At the centre of effective governance sits the Board, a body of knowledgeable and skilled individuals, ultimately existing to take legal responsibility for the organisation. The Board hires a management team to run the organisation on a day-to-day basis on their behalf. During times of crisis, the Board should not forget that it is ultimately responsible.
In the current crisis, the role and effectiveness of Boards in leading the direction of the organisation and in decision-making has come to the fore and is under closer scrutiny from stakeholders including employees, shareholders, customers, and regulators. In some cases, Boards may feel overwhelmed by the magnitude and speed of events. In others, they may perceive themselves as bystanders who watch on as the management team deals with the ongoing challenges that the crisis brings.
So how are Boards being affected and what challenges are they are facing in these unprecedented times?
Evolving methods and speed of governance
Governance activities and communications are happening in different ways. While many organisations have adapted to using technology to facilitate their formal board and committee meetings, more than ever, governance-related activities and decisions are taking place outside of formal meetings.
Discussions and decision-making are more fluid and frequent, as Boards respond to rapidly evolving situations. This increased speed and urgency of decision-making may mean a risk that:
Decisions and actions taken by the Board and management may not be appropriately informed or considered.
The quality of data and management information used to support key decisions may be lacking.
The level of documentation to record the discussion and challenge around key decisions may be poor.
While immediate decisions to ‘get out of the woods’ and survive the crisis may seem appropriate at the time, once the dust settles and we exit the crisis, this view may change. Behaviours, decisions and actions taken during the crisis will attract more scrutiny from both internal and external stakeholders, so Boards must prepare to be accountable.
Boards need to ensure:
Appropriate communication and escalation channels and criteria be established and clarified between management and the Board to ensure all key decisions are subject to review and challenge.
Discussions and decisions continue to be adequately documented, including those outside of formal meetings.
Increasing importance of quality data and management information
Boards need to take account of the fact that they and their management teams may be making key decisions based on new sources or types of data and management information, often prepared at speed to allow faster decision-making.
Management information used to support decision-making is only as reliable as the underlying data, IT systems and MI reporting tools that are used to produce it. Information may be inadequate due to limitations arising from remote working and other pressures on finance, operations and IT teams. Key controls over data and management information such as review processes and verification mechanisms may be weakened in order to service the increased speed and frequency of information required.
Where Boards are making key decisions based on data and management information they should:
Challenge management on the controls that have been implemented to ensure its completeness and accuracy.
Pay particular attention to new sources of data and management information which may be less reliable.
Whilst industry regulators have issued various statements with measures to alleviate operational burdens and other pressures as a result of COVID-19, there is also a clear message of the need to maintain financial stability, ensure safety and soundness by maintaining appropriate systems and controls, and ensure customers (especially those classed as vulnerable) are protected. Governance remains an important regulatory priority, and Boards and management have a duty to ensure they don’t ‘drop the ball’ in these areas.
Directors’ responsibilities regarding insolvency
In the current crisis, most organisations are paying close attention to cash flow and liquidity and a number may find themselves at risk of insolvency.
Under normal circumstances, directors run their businesses to increase shareholder wealth, but only up until the point they become unable to pay debts as they fall due or when it becomes probable they will be unable to do so at some point in the future. At that stage, directors’ responsibilities should shift from doing what is best for shareholders to doing what is best for creditors. Directors’ actions will be assessed on how they benefit (or minimise the losses to) their creditors.
In the current circumstances, Directors should be aware that changes to insolvency legislation have been announced (including a new insolvency process). One change that has been communicated is the suspension of the wrongful trading provision (continuing to trade in the knowledge that they are insolvent) which can have severe repercussions on Directors. Despite this suspension, Directors remain subject to several other potential sources of liability (including criminal liability) under the Insolvency and Companies Act.
To protect themselves, Directors should adopt the following good practices:
Not incur unnecessary credit or any credit that the company is unable to repay.
Not prioritise some creditors over others.
Not sell assets at an undervalue.
Document all actions, the reasons for them and the intended consequences. This will be very helpful if accusations are made at a later stage.
Ongoing need to adapt and balance stakeholder needs
Boards and management are expected to discharge their responsibilities, operate effectively and adapt to the current limitations and challenges. While the government and regulators grant some flexibility and relief measures, the Board must continue to balance its obligations to employees, shareholders, customers, regulators and potentially creditors.