Corporate Governance During the COVID-19 Crisis: Bold Moves Early On Increase the Likelihood of Economic Recovery
by Stefani Carter, Attorney/Shareholder
The year 2020 has been a time of crisis for most companies. Corporate management has had to take swift action to respond to the COVID-19 crisis and navigate through these challenging times. The companies that emerge from the pandemic even stronger than before will be those that took action early on to reduce costs and continue to be proactive and agile throughout the crisis. The following are the Top 3 Board considerations at play for executives and directors going into 2021.
#1: Trim Expenses and Apply for PPP
As the COVID-19 crisis began in March 2020, companies struggled with liquidity issues. They had a weaker cash position because of lower revenue. Should they suspend dividend payments? What about compensation? How do we pay executives? Do they reduce pay for their directors? The way in which Boards chose to do their work at that time has proven to be a critical factor in their companies’ ability to emerge from the current crisis and push forward into a new era of economic recovery and opportunity for the benefit of all stakeholders. Although early intervention is key, Boards should continue to revisit compensation levels and opportunities to cut costs throughout the pandemic.
The last half of 2020 saw Boards dealing with the natural effects of the impact of COVID-19. Directors and management alike likely had more interaction and communication with shareholders, as well as managers on the ground. Companies were grappling with foreclosures and forbearance (and many still are). The big question became what is the government going to do to help? How will they apply that help? Round two of the Paycheck Protection Program (PPP) is coming available soon. Also, how will performance measures be revised, for both executives and directors? Should companies suspend business objectives? What should accountability of organizations and employees look like for employees working from home?
#2: Address Debt and Create New Revenue Streams
Considerations taken by Boards in previous months will dictate the strength of their organization in 2021. Can companies emerge even stronger than before COVID-19? Yes, at least for most industries as the worst is likely behind them. It will be interesting to see how the markets fare in 2021, as that will be a big indicator for how well industries move forward.
The big issue for 2021 is to focus on financial aspects. Say you’ve brought on more debt, some forbearance. How do you go about cleaning up the balance sheet? For many companies the answer will be to pivot to create new revenue streams. For example, many consumer behaviors changed in 2020. More people will continue to work from home in 2021 so consumer needs will likely be different. How can companies capitalize on that?
As 2021 begins, there is uncertainty about the length of this current recession. Some believe it will last well into 2022 or 2023. This should be taken into consideration as directors and executives chart the path forward to provide the direction for their organization as it moves through this unprecedented time toward a brighter future free from COVID-19.
#3: Nasdaq Proposes Increase in Board Diversity
Nasdaq filed a proposal in late November with the Securities and Exchange Commission that, if approved, would require all 3,000 companies on the exchange to satisfy a minimum number of diverse directors and disclose the breakdowns of their Boards by gender, race, and sexual orientation. Companies that do not comply could be delisted.
Companies would have to explain their decision to fall below the standard required. Currently, more than 75% of the listed companies fall short.
This proposal appears to be an attempt to highlight the importance of diversity and transparency, but it will not deter companies from wanting to be listed on Nasdaq.
Nasdaq’s position on diversity is just the latest in a growing trend. Starting in 2018, for example, the California legislature passed increased diversity requirements for public corporate boards headquartered in the state. Some speculate the New York Stock Exchange will follow suit. Time will tell.
Brief Conclusions
Boards of directors play a critical part by providing oversight, making well-informed decisions, and working closely with management. Going forward, the markets will show us the industries that will be well-positioned coming out of this pandemic. As 2021 begins, the most agile companies will emerge stronger and be well-positioned for a year of growth.