Directors’ difficult decisions during the COVID-19 lockdown

What can directors continue to do to ensure good governance of their business?

The directors of companies in the UK across many business areas are having to make unusually difficult decisions. Sometimes this even includes if their company can continue to trade and exist. Directors take advice where necessary and frequently have had to act quickly. It is important to note that even if directors have managed to weather the storm, good corporate governance will not end when lock down ceases. It is crucial that directors continue with their regular board meetings and ensure they receive up-to-date financial information. Directors must continue to challenge and test decisions. Records must be kept of decisions made, particularly when conclusions have been reached quickly. 

Summary of directors’ duties during the coronavirus lockdown

Directors owe a range of duties to the company to which they are appointed. This includes acting in a way in which they consider, in good faith, would be most likely to promote the success of the company. This duty must be exercised having regard to shareholders as a whole and importantly focussing on six specific factors, which includes acting in the interests of the company’s employees. For larger businesses,  2020 sees the first reporting period where the new statutory disclosure obligation requires to be included in the directors strategic report (see section 414CZA Companies Act 2006). Also as we have previously reported, directors must not drop their guard even if the UK Government are to relax wrongful trading rules during the current crisis.

Virtual board and committee meetings during COVID-19 lockdown

Good planning during the next phase of the COVID-19 pandemic will test directors’ systems and controls. The Chartered Governance Institute (or ISCA), has issued guidance on the conduct of virtual board and committee meetings in light of the current ban on the public meeting. As restrictions are eased, directors should consider which measures to assist the board and its committees during lockdown should remain in place. Use of existing board authorities and electronic signatures, and other such measures, are likely to continue to be used for some time to come

COVID-19 risk management for directors

Directors must exercise oversight by fully understanding the risks facing the company and the impact of the COVID-19 crisis on day-to-day decision making. There must be regular reviews as to the ongoing viability of the company or business. Directors will need to weigh up their duties to employees’ health and safety particularly when companies begin to commence full operations as lockdown measures are lifted.

Directors should evaluate how well its policies, procedures, systems and controls have operated in practice. It will be important to check: (a) the impact of the pandemic on the operations of the company; and (b) whether issues were escalated effectively. Also to implement lessons learned during the crisis for the future.

As mentioned above, employee safety will be key as lockdown measures are gradually eased. Directors will need to consider what changes they will need to make to working environments to protect staff. This may lead to extended home working or staggered working hours where this is practicable to minimise contact between employees. Social distancing and testing will be a critical element of business output but Employment Law considerations will arise to be considered. Many companies have asked employees to accept pay cuts and reduced hours. 

Maintaining regular communication with staff during the easing of lockdown measures will be critical to ensure that employees understand and comply with updated company policies and guidelines. For those companies struggling to maintain sound internal communications, directors should consider how this can be addressed in the short term.

Pay and benefit cuts- including at the top

Boards of directors should ensure that pay outcomes for executive and senior management are adequately aligned with shareholder, employee and wider stakeholder expectations. Shareholders will expect boards to be transparent about the company’s approach to remuneration. Many companies have already announced a range of measures, including:

  • temporary pay cuts for executives;
  • temporary reductions in consultant and non- executive fees;
  • bonus deferral; and
  • postponement of share scheme awards.

In time, directors may need to consider reviewing the company’s whole remuneration policy to ensure that the right balance is struck between incentivising management performance during these challenging times and stakeholder expectations.

Summary

The way companies do business in future is likely to change for good. However , directors should continue as they have always done to strive for best advice whether that is financial or now more than ever before – sound legal input.


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