Corporate Governance — Managing Companies through Crisis

The King, the Queen & the Emperor

In January 1996, Bill Gates wrote “Content is King¹”. He went on to add – “Content is where I expect much of the real money will be made on the internet, just as it was in broadcasting.” In the grammar class, while teaching the difference between a proverb and an idiom, it was drilled in my head that ‘God is in the Detail’ is a proverb, ‘Devil is in the Details’ is an idiom. The proverb or the idiom, the importance of ‘Details’ became apparent and the both the God and the Devil moved from grammar to real-life situations. As a professional, the life taught us that the ‘Money is in the Details’. So, while ‘Content is King’, Profit became the Queen. Come COVID-19, we all learnt, understood, recognised, respected and bowed down to “Context is the Emperor”.

The cardinal principle of ‘Stakeholder at the Center’ pivoted the stakeholder to the Kings’ place. Long-term purpose of the business, together with short-term profits occupies the Queens’ position. However, the issues such as risk and resilience have emerged and will continue to be the Emperor.

The Black Elephant

The Indian companies seem to have realised that there are Black Elephants in the room today². COVID-19 is an event that has redefined all relationships—business, family or social. It has once again taught the businesses that while the unplanned catastrophic events will strike them, preparing for these unplanned catastrophic events is only just one function relating to the risk. During the pandemic, business leaders have played a pivotal role in responding to the situation. Initially, the response was varied. Once the learnings pandemic improved, the responses were prioritised around—health, hygiene, social responsibility (proximate), social responsibility (general) and thereafter came the economic realities.

While no one would have contemplated the pandemic, have the boards / business leaders now learned to plan for the catastrophic events? There is some criticism about the Directors’ failure in identifying and dealing with the catastrophic events. Responding to ‘unidentified catastrophic events’, is predominantly a ‘Risk’ function. The Boards could have done better in mitigating risks arising from the unidentified catastrophic events. It is only now, after almost three quarters under lockdown, that the boards are focusing on developing resilience through governance.

The Good and Not-So Good Leaders

During COVID-19, we experienced diametrically opposite leadership traits in India. Some of the remarkable corporate leaders acted responsibly towards the stakeholders³. The activities undertaken by the Indian companies include donating funds, providing hotel capacity as the quarantine centre, IMFL manufacturers producing alcohol-based sanitiser, opening kitchens to supply food to migrant workers, making information available at the COVID Information Resource Centre, providing free Risk Mitigation Software and Standard Operating Procedures, to name a few. Some of the very innovative leaders caused their businesses to quickly launch products, services and solutions that were complimentary to their businesses. Doing good towards society during these times also makes good business sense.

Then there are those remarkable leaders who were bogged down by the Black Elephant, its uncertainties, pecuniary consequences and simply the enormity of it all. There are also those remarkable leaders who adopted the ‘conserve-the-cash’ mantra and did not care for anything else. The second set of remarkable leaders did not act so responsibly qua their stakeholders. These leaders will now force their stakeholders to forget them or remember them for wrong reasons. The stakeholders (the clients / customers, included) will not recall the brands led by the bogged-down, not-so good leaders.

In this sense, the good and not-so-good leaders will be remarkable in their approach and will be remembered by the stakeholders for a long, long time. “What did you do during the lockdown?”, is the question that will haunt many leaders for a long time to come.

Corporate Governance in Crisis

There is enough empirical evidence to prove that good governance helps manage the companies through crisis⁴. Studies have shown that strong and experienced boards following clearly-defined protocols are better positioned to make good decisions. At a time when speed is of the essence, such as when a country is in the grips of open conflict, empowered boards and capable leaders can act quickly and decisively, sustaining the business, even in the midst of the worst.

Short-Termism

‘Short-Termism’⁵ as a noun finds place in almost all modern dictionaries. As the COVID-19 crisis has moved beyond two quarters, everyone expects that the quarterly reports for a few quarters to come will demonstrate the consequences of this pandemic. In this context, it is interesting to read extracts from the relevant reports:

Notwithstanding the conundrum regarding the ‘quarterly reporting’ (and each such quarterly report taking into consideration Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements), 2015 with respect to the COVID impact) most of the Statutory Auditors are advising, and the boards are readily accepting, a medium-term to long-term outlook supported by the weeding out of all the old questionable accounting practices, qualifications and the like. While very few rogues will try to hide things under the pretext of the pandemic, most of the sensible leaders have embarked upon ironing their accounting practices and revisiting their policies and practices amidst conversations of resetting by businesses.

Reference: The Development Committee of the International Monetary Fund, a ministerial-level forum that represents 189 member countries of the World Bank Group and the International Monetary Fund, on October 16, 2020 issued a statement after the online annual meeting.⁷ World Bank Group President David Malpass remarked that the pandemic “could lead to a lost decade characterized by weak growth, a collapse in many health and education systems, and a new round of sovereign-debt crises.”

Every discussion about the role of directors in current context is focusing on the ‘Re’ factors. Building resilience, no doubt appeared as the most prominent agenda.⁸ Use of ‘Re’ has been revisited during the pandemic. The speed with which Mother Earth repaired itself startled many scientists, leading to the formation of a firm belief that the war against climate change is not lost. The corporate leaders used ‘Re’ more often than any other prefix. Reimagine, Rethink, Reinvent, Recalibrate, Redesign, Reengineer, Restructure, Revive, Repair, Rebuild, Reset, Restore…. The Re-factor strongly led to redefining Corporate Governance and its relevancy.

In most of the companies, the divide between the board and the management blurred, and everyone was united in the face of the catastrophe. ‘Resilient Recovery’ has been the catchword that described the optimism at the Boards. It is interesting to draw a parallel with ‘Surmounting Setbacks’⁹ that was articulated by the World Bank on October 17, 2020 i.e., End Poverty Day. As the World Bank Group President, Mr. David Malpass said “Even in the midst of a once-in-a-century crisis, I have confidence that sustainable solutions will emerge, in part by embracing constructive change.” He expanded on this vision: “Working together, I believe that we can shorten the downturn and build a strong foundation for a more durable model of prosperity: one that can lift all countries and all people.”

It may not be out of place to mention ten tenets articulated by Dr. R. A. Mashelkar in the context of building resilience during crisis. This definitely is the agenda for all boards of the companies.

Board Agenda, ATRs and Impact

The once-in-a-century crisis has also catapulted hopes for once-in-a-lifetime opportunity. Sustainability solutions are already an emerging trend. During the pandemic while stock exchanges were trading, almost every other investment opportunity was absent, investors supported those companies that demonstrated responsible behavior, exhibited resilience and embraced these sustainability solutions. Whether in development of AI, moving from thermal to renewable, designing a new packaging label and evaluating entire supply chain, business ethics now play a major role in shaping the future of business.

The Triple Bottomline, Environmental Social and Corporate Governance, Corporate Sustainability, Business Responsibilities no longer remain mere buzzwords at conferences and workshops, or even simply a part of shiny financial statements and photo ops. The agenda of sustainability has now moved from the conferences and workshops in luxurious hotels to their rightful place i.e., the Board Rooms.

The boards will have to drive the agenda of sustainability, not just from the point of view of Sustainable Development Goals, Corporate Social Responsibility, or Global Reporting Initiatives but by measures such as inculcating compassion, by adopting Green Chemistry and by embracing the fundamentals of Circular Economy. The board’s agenda items now ought to include Green Chemistry, Circular Economy, Corporate Compassion and Innovation. Each of these items will now be elements to be tracked as part of the Board’s Action Taken Report. The performance of the board will now be evaluated based on its measurable impact on these parameters.

Good to Great

It is an inescapable conclusion that if the company aspires to move from being good to becoming great, the DNA of the organisation will have to be formed based on sustainability. As we know by now, if there is deformity in the DNA, there is recombinant DNA technology to solve the problem. There is no better time than now for companies to undertake the genetic reengineering of its DNA so that the organisational culture is reset correctly.

World Economic Forum’s COVID-19 Risks Outlook¹⁰ published in May, 2020 outlines that:

It almost imperative that unless the board’s agenda includes sustainability at all levels, the companies will just aspire to be the ‘best’ but not the ‘next’. Being the best is not going to be enough because the focus of the company would always be on being the best albeit ‘in-time’. Not just being ‘The Best’, but ‘The Next’, ought to be the new mantra.

Notes & References

1. https://www.craigbailey.net/content-is-king-by-bill-gates
2. The coronavirus epidemic is not the proverbial ‘elephant in the room’. It could, however, be called a ‘black elephant’ event. The environmentalist, Adam Sweidan, explained this idea to Thomas L. Friedman thus: “[It is] a cross between a ‘black swan’ — a rare, low-probability, unanticipated event with enormous ramifications — and ‘the elephant in the room’: a problem that is widely visible to everyone, yet that no one wants to address, even though we absolutely know that one day it will have vast, black-swan-like consequences.” https://corpgov.law.harvard.edu/2020/09/19/how-can-boards-prepare-for-unplanned-catastrophic-events/
3. ‘Note regarding Positive Developments in the Industry During Lockdown’—Adv Dr Girish Bakshi, July 3, 2020.
4. https://www.ifc.org/.../Strengthening_Governance_During_Crisis_Merima_Buzadzic.pdf
5. Defined as ‘a way of thinking or planning that only considers the advantages or profits you could have now, rather than the effects in the future’: https://www.oxfordlearnersdictionaries.com/definition/english/short-termism
6. https://www.cfainstitute.org/-/media/documents/article/position-paper/Short-termism-revisted.ashx
7. https://www.worldbank.org/en/news/feature/2020/10/16/laying-the-foundations-for-a-resilient-recovery
8. https://corpgov.law.harvard.edu/2020/09/19/how-can-boards-prepare-for-unplanned-catastrophic-events
9. https://live.worldbank.org/end-poverty-day-2020
10. http://www3.weforum.org/docs/WEF_COVID_19_Risks_Outlook_Special_Edition_Pages.pdf