Bloomberg Law
Free Newsletter Sign Up
Bloomberg Law
Advanced Search Go
Free Newsletter Sign Up

ANALYSIS: The Board’s Role in Guiding Corporate Change

May 18, 2020, 9:21 AM

Boards of directors will be on the leading edge of changes that result from the coronavirus pandemic. The current crisis, in conjunction with a shift in the role of corporations, is testing and expanding traditional notions of boards’ roles. Of course, they still provide supervision of management and strategic direction for the company. But they have become more involved in shaping their companies’ response to the short-term and long-term issues that corporations must now face—and more attuned to the importance of comprehensive risk management and contingency planning.

Perhaps the most important topic that boards will address as the economy reopens is the company’s long-term viability. With company valuations generally declining during the economic shutdown, some may have become attractive to opportunist investors, including activist shareholders that want to put the company in play. On the other hand, low valuations make strategic acquisitions more affordable. Boards need to prepare the company with a range of alternatives for the resurgence in M&A activities that will likely accompany a reopening of the economy.

Leadership in Time of Uncertainty

Boards need to be responsive to the full spectrum of issues that corporations face today, including those involving other corporate constituencies and society at large, in considering the best interests of stockholders and discharging fiduciary duties. Boards are being held more and more accountable, and are in the best position to balance the short- and long-term interests of the various stakeholders of the company.

When non-essential office and plant doors open again, not everyone will return to work. Workforces that have been reduced through layoffs, furloughs and business shutdowns will not immediately resurrect at the flip of a switch. And continued social distancing along with successful experiences with remote work rules may prolong work-from-home practices. Companies that prosper will learn to leverage the advantages of a remote workforce to capture greater talent and productivity. Management and the board will need to embrace the new virtual reality in order to do more with less. Additional investment in IT and cybersecurity will be required to support remote workforces and address increased data security risks as businesses adapt to distance protocols with customers, suppliers, and employees.

—In the short term, as the economy begins to reopen, boards may take the opportunity to sponsor a re-assessment of the company’s commercial arrangements. Here are some key questions to consider.

—Has the business slowdown revealed the need for different products or services that the company is able to provide profitably, with or without significant re-tooling or capital investment?

—Are the company’s supply chain relationships demonstrating sufficient resiliency and resourcefulness to merit continued consideration for the future, or is it time to re-source and diversify the supplier base?

—Are commercial terms with customers in need of tightening to address heightened credit and collection concerns or customer performance issues?

—Are customer/consumer behaviors or perceptions of the value of the company’s products and services changing, and if so, how might the company use that information to respond innovatively?

Beyond Survival: Growth and New Opportunity

In the longer term, boards will likely face a number of urgent issues resulting from the general economic shutdown—the strength of the company’s balance sheet being one of the more significant.

The board will be instrumental in setting direction for the company’s capital planning, which in the post-pandemic economy may be quite different from past practices. Its review of the company’s capital structure and uses of capital will focus on liquidity, leverage and carrying costs, reducing debt, share buybacks and dividends, and determining acceptable margins of error for contingencies.

Overall, the board will focus on more stringent risk management policies, contingency plans, and business continuity strategies.

A key continuity consideration is adequate succession planningfor both management and board members. With the assistance of outside and inside experts, the board will want to have identified persons who can succeed, on an interim or long-term basis, key executives who may become incapacitated or leave the company, including the CEO, CFO, CLO, and lead director positions. In addition, management incentive programs may need to be revised, and goals reset, to motivate and reward optimum behaviors during uncertain and unsettled times.

The company’s long-term success depends on the board’s vision and leadership. The most successful companies will have leaders who think and plan ahead, and see opportunity amid the challenges.

During the crisis, boards have become used to receiving frequent—sometimes daily—updates from management and participating in regular telephonic or electronic board meetings. If board members believe this more involved approach provided them effective and timely information that enabled them to provide objective, sound, and thoughtful advice during this period, they may choose to continue this practice for the immediate future. As a result, boards will become more aware of their company’s strengths and vulnerabilities and have additional opportunities to effect change and promote the value of the corporation through strategic goal-setting and growth initiatives.

Companies that successfully weather the Covid-19 storm will be characterized by their resilience and ability to change. The most effective corporate boards are stepping up to the challenge by providing vision and insightful direction to their companies in these uncertain times.

If you’re reading this on the Bloomberg Terminal, please run BLAW OUT <GO> in order to access the hyperlinked content.