The role of the board of directors in the context of COVID-19: how should corporate directors act?
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 fulfill 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.
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,  3 S.C.R. 560; Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68,  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
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.