s values and culture
The board plays an important role as steward of the organization’s culture and the values that the organization seeks to instill in every employee. In the rush of day-to-day decision-making as management reacts to each new development, management may need to be reminded by the board periodically that “we cannot lose sight of who we are.” A crisis tests an organization’s culture. It can be an excuse for making risky or short-term decisions that can damage the long-term prospects of the business. But maintaining a focus on integrity, accountability and transparency can preserve the organization’s culture and ensure that its reputation remains intact when the current crisis is over.
9. Consider opportunities
The COVID-19 pandemic may afford some opportunities for businesses operating in the health care industry and those which support them. Facilities and employees may be repurposed to meet some of the urgent needs of healthcare providers and the community during the pandemic. The sudden drop in stock market prices has not affected everyone equally, and there may be new investment or acquisition opportunities that would be value-enhancing. Some technology-based companies are facing unprecedented demand as a result of the accelerated move to telecommuting, online ordering and increased use of technology precipitated by the pandemic.
10. Assess the risk of opportunistic behaviour
The board should not assume that the current economic dislocation will lead to a pause in shareholder activism or other opportunistic behaviour once the immediate crisis subsides. In addition to assessing management’s communications strategy, the board should confirm whether appropriate steps are being taken to monitor trading patterns in their organization’s securities (including the size of short positions and market options) and to ensure they remain aware of significant investors given the considerable turnover in most stocks in the recent period of volatility. Boards should also consider whether to adopt additional protections, such as adopting a shareholder rights plan (to preventing “creeping” bids) and/or advance notice provisions for nominating directors.
11. Keep a long-term focus
The COVID-19 pandemic will eventually end and the extreme measures currently being taken to mitigate its impact will cease. But the changes it has precipitated will linger and some will become permanent. The move to technology, an increased focus on human health, reduced globalization, and stronger domestic supply chains are just some of the changes that are expected. The board needs to consider how to best position the organization for success in the brave new world to come. Crucial to realizing on that vision is the need to ensure that decisions made to address the short-term needs of the organization do not come at the expense of the organization’s relationships with its employees, partners and customers and that the goodwill and reputation of the business is preserved.
12. Engage in a “Lessons Learned” exercise once the dust settles
The adage “never let a good crisis go to waste” should lead directors as well as managers to engage in a review of how the organization handled itself, including the roles played by each of its constituents. While there is often a tendency to want to simply wipe one’s brow and move onto transitioning back to normalcy, there is much that can be gained in identifying what went right, what went wrong and how to better prepare the organization for the next crisis.
How does COVID-19 impact your business? Stay informed with our COVID-19 Digest.