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Corporate Governance In The Times Of COVID-19 – Corporate/Commercial Law | #riskmanagement | #security | #ceo | #businesssecurity | #



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“When the going gets tough, the tough get going!”

The times we face are trying, unprecedented and marked by
absolute uncertainty. The situation at hand is extraordinary. The
speed with which the pandemic is spreading and its gigantic
proportions have impacted every aspect of human civilization and
left us not just speechless but also motionless. This is one event
that has a fundamental and far reaching impact on the way the
businesses conduct themselves. Newer models of doing business had
to be evolved such as prescriptive work from home, curfews and
lockdowns across cities, nations and continents.

While the economy has taken a plunge, the bears are pulling down
the stock markets deeper by the hour and even continuity of
business is threatened, the real mantra for any corporate
would be to stand by its conviction of purpose and sustainability.
It is for the board of directors of a company to lead from the
front in such a crisis and provide leadership with utmost optimism
and self-confidence to survive these tough times.

In this update we focus on corporate governance best practices
the board could adopt to ensure continuity of business, crisis
management and sustainability.

1. Dynamic Risk Identification, Assessment and Management

  • The Board must be in close contact
    with the CEO and CFO work with the management to ensure safety,
    security and well-being of the Company’s workforce and other
    stakeholders.
  • The Board must frequently monitor
    with the executive management the emerging risks of the pandemic
    and strategizing for minimizing the adverse consequences and
    mitigating the risks and ensure viability.
  • The Board may consider a two-pronged
    approach of risk analysis:

(a) Firstly, the Board along with the management consider effect
on supply chains manufacturing operations (including quality,
quantity and overall productivity), intermediary processes, pricing
and costs, liquidity, and so on; and

(b) Secondly, companies must continuously examine and consider
the legal impact of disruption in the above e.g. probability of
violation of local sourcing requirement under foreign direct
investment approvals due to short supply of locally sourced
material.

2. Financial Continuity and Going Concern

  • The Board must seek frequent briefing
    on the company’s indebtedness, the bank financing, lines of
    credit, liquidity risks in short term and work with the management
    to proactively secure the liquidity needs.
  • 2019-20 has not been a great year for
    many companies. The last quarter will close soon but with a shadow
    of an overall gloom and doom. The year-end audits at a fairly
    advanced stage. The Board must constantly watch out for any early
    warning signals that may put their going concern belief to the most
    stringent test. The Board must work with the management to prepare
    and update business forecasts on a real time basis.

3. Communicate, communicate, communicate

  • The Board must often be in proactive
    mode for communicating with the sectoral regulators and
    governmental agencies. Procuring timely guidance from these
    authorities can facilitate the company to navigate better through
    choppy waters.
  • The Board must look out for
    opportunities in every adverse situation and strategize to encash
    them at the soonest. For successful implementation of the
    Board’s vision in adversity, the CEO and the management team
    will have to shore up the resources keeping in mind the strict
    limitations on physical movement of people. The mentorship of the
    Board members coupled with the diversity and depth of experience
    can positively impact the fortunes for the company in worst of the
    situations.
  • The Board must be fully engaged with
    major shareholders and other stakeholders to share their vision and
    strategy to rise out like a phoenix.
  • The challenging economic conditions
    are also getting complicated with multitude of regulators bringing
    in several regulatory changes at the same time. The Board must be
    vigilant about the prospective change in law and must be quick to
    respond and reflect and even staunchly resist any deviations from
    conventional wisdom.

4. Disclosures – mandatory and otherwise

  • One of the most successful strategies
    of risk mitigation is a prompt and measured disclosure. In light of
    existing and emerging uncertainties, it would be the most
    appropriate to take a more conservative approach about the prompt
    disclosure of all risk factors and reservations that intimidate the
    business models.
  • No Board is blessed with magic a wand
    to resolve all issues at all times. However, the stakeholders are
    more than likely to appreciate and respect an honest approach of
    disclosure of the efforts being taken by the Board to address the
    problem or mitigate the risk.
  • The Boards of listed companies have
    to be mindful of the mandatory disclosure requirements. E.g. prompt
    and comprehensive disclosure of occurrence of all material events
    under the SEBI (Listing Obligations and Disclosure Requirements)
    Regulations 20151 or the
    unpublished price sensitive information that would impact price
    discovery of its securities, under the SEBI (Prohibition of Insider
    Trading) Regulations 20152.
  • In order to determine price
    sensitivity and materiality, the Boards must seek timely legal
    counsel for a thorough commercial and legal risk analysis to
    discern actual risk from potential risk and craft the disclosure
    statement under expert guidance.
  • Most Boards prefer to follow the
    precedents. However, the Board must ensure that the form does not
    obscure the substance of the disclosure.
  • The Boards must guard themselves
    against the temptation of limited or selective disclosure.
    Companies must not indulge in such a practice and must provide full
    and fair disclosure to ensure protection of investors’
    interest.

5. Supply chain disruption

  • With economies affected globally,
    there is an obvious crunch in the supply of raw materials and
    components whereas the demand remains constant, if not inflated by
    the perceived fear of absolute breakdown of the economic cycle. The
    security of the supply has been compromised due to various reasons
    like source of supply being a COVID-19 affected area and
    apprehension of spread of the fatal virus in transit. This has
    impacted the supply chain and more crucially the life cycle of
    product manufacturing. The disruption at the first rung of supply,
    say for instance raw material, has a domino effect –
    impacting each step – work in progress, finished goods, further
    value addition to finished goods, if any, packing material
    inventory and lastly the ultimate use of product whether as a
    commodity for end use as a component for other OEMs.
  • The board and management need to
    respond to the crunch in supply chain and the dynamic
    circumstances.

(a) Contractual issues

It would not be uncommon for COVID-19 situation to be construed
or claimed as a force majeure event or even leading to
impossibility of performance i.e. frustration of contract,
depending on the contractual terms. However, what would be key for
the Board of Directors would be to find alternatives for
sustainability and negotiate support, in case such events are
triggered under the contract. The Board should not assume or adopt
adversarial attitude or strategy to ensure continuity of fair and
long-term relations with operational stakeholders.

In hindsight, this episode will certainly lead to careful
crafting of the commercial contracts reducing the dependency on the
boiler plate clauses.

(b) Effective planning

In line with the national motto to deal with disasters –
Mitigate, Prepare and Respond, the Board in consultation with the
management must assess the supply chain and logistical risks in
order to come up with a mitigation strategy and plan to effectively
tackle the such risks, set milestones to ensure preparedness and
plan for response in case of adversity.

(c) Resetting the goals

The Board should reconsider its financial and operational
capabilities as well as key performance indicators, by taking into
account its market demand and budget. It may be helpful to
decentralize non-essential decision making with respect to supply
chain relation functions as well as cross-training personnel to
fill for originally responsible person’s absence.

(d) Long term sustainability

From a forward looking perspective, the current times offer a
golden opportunity to the boards and management to spend some time
on making their supply chain ecologically resilient.

(e) Be the Leader

From an altruistic perspective, the Boards may also encourage
their companies to share their best practices for disaster
management in public domain for others to emulate.

6. Data Privacy considerations

  • Unscrupulous dissemination of
    sensitive company data can have fatal repercussions. However, under
    remote working circumstances, maintaining control over data,
    especially unpublished price sensitive information, might pose
    certain barriers. The Boards may consider implementation of the
    following practices:

(a) Use company protocol for sharing data

It is suggested to ensure compliance with company protocol on
data sharing. In case the company does not have any such policy in
place, the Board along with management inputs could develop the
policy pointers for ensuring safety of data, such as restricted use
of WhatsApp or other social media or communication platforms for
sharing sensitive data.

(b) Updating information technology and communications
system

Information technology plays a crucial role in the day to day
operations in the current tech-savvy commercial operations. It is
recommended for the companies to ensure that the employees have
adequate IT support and have the bare minimum facilities like
anti-virus, VPN (virtual private network), etc. to ensure the
integrity of confidentiality and reasonably pawn off cyber attacks
and data phishing.

7. Facilitating and undertaking year end audits

The financial statements and auditor’s report are the
crucial investor report cards which have a bearing on the fate of
the company. Given the proximity of current events to the end of
financial year, the companies must not only prepare for the annual
statutory audit exercise as usual, albeit this time round also
consider the eventuality of the audit being conducted in a hybrid
manner, which could mean a part of audit being done remotely with
documents uploaded in the cloud. This exposes the company to
potential data breach and compromised audits. The Boards may
consider some of the following measures to mitigate these
issues:

(a) Execution of a robust non-disclosure agreements with
auditors including indemnity and personal liability clauses for
breach.

(b) Keep up with ICAI advisory

The Institute of Chartered Accountants of India (ICAI) is
expected to release advisory on dealing with coronavirus and impact
on conduct of audit assignments. The Audit Committee as well as the
Board should familiarize themselves with these new procedures and
associated risks so that the audits can be planned accordingly.

(c) CARO, 2020

The Companies (Auditor’s Report) Order, 2020 notified
recently by MCA entails more than 25 new checks to be carried out
by the statutory auditors. The ICAI’s guidance note on CARO
2020 will be soon released. In spite of Work-From-Home regime
enforced on all organisations, the management teams will have to
quickly adapt to this new challenge and meet the auditor’s
expectations.

8. Avoiding Ethical Traps

  • The primary purpose of the Board
    Leadership is to create, preserve and grow shareholder value and
    contribute to the nation’s wealth legally and ethically.
  • The Boards must remind themselves
    that when crisis hits, Milton Friedman can often overpower the
    Guidelines for Responsible Business Conduct. The survival instincts
    are likely to cause ethical blind spots and result in serious
    erosion of the moral values on which the business once flourished.
    Before the economics of innocent fraud become the rule of the game,
    the Boards are required to nudge the CEO and the management of the
    core values and sustainability.
  • In extreme situations such as the
    Covid-19 pandemic, the Boards should ensure re-dedication of the
    management to simple principles of behavioural ethics – moral
    awareness of the company coupled with moral intent lead to moral
    decision making, the foundation of a moral action and ESG compliant
    company.

Footnotes

2 Regulation 8 read with Schedule
A.

The content of this document do not necessarily reflect the
views/position of Khaitan & Co but remain solely those of the
author(s). For any further queries or follow up please contact
Khaitan & Co at legalalerts@khaitanco.com



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