Governing through COVID-19: the immediate response and beyond

On Wednesday 13 May 2020, amid the final days of New Zealand’s Alert Level 3 COVID-19 lockdown, MinterEllisonRuddWatts held its annual Corporate Governance Symposium for directors and executives – via webinar this year.

Exploring the role of governors through the challenges all organisations are facing due to the COVID-19 pandemic, Sir Bill English as the symposium’s keynote speaker discussed the macroeconomic position that boards are needing to make decisions within.

This was followed by a panel debate featuring highly regarded governors Bruce Hassall (Chair of Fletcher Building, Farmers, Prolife Foods and a director of Fonterra and BNZ), Barbara Chapman (Chair of Genesis Energy, deputy chair of the NZ Initiative, director of Fletcher Building, IAG and NZME), Scott St John (Chancellor of Auckland University, director of Fisher & Paykel Healthcare, Fonterra and Mercury Energy) and Matt Whineray (CEO of NZ Super).

Several themes emerged from the symposium, including:

Learn to live with COVID-19

All organisations are facing a great deal of uncertainty. It will be important to sort the signal from the noise – we have made it through what may well be the relatively easier part of responding to the immediate challenges, now comes the trickier period as we move forward with less clarity.

We need to learn to live with COVID-19. The idea of elimination is gone and so organisations will need to conduct business as if they could again be affected by COVID-19.

The recovery may take the shape of a short “v”, that is a recession that starts with a bounce. What happens after that bounce will be key.

Directors are going to be challenged by ‘radical uncertainty’ both in the macro context and with their consumers. We are moving into a world where consumers will be actively making their own risk assessments and deciding for themselves what risks to take.

One of the reasons for the ongoing uncertainty is the intensifying mis-pricing of risk – the flood of liquidity from central banks means that no asset is actually worth what it looks like it is worth today.

As we move out of lockdown we will be dealing with a world where prices really matter – there will be an obligation on directors to make sure they really understand the risk and work hard to achieve clarity of purpose around the management of capital and risk.

It will also be very important for directors to really understand the ongoing impact of COVID-19 on their business and their customers.

A big challenge for directors is to consider the social aspects of their business, preserving jobs and creating jobs as the Government may not be in the best shape to deal with those left behind after the effects of the COVID-19 relief measures fade. In the aftermath it is anticipated that there will be a focus on the “S” in ESG.

Don’t miss the ‘Big COVID-19 Opportunity’

To date, directors have (rightly) focused on dealing with the endless array of immediate challenges posed by COVID-19. However, they must ensure that they do not miss their “Big COVID-19 Opportunity” – namely, the opportunity to implement serious business model transformation.

The biggest constraint to transformation projects is usually behavioural – people don’t like change, they prefer the status quo.

The silver lining of the COVID-19 cloud is that, given the forced acceleration of change, it should be easier to get your people to buy in and embrace transformational change than it has ever been.

Directors need to think about what their organisation needs to look like to adapt, thrive and succeed in a rapidly changing world including:

• How can we transform the business to ensure that it thrives and succeeds coming out of COVID-19?
• What are the societal and customer trends that could arise in the new, post-COVID world and how will they impact our business?
• How do we take our people with us, and show them what a better future might look like?
• Do we have the right management team in place to lead the transformation?
• Will the organisation’s current culture hinder or help that transformation?

Communication creates culture

As we emerge from the COVID-19 lockdown it is important that boards challenge themselves to understand how this new environment might have changed their views on the people and culture markers that were previously considered standard, and think about what new questions and insights they, as directors, should be asking of management.

With increased remote working, the communications landscape is likely to have permanently changed – boards need to identify what investments (which will likely involve technology) are needed to ensure that communications channels and platforms remain open, and that effective mechanisms for receiving feedback are in place.

Boards should also be thinking about how to build the organisation’s cultural reference for their people through internal communications, which will be challenging in a world where teams might not meet as frequently as they did in the past, if at all. Work to ensure all communications inform, involve and inspire (the three “I’s” of communication) people at all levels of the organisation.

The importance of informal communications (not just the informality in tone of some communications) needs to be understood. Informal communications are a key part of the cultural links within a business, but it is difficult to build in the important social and cultural aspects of a “team” when you are not in close proximity to people. This will require careful attention.

The sudden shift to remote working has likely amplified the challenges that organisations face around identifying and nurturing key talent, succession planning and impacts on diversity. Boards should be:

• Thinking about how existing talent and succession planning processes will respond to an environment in which remote working is the norm.
• Asking themselves whether there are differences around employee engagement between those who work from home and those who don’t?
• Looking closely at how diversity outcomes may be changing in their workplaces.

Learn from an ‘essential’ business

Drawing from the experience of an ‘essential’ business which was forced to scale up production rapidly in the early days of New Zealand’s Alert Level 4 lockdown. There are steps that boards and management teams of non-essential business can take now to help when it is their turn.

It is important to keep the board informed, but in a way that doesn’t increase the management burden. The board may need to ‘stay out of the way’ to some degree, to let management navigate through the various challenges. It will be difficult for organisations to respond in that way without having certain pre-existing conditions in place, the most important being a confident and competent CEO and executive team.

A granular and manual approach to managing risks will reap rewards – talk to individuals in each business area to establish what would prevent the company from achieving its strategic goals. By delving into and including all levels of the organisation you can more effectively impact culture and embed the concept of risk.

Your staff are the eyes and ears of the organisation and will see risks arising first. Staff need to view the organisation’s risk framework as helping them, helping their job and helping the business. They need to feel comfortable in identifying and solving risk.

Solid processes are key. Decision making will be much easier and more effective if those decisions are anchored in clear processes (for example, a detailed strategic response framework).

Evil doesn’t rest. Cyber security and the threat of fraud will continue to be a significant (and possibly heightened) risk for most organisations.

When planning for growth, organisations need to review and identify any weaknesses arising from its supply chain, optionality and reliance.

Government assistance and support may have real value, and boards should consider it seriously.

Investment in culture up front makes a huge difference when times get tough or challenging. An organisation needs to trust and empower its people – it is a great time to find out who of your people can really grow.

The investor’s perspective is shifting

Clear delegation and strong governance are fundamental to success. From the perspective of a long-term investor running a growth portfolio with significant risk tolerance, delegation by the board to management, based on strong governance processes, is critical. While there has been an increase in the frequency of reporting to the board, meeting agendas have been adjusted to focus more on the crisis response and less on operational matters.

A crisis like COVID-19 will exacerbate under performance, however those with certain pre-conditions (including operational independence, transparency, and commitment to strong governance) are likely to be able to respond in a way that mitigates the impacts.

While it is natural to concentrate on the short-term in a crisis, investors want to see boards keeping a focus on the long-term, particularly the long-term social and climate impacts of projects.

Investors in local capital markets have, overall, been supportive of the changes to the rules around capital raising, reporting timeframes and directors’ duties safe harbours introduced by the Government and regulators. These changes recognise both the improvement in governance standards in New Zealand and the trade-off for investors given the erosion of shareholder rights they effectively imply. On that note, investors were pleased to see that these changes are time bound.

The focuses on sustainability and ESG remain when considering investments. But, while in the past the focus appears to have centred on the “E” (Environmental), there has been a noticeable shift overseas toward a greater focus on the social (“S”) outcomes of corporate decision-making and corporate resilience.

Boards have a huge challenge ahead. It is more important than ever to keep your eyes on the ball, and take a dynamic and nimble approach. Doing nothing is the riskiest strategy.