Corporate boards have important duties to perform as responses to the new coronavirus, known as COVID-19, ripple around the world, disrupting supply chains, upsetting consumer spending, and placing anybody from political leaders to whole city populations under quarantine.
“Even one case of COVID-19 in a plant results in the plant being shut down, workers not coming to work, and trucks not delivering. The entire supply chain is disrupted.” said Cecilia Locati, FCMA, CGMA, founder of Internal Control Toolbox and a governance and risk management consultant who works with multinational clients based in Europe. “Experienced boards see the danger.”
As part of their mandate to oversee good governance and risk management, a board should take a keen interest in how management is handling a crisis, according to Deloitte’s Global Center for Corporate Governance.
Quick decisions are crucial for addressing the impact, which can differ from business to business and from industry to industry. Thoughtful communication is key to keeping fearful employees and external stakeholders, such as investors, suppliers, and customers, from panicking. Crises are “unknown unknowns” that require good protocols and strong leadership.
Anybody questioning whether the global COVID-19 response warrants crisis status need only look at the erratic stock and bond markets, store shelves emptied by shoppers preparing for the worst, the glut of crude oil going unused, and increasingly stringent travel restrictions as the virus has spread from Asia to Europe to North America to Latin America within the past three months.
“The coronavirus is absolutely on top of the board agenda at the moment,” said Sarah Ghosh, FCMA, CGMA, a board adviser and former finance director at a boutique care services company in the UK.
Board leadership can protect employees, ensure the business’s financials are strong enough to ride out the crisis, and advise management to look for potential business opportunities among the challenges, Ghosh and Locati said.
To coordinate efforts, Locati suggested that boards consider establishing a crisis management committee and task it with devising strategies and initiatives to manage the crisis. Such a crisis management committee could, for example, figure out how to promote smart work in countries where employees may not have the IT infrastructure to work from home.
“It’s really about safeguarding confidence in the business,” Ghosh said. “Working with suppliers and ensuring there’s a level of continuity.”
6 actions boards can take
The National Association of Corporate Directors, a US not-for-profit member organisation for corporate board members, is advising directors to take these actions to confront the risk COVID-19 poses and boost the resilience of the businesses they oversee:
Assess the company’s exposure. To understand COVID-19’s threat to the business, board members need to dig into management’s assessment of how much the virus and efforts to contain its spread will affect the company’s supply chain, sales forecast, employee health and productivity, and key strategic initiatives. In its assessment, management should quantify the risk exposure, simulate financial and operational impacts with “what-if” scenarios, and explore alternative supply chain sourcing.
The board should track that management stays up to date on fast-changing information and adapts its response to the virus’s impact. Also, the board should check whether the crisis team has the right skillset and the right level of decision-making authority to manage the situation.
Directors may also pressure-test management’s assumptions about the financial, strategic, and operational implications of the crisis.
There should be discussions on the board level about how the business can get through the next few months financially, Ghosh said. For example, assets may need to be released to ensure liquidity, Locati said. Highly leveraged companies may need to consider renegotiating loan conditions or cutting costs.
Define crisis response roles. To ensure management can act quickly, members of the board and management must have a good understanding of their roles. Candid conversations between the board and management ensure everybody knows the parts they play.
It is management’s responsibility to develop and update a pandemic response plan and integrate it with existing crisis and business continuity plans. That may include reconsidering international travel plans, developing flexible-work or work-from-home policies for employees, conducting employee awareness training, and considering pandemic insurance coverage for impacts on, for example, property or supply chains.
It is the directors’ responsibility to have a clear, effective, and open rapport with management. Also, directors must ensure that the identification and treatment of disruptive risks is a standing agenda item on the full board or committee level.
Ensure effective crisis management reporting to the board. Board members should know what information they can expect to receive from management and how frequently. Protocols and ground rules determine what and when management reports to the board.
To help the board understand what’s going on, management should report on key indicators that represent operational impact, risk mitigation, and business recovery.
Evaluate management’s internal communication strategy. The board should advise management to develop protocols for internal communications and decision-making. These protocols should clearly and properly inform employees about the impact the COVID-19 response is having on the business.
The proper internal communication strategy addresses employees’ fear and prevents it from paralysing the workforce and reducing productivity.
Address the challenge of effectively communicating with external stakeholders. To prevent damaging message failures during the crisis, management should create an external communications strategy that targets customers, investors, government agencies, and suppliers. To ensure the external communications strategy doesn’t expose the business to litigation risk, board members should ask the general counsel and outside counsel what is material to disclose and when to disclose it.
The board’s audit committee should work with auditors to ensure audit and financial reporting processes are robust enough to reflect quickly changing conditions.
Also, the board and management should consider whether to establish a board-level crisis committee or task force.
Consider long-term resilience and recovery. In an increasingly volatile global business environment, an existing crisis management plan helps businesses make, communicate, and implement decisions quickly when the need arises. COVID-19’s global health threat is an opportunity to either develop such a crisis management plan where none exists or improve and update existing plans.
Board members should advise management to develop long-term resilience and post-crisis recovery plans. Such plans could, for example, address structural changes to the supply chain to avoid future exposure and steps to weather a sustained market decline should the COVID-19 response turn into a global economic downturn.
For more news and reporting on the coronavirus and how management accountants can handle challenges related to the outbreak, visit FM’s coronavirus resources page.
— Sabine Vollmer (Sabine.Vollmer@aicpa-cima.com) is an FM magazine senior editor.