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The Role Of The Board Of Directors In To The Context Of COVID-19: How Should Corporate Directors Act? – Corporate/Commercial Law | #riskmanagement | #security | #ceo | #businesssecurity | #



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Since the start of the unprecedented public health and economic
crisis caused by COVID-191, directors may have felt
tempted to intervene in the day-to-day management of the company or
to step into a management role, especially if they are also
shareholders. However, it is up to the crisis management
committee—often made up of executive officers—to assume
responsibility for managing the crisis on a day-to-day basis.
Directors do, however, have a role to play: their duty is to ensure
the good governance of the company in the short, medium and long
term2.

This duty is all the greater during the COVID-19 crisis and
calls for reflection by corporate directors, who must carefully
consider how to manage both the current risks within the
organisation as well as the collateral risks that could arise,
while identifying areas for future improvements.

In this article on corporate governance during a crisis, we take
a close look at the governance reflexes to be adopted in the
current context, without losing sight of the post-COVID-19
outlook.

Financial pressure during the crisis: an opportunity to test
the strength of internal procedures, structures and values

Aside from the obvious health and safety issues, the current
crisis is hitting corporate cash flow hard. Companies previously
stable may soon be facing the prospect of insolvency or bankruptcy.
In such situations, companies tend to make tough management
decisions quickly, without taking a step back to ensure that they
are truly justified or are in fact the best scenario.

With pressure being so high, it is more important than ever for
corporate directors to fulfil their corporate governance role and
duties. Furthermore, the current crisis presents a unique
opportunity to test the strength of a company’s internal
procedures and structures, which are designed to ensure the best
possible governance while providing managers with appropriate
leeway. It is also an excellent time to test the company’s
values, which are meant to guide its decision-making process.

It is the responsibility of directors to supervise and guide
management in navigating the crisis and to ensure that management
adequately considers the extent of the risks generated by COVID-19
on the company’s strategy, operations and financial health, in
accordance with its values. In the current context, directors must
also:

  • ensure that management deploys mitigation measures to limit the
    extent of the impact of these risks on the business;
  • exercise its supervisory role in this context by appointing or
    assigning a committee with responsibility to oversee the management
    of current events.

It goes without saying that in the event of senior
management’s inability to act or poor handling of the crisis,
directors may have to play a more active role.

The role of corporate directors is all the more important at
this time because they are the ones who must ensure that the
corporation is able to plan for the return of normal operations,
post-COVID-19. Directors are subject to a fiduciary duty to the
corporation. Being obliged to act for the good of the company and
to take into account the interests of all stakeholders3,
directors may have a broader perspective than the managers who are
only involved in day-to-day operations.

Since the beginning of the crisis, we can see that various
ethical questions have already emerged. Ethics is at the heart of
society, particularly in the context of the issues we are currently
facing. The values of solidarity and concern for others will have
to be taken into consideration by directors. The society will have
new expectations for its organizations.

Heightened risk of personal liability for directors and
officers during a crisis

Good governance reflexes and adequate control of a company’s
operations by directors are often accompanied by good
organizational performance. However, this unprecedented health
crisis increases the risk that directors and officers will be held
liable for conduct that deviates from good practice.

As a result, certain behaviours by directors could lead to
personal liability claims. Such claims may be covered by directors
and officers liability insurance (often called
D&O“), if such insurance is in
place4.

In the normal course of business, it is easy to imagine that an
industrial explosion, a chemical spill in a river or an airplane
crash could potentially result in D&O claims. In the midst of
the current crisis, what circumstances could result in the personal
liability of directors and officers, thereby increasing the risk of
D&O claims?

Now that containment is mandatory and only companies providing
essential goods or services can continue to operate more or less
normally, inadequate control of the company’s activities by
directors could lead to the following allegations of
misconduct:

  • inconsistent and disruptive management of the risks resulting
    from poor communications with customers, staff, supply chain
    partners and investors;
  • poor management of information technology, jeopardizing access
    to essential data for business continuity and undermining data
    security and confidentiality (which may constitute fraud or
    unjustly increase cybersecurity risks);
  • poor planning of how to monitor systems and controls by an
    increase in remote work5;
  • poor compliance with health standards, leading to the spread of
    COVID-19 within the company;
  • alleged discrimination, if the company manages risks
    differently depending on the work site (e.g., work site in Quebec
    vs. foreign work site), or the department (e.g., management vs.
    support staff)6.

Beyond these issues, the company will also be judged by its
actions. Governance will need to demonstrate ethical leadership.
This will involve taking into account the consequences of its
actions on all stakeholders in order to pursue the fairest and most
equitable actions possible under the circumstances. Corporate
culture will play a key role in this regard.

Skill and agility: two key words to guide directors in striking
the right balance and taking appropriate governance actions during
a crisis

In the current context and in light of the above, directors must
balance the temptation to step into the role of manager against the
need for an appropriate level of supervision of company activities
that may give rise to personal liability.

While not required by law or jurisprudence, we believe that it
is more relevant than ever for directors to approach their mandate
with agility and skill, especially with a view of adding value to
their organization. Agility will help them to sail to a safe
harbour, sometimes making the decision to follow a different route
than what was originally planned. Existing crisis management or
business continuity measures or policies may be insufficient or
outdated in the face of the current crisis7.
Benchmarking against best practices and updating this data on an
ongoing basis, should be considered. It would also be advisable to
consult crisis management specialists if the company does not have
specialized resources in-house. Directors will require skill to
pursue their mandate capably and with the highest standard of
competence.

The post-crisis review: seizing opportunities

Directors need to work with management to explore opportunities
for recovery and to set up winning conditions to take full
advantage of the post-COVID-19 environment. Planning an
extraordinary meeting of the board of directors or its executive
committee to review (a) how the company navigated the crisis and
(b) the governance behaviours it adopted will help identify best
practices to ensure the continuity of the business in a world of
rapidly changing risks that threaten the smooth running of
operations.

Ethical problems and questions are being raised in companies at
this very moment. They should already be thinking about these
issues. Ethics is a tool that can help a business clarify the
values to be prioritized in this exceptional situation, so that it
can do not only what is reasonable, but also what is right under
the circumstances. The concept of responsible corporate citizen
adopted by the Supreme Court in the BCE case cannot be ignored by
directors and should therefore be integrated into their
decision-making process.

The recovery phase will be a time for soliciting feedback,
reviewing the company’s values and consolidating lessons
learned. This process, based on dialogue with the various
stakeholders, will help everyone respond more effectively to the
next crisis, through preventive action, preparation, and an
awareness of ethical considerations.

We mustn’t forget that barely a month ago, Quebec was facing
an unprecedented labour shortage. Today, the rate of unemployment
is dramatically high. When business resumes, many people may take
the opportunity to reassess their professional interests and goals.
Accordingly, we anticipate human resources’ opportunities for
companies that have set themselves apart through strong crisis
management and ethical values.

Footnotes

1. In Quebec, the crisis became a public reality on or
around March 12, 2020. However, for groups affected by the
disruption of supply chains, many of them connected to China, the
warning signs were apparent long before that date.

2. It should be noted that Sections 119(2) of the
Quebec Business Corporations Act and 122(1) of the
Canada Business Corporations Act enact the obligations of
directors and officers to act with prudence and diligence as well
as honesty and loyalty in the best interests of the
corporation.

3. See, in particular, BCE Inc. v. 1976
Debentureholders
, 2008 SCC 69, [2008] 3 S.C.R. 560;
Peoples Department Stores Inc. (Trustee of) v.
Wise, 2004 SCC 68, [2004] 3 S.C.R. 461.

4. See, in particular, the analysis of the COVID-19
situation: Sarah COUTTS, “COVID-19: What Are the Management
Liability Implications”, Marsh LLC, https://www.marsh.com/ca/en/insights/risk-in-context/covid-19-management-liability-implications.html,
March 12, 2020

5. Ibid.

6. Ibid.

7. For instance, companies that implemented this type of
measure or policy following the 1998 ice storm will benefit from
reviewing and updating these through best practice
benchmarking.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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