Revisiting Boardroom Priorities During COVID-19 Crisis
Dr. Rajashri Chatterjee & Dr. Debdas Rakshit
The authors are faculty at International Management Institute Kolkata and The University of Burdwan, West Bengal respectively. They can be reached at debdas_rakshit@yahoo.co.in and eboard@icai.in.
“As the COVID-19 pandemic sweeps the world at large, the corporates are facing unprecedented challenges from every aspect with severe disruptions brought in by the crisis in all domains viz. finance, marketing, human resources, technology and the like. Almost all industrial sectors are bearing the brunt due to massive collapse in business activity. The Board of Directors is the key constituent of the governance framework of any company. It plays a pivotal role in keeping the functioning of business on track. This role encompasses various responsibilities which are extremely challenging at all especially in these tough times of ongoing pandemic crisis. Faced by the unanticipated crisis, the companies are experiencing a paradigm shift in the way of doing business. Business-as-usual is not plausible at present and also in near future. Given these uncertainties, the article predominantly tries to revisit the Boardroom priorities in terms of the strategies and activities undertaken or that needs to be undertaken during the crisis. At the final stage, it also attempts to briefly touch upon certain major transitory relaxations provided by the regulatory authorities in India in the domain of corporate governance to deal with the significant challenges posed by the pandemic. Read on…”
Introduction
The world has been shaken suddenly with the COVID-19 pandemic for which no one was prepared for. The quandary brought in by the contagion calls for redefining our fundamental understanding of business, livelihood, survival and progress. As India and the rest of the world are earnestly trying to batter the virus with no one with the knowledge of how long the struggle will continue, all businesses irrespective of their strength and stature are suffering serious downturn. There is an urgent need to look at how the corporates plan to manage and carry on their activities at present. Hence, this article tries to concentrate on the priorities of the Board of Directors in configuring business strategies to take forward a firm’s business as effectively as possible through this turbulent time. In this endeavour it tries to shed light on various aspects of the corporate governance framework with a focus on the Board’s roles and priorities during the pandemic.
The Ministry of Corporate Affairs highlights the key roles of the Board of Directors (BOD) as exercising strategic oversight over the operations of the company, complying with the legal framework, ensuring the veracity of financial reporting as well the reporting systems to all its stakeholders, measuring the performance of managers and rewarding them accordingly. Amidst the current COVID-19 crisis as the world is experiencing unprecedented and unanticipated testing times the directors’ role call for a reconsideration as there is a shift in the priorities.
“The Ministry of Corporate Affairs highlights the key roles of the Board of Directors (BOD) as exercising strategic oversight over the operations of the company, complying with the legal framework, ensuring the veracity of financial reporting as well the reporting systems to all its stakeholders, measuring the performance of managers and rewarding them accordingly.”
The market is extremely volatile and unstable at present due to the uncertainty posed by the contagion. There is even a huge threat to the endurance of several companies. In this challenging scenario especially for a country like India which was already going through a rough patch prior to the pandemic in terms of declining GDP, immense pressure has come up on the company leadership team as maintaining business-as-usual does not appear to be plausible or easy amidst stringent government interventions in the form of prolonged lockdown. Daily receipt of information on operational activities and financial impact thereof appears to be extremely important for the directors keeping in view the plans that need to be implemented with immediate effect.
The monitoring role of top executives like the Managing Directors, the CEOs, the CFOs, in all industrial sectors are fraught with the concerns with respect to keeping financials under control. Tracking cashflows generated from the business operations is also of utmost importance. The pandemic happened in the last quarter of the financial year 2019-20. During this time the companies are busy observing the past performance and drawing the annual financial statements at the same time being involved in the budgeting process for the next financial year. The Board of a company is armed with members with diverse perspectives, knowledge and expertise. As the corporates face an unprecedented uncertainty, their diverse perspectives can assist in combating the challenges posed. Revisiting the purview of the responsibilities on a continuous basis, developing a culture of trust, brainstorming collectively to come up with judicious decisions and recommendations to handle the present circumstances and estimate future performance are indispensable today.
Role of the Senior Leadership Team of the Company
The Board of the company assumes a very important role during any crisis and certainly in the backdrop of a pandemic like COVID-19. The management of the day to day affairs of the company continues to be the responsibility of the management team. In times of crisis, the Executive Directors of the Board including the CEO and CFO assume higher responsibility of managing the company and often the Board gives them more powers to ensure they do not face hindrances while taking decisions as time and urgency of decision making are critical. The Board especially the Chairman of the company has to work very closely with the CEO and CFO to support the management in dealing with the crisis.
The CEO and CFO of the company take the role of crisis managers in any crisis and the COVID-19 pandemic is no different. In these unprecedented times, where managing the company as a going concern is so critical, it is up to the CFO to take the lead in developing scenarios and preparing cash contingency plans on a war footing. The global best practices in crisis management in such situation are as follows:
Board Meetings
It is also important to set the right balance of the frequency of the board meetings at this juncture as the meetings should be efficient and decision focused as time is of the essence for the management. The mode in which the meetings are being convened during the pandemic also needs serious attention in terms of whether online discourse is actually productive. Videoconference or teleconference carried on with directors dispersed at various places may not always lead to desired or essential decisions or outcomes because of lack of face-to-face interaction.
Thus, there is a need to strategise how to make the meetings more effective, more engaging, keeping in view the perilous time the organisation is going through. A provision to record the discussions held during each meeting to circulate to all especially the absentees is also imperative at this moment. Seeking views from each board member on every aspect may lead to important remedies to a concern. Here, the extent of being conversant with technology also matters. If majority of the board members in a firm are tech-savvy, are well-conversant of the technological advancements, the firm is able to harness the advantages offered by modern technological platforms efficaciously. This is expected to assist the company to move ahead of the peers that are less technologically conversant.
“If majority of the board members in a firm are tech-savvy, are well-conversant of the technological advancements, the firm is able to harness the advantages offered by modern technological platforms efficaciously.”
Remote Working & Cybersecurity Governance
Remote working is the ideal way to conduct business during the pandemic. As it emerges as the well-accepted norm across industrial sectors, supervision of data/information security and privacy is extremely crucial. Cyber security concerns attract enormous attention amidst the mayhem. A Technology Committee of the Board may be helpful at this stage from the point of view of exercising oversight on proper handling and dissemination of data, data security and other related concerns.
While for certain sectors like IT, work from home is common and has been found to increase efficiencies at times, for most of the other industrial sectors like manufacturing, banking etc. this is essentially difficult. Again, if we consider the banks, they deal with people’s money and critical information. The Indian banks mostly lack necessary infrastructure for working on a virtual mode. If that becomes a norm for the sector, enormous investment will be needed to put the necessary infrastructure and cybersecurity in place which is not possible amidst a crisis. Hence the Board needs to take key decisions based on various dilemma on how to handle the operations.
From the perspective of external audit, which play a significant role in ensuring the accuracy of financial reporting, the auditors may not be expected now to visit companies to certify. Data and information, confidential or otherwise, therefore are expected to be sent online. A competent Technology Committee is thus of utmost importance in ensuring data privacy and security. Artificial Intelligence, if prudently employed as an effective companion without the risk of job losses, may be helpful in prompt decision making and processing of large volumes of varied datasets during these trying times when the businesses are compelled to pursue different and unusual modes of operations.
Crisis Management Sub-committee
One of the global best practices on governance is the creation of a subcommittee of the Board comprising the Chairman, one independent director who can devote substantial time on the company and has risk management or crisis management expertise along with the CEO and the CFO.
This subcommittee on crisis management has empowered delegation from the main board and meets at frequent intervals and helps the management in taking material decisions for example, reviewing capex decisions to decide on go-no go on approved capex, reviewing the business continuity plans and IT readiness, level of operations during the crisis, liquidity and balance support decisions to illustrate a few. The subcommittee also reviews the scenario planning work undertaken by the management and advises the management on contingency planning and stress test for solvency.
Integrity at Place, Remuneration and Human Resource Functions
Pay cuts are taking place in every sector as the pandemic has led to a global recession. Some companies have even put in place leave without pay as of now. Hence, at this crucial juncture the BOD should also take care that management does not manipulate information to safeguard the legitimacy of the company and avoid massive reduction in their compensation package. Thus, the BOD needs to be extremely well versed and careful about the actions taken by one and all. Transparency and effective communication of accurate information will help the stakeholders to empathize as well.
Remuneration Committee & Employee Well-Being
With pay cuts taking place across the globe the role of the remuneration committee of the board calls for a relook at this moment. The remuneration committee needs to now focus on the wellbeing of the people as one of its top priorities. If there is pay cut, it should be handled in a manner that the morale of the management and other employees should not be hurt in any way. The social dimension of the business cannot be overlooked even in this severe crisis. The committee is expected to play a pivotal role in striking a balance between declining performance and retaining employees and employee morale.
Again, high job losses are also estimated worldwide due to the pandemic. Instead of laying off people or bringing forth substantial pay cuts, a company may choose to consider to operate at reduced profit or breakeven in the current scenario. The Boards of companies may consider cutting capex, incentives and other discretionary expenses. Companies in India have already started revisiting their capex programmes as reported by The Times of India on April 25, 2020. However, every industrial sector is unique in its own terms and are impacted differently. So, a firm’s governance framework is actually in the right position to consider the pros and cons of such endeavours. All these initiatives should be undertaken prudently with proper disclosures in the financial and other reports so that the external stakeholders’ sentiments are not hurt at the same time.
At times when the economy is flourishing and has many opportunities to offer, it becomes a challenge for companies to hire best talents in the domain or to retain talents. But the present grim situation has placed the corporates in deep trouble with drastically declining revenues. Thus, employees are confronting severe threat pertaining to losing their jobs as well as dearth of employment opportunities in home and abroad. They now want the companies to retain them as every family is facing enormous health, financial and psychological risk. The senior leadership should consider this factor with compassion at this juncture.
Effective communication is even more important now. All managers or senior personnel need to be provided with ongoing updates which may call for a change in the way the employees and the company operate.
How to get the maximum benefit from the services of managerial personnel and other employees in the new format of conducting business also calls for attention by the Board. New training and working modes and schedules need to be discussed by the members of the board for effective deployment. It is also noteworthy here that some businesses (viz. online media and entertainment, e-learning, healthcare, medical equipment, digital payment, financial technology, online shopping etc.) are witnessing increase in demand and new job opportunities amidst the pandemic. Nevertheless, the senior leadership and the management team in all industrial sectors are now focused on keeping the employees optimistic and engaged. Recruitment, training, upskilling etc. are all thought of now from a different perspective with a focus on leveraging technology in the best possible way, focus on effective distant working.
Risk Committee & Corporate Social Responsibility (CSR)
Risk Committee Responsibilities
The risk committee of the board now is expected to play an increasingly important role in monitoring the identification of significant disruptions and potential threats to businesses as well as the risk management policies and practices undertaken by the firm. The committee’s role may be redefined keeping in view that certain unanticipated risks or disruptions faced at present may re-emerge later as well.
Corporate Social Responsibility Committee (Section 135)
In India, Section 135(5) of the Companies Act 2013 specifies that the Board of every eligible firm shall ensure that the firm spends, in every financial year, at least 2 per cent of the average net profits made during the three immediately preceding financial years in pursuance of its Corporate Social Responsibility (CSR) policy. The government in March 2020 specified that spending CSR funds for COVID related activities shall qualify as CSR expenditure. Contributions to the PM-CARES fund would be also considered a CSR spending.
The Boards of highly profitable firms may now consider increasing their CSR spending much above the current prescribed norm to benefit the society at large amidst the pandemic. There may an amendment in the provision stating that any such increased spending (i.e. above the prescribed norm) by a company for COVID-19 related activities may be noted at present, and set-off by decreasing the contribution in future if the companies then need to retain the profit for other purposes. The focus of the CSR programmes should be on lives and livelihood and raise the bar on corporate citizenship.
Other Responsible Business Practices
It is absolutely essential for the Board to monitor that the company considers responsible business practices during crisis and engages in meaningful discourse with all stakeholders. For instance, contractual obligations may be deferred if required in consultation with the creditors but not denied.
Relaxations Offered in Corporate Governance Domain in India (MCA & SEBI)
In the backdrop of the discourse held, this article now tries to present a glimpse of the current developments in the corporate governance milieu in India. Several temporary relaxations have been notified by the regulatory authorities like the Ministry of Corporate Affairs (MCA) and Securities and Exchange Board of India (SEBI) to address the challenges faced by the corporates amidst the pandemic. The Boards of the companies are able to decide on availing such relaxations to steer their companies in the best possible way and for the benefit of all in the midst of the unprecedented crisis:
“Innovation, overhaul and technological upgrading on a continuous basis to combat the disruptions faced are again the priorities now.”