Governance considerations for boards of directors during the COVID-19 crisis

We are now weeks into the unfolding COVID-19 crisis and all indications are that it will persist for many more weeks. Companies have activated their business continuity plans and organized themselves to cope with the restrictions issued by governments and public health authorities. Depending on the organization, this will mean everything from shutting down operations to continuing operations with some or all employees working remotely.

Does this crisis require the board to approach its role differently? On the one hand, no: the board’s role continues to be one of oversight. However, as in any other high-stakes context, this situation demands greater attention on the part of the board and may require greater involvement depending on the degree of challenge COVID-19 presents to the viability of the business.

Management is on the front lines in responding to the crisis and adapting the company’s operations as events unfold. It is important that the board not interfere in the difficult and evolving operational issues that management is being pressed to deal with on a day-to-day basis. However, the board has an important responsibility for oversight. This entails:

  • ongoing alignment with management on the company’s immediate and near-term objectives;
  • monitoring the effectiveness of management’s efforts against those objectives;
  • ensuring that management is both dealing with the immediate issues and looking ahead to the range of potential scenarios that could arise; and
  • ensuring that the company is prepared for those scenarios.

The duty of loyalty of directors and officers requires that they act with a view to the best interests of the company. Under Canadian law, the company’s interests are to be determined by reference to the interests of the various stakeholder groups that together comprise the corporate enterprise. That assessment, in the context of the COVID-19 crisis, can be extremely challenging because those interests will not necessarily be aligned. For example, it may well be in the interests of investors for the company to lay off employees whose services are not required for the foreseeable future. However, taking that step would be inimical to the interests of those employees and, perhaps, the community, at least in the short-term. The board and management, in setting immediate and near-term objectives, will necessarily be weighing potentially conflicting stakeholder interests and making trade-offs. Further trade-offs could be required by management in the course of execution. The board will review, assess and, if appropriate, approve those trade-offs. As long as the board carefully considers all of the affected interests and acts on a fully informed and unconflicted basis, its decisions will receive business judgment deference in the event of any challenge.

Questions the board should ask, in discharging its oversight responsibilities, include the following:

  • Are we aligned with management on immediate and near-term objectives?
  • Are we meeting sufficiently frequently, and are we sufficiently coordinated amongst the board and board committees, to discharge our oversight role?
  • To what extent can the Chair or Lead Independent Director usefully supplement the board process during this period by liaising between the board and the CEO?
  • Are we getting the information we need to assess the effectiveness of the company’s response to the crisis, including whether management has adequate resources?
  • Are we confident based on the information we are getting that the company’s response is effective and sustainable?
  • Is the management infrastructure sufficiently robust to withstand critical members of senior management being disabled by illness?
  • Is the company’s normal compensation approach appropriate in the current circumstances?
  • Are there risks or opportunities on the horizon, capital allocation or other broader strategic issues that are not being sufficiently considered?
  • Is the company’s communications strategy sufficient for its various internal and external stakeholders?

Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2020 by Torys LLP.
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