Corporate governance in the post-pandemic world

August 2021 | EXPERT BRIEFING | BOARDROOM INTELLIGENCE

financierworldwide.com

The COVID-19 pandemic began at a point during which the importance of corporate governance had already been increasing. The crisis has, in many cases, accelerated the trend of integrating environmental, social and governance (ESG) factors into decision making by bringing into focus both the role of business in confronting wider societal issues and the need for strong corporate governance.

The term ‘corporate governance’ suggests legal and financial constructs, including topics such as board structure, dividends, executive remuneration, and financing and tax strategy. However, as the COVID-19 crisis rapidly exposed significant risks to the most vulnerable sections of society, and the disproportionate effect of the pandemic on minorities and those with lower incomes has been brought into sharp focus, it is becoming increasingly difficult to separate these issues from ‘social’ factors such as employee relations, working conditions, diversity and interactions with the community.

Many boards adeptly adjusted to governance during the crisis, and continued to improve their approach to corporate governance even while concentrating on the immediate governance issues involved with keeping their businesses operational during a global pandemic. Boards are now focusing on the road ahead and contemplating what their industry will look like, and how corporate governance will be used to underpin their recovery. While management and the executive team will be battling in the short term, the board needs to retain a clear focus on the longer-term consequences of decisions and help management to adapt and develop strategies to allow the business to thrive after the crisis abates. There may be particularly difficult decisions to be made regarding job losses and restructuring considering ongoing uncertainty.

The emerging corporate governance environment is characterised by an increasingly complex set of pressures and demands from various stakeholder groups, increased expectations of engagement with societal and environmental factors, coupled with uncertainty about the future. These factors are complicating board decision making and challenging the traditional models of governance that have guided boards until now.

The move online

One of the more visible aspects of the pandemic has been the rapid acceleration of the move toward online life. Trends such as agile working, e-commerce, digitalisation and automation have taken a significant leap forward as a result of the crisis. This is likely to be the new reality to which businesses must continue to adapt, and will have implications for corporate governance, including data security, data privacy and supply chain management.

Dividends

Pre-pandemic, decisions around the payment of dividends were relatively straightforward. Boards would choose an amount based on the company’s earnings for the financial year while considering dividend policy, the company’s past practice and perhaps shareholder expectations. During the crisis, the decision-making process has become more complex. Where a company has considered paying any dividend at all, it has become a matter of balancing many competing considerations, such as pressure from the government on certain sectors to reduce or cancel dividend payments, the optics of returning cash to shareholders when the company is making job cuts or furloughing staff, the effect on the company’s financial reputation of reducing or cancelling dividend payments, the company’s cash position and strategic plans, caution in the face of ongoing uncertainty and the expectations of shareholders and their reliance on dividend income.

Looking to the future, the COVID-19 crisis may affect how some businesses consider paying out dividends. Some sectors could see this as an opportunity to rebase their companies’ dividend policies entirely. Many companies will aim to strengthen their balance sheets, reducing debt and increasing cash, and reducing dividends while they achieve this.

Executive pay

As part of the focus on the long-term success of the company, executive pay is under greater scrutiny and the focus is on alignment to company performance. In the context of furloughing employees, reduced working hours, job losses and salary cuts, or even where a company cancels dividend payments, boards will need to consider how this should be reflected in their approach to executive pay.

Balancing the needs of stakeholders

Companies have been working hard to keep their shareholders informed as the economic landscape changes. Companies should ensure they cover all major shareholder groups in their shareholder engagement activities. When facing financial difficulties, boards must also be mindful of the potential need to weigh creditors’ interests in their decision making.

For many businesses, the pandemic has presented unprecedented challenges for their employees in terms of health, wellbeing and financial security. Decisions taken will have long-lasting effects on the workforce, and many decisions will be extremely hard. Effective communication channels to and from employees will be key to making decisions in a way that ensures businesses enter the post-pandemic world with a workforce that can rise to the challenge.

Board composition

A board’s role is to provide strategic guidance and oversight of decisions made within the business. Its directors must provide the appropriate skills to address a company’s business needs. The renewed focus on inequalities during the pandemic has further illuminated the importance of diversity of experience and perspective of board members. The spotlight has recently been on increasing the numbers of women directors on boards, and positive changes have been observed where this has been achieved. Increasing the representation of other underrepresented groups should have a similar effect.

Nurturing key business relationships

As much as clear information about a company’s plans is important for its shareholders and employees, it is also important for those with whom the company has key business relationships. Open communication will, in turn, develop trust, including keeping suppliers and customers informed as to supply expectations and payments.

Impact on society and the environment

Businesses are rightly paying much more attention to the communities in which they operate, and directors should also bear in mind heightened consumer and shareholder focus on environmental issues. These will be key considerations when making decisions relating to operations such as technology, working practices, travel, real estate and supply chain management.

Victoria Rodley is counsel at Brown Rudnick LLP. She can be contacted on +44 (0)20 7851 6163 or by email: vrodley@brownrudnick.com.

Victoria Rodley

Brown Rudnick LLP