Gouvernance | Page 52

Belle tribune de Yvan Allaire et Mihaela Firsirotu dans Financial Post : « What post-pandemic corporate governance might look like » (1er mai 2020).

Extrait :

Another challenge for boards of directors will come from the mood of the population as we emerge from the pandemic. Some flaws and irritants in our current economic system may well become intolerable. For instance, the expectation of continuous growth in earnings per share, the cost-driven global search for the cheapest labour and the disparity in income within both corporations and society may all come in for criticism and calls for reform.

Boards of directors need to be alert to early warnings of impending political and social disturbances, which may be harbingers of the next flock of black swans. If they do not effectively handle these new expectations, they can expect governments now flush with power to seize the initiative regarding work arrangements, executive compensation, wealth-sharing, offshoring, and so forth.

Contrary to what might be expected given the serious financial issues many businesses will face, the recent infatuation of large institutional shareholders with ESG (Environment, Social, Governance) drivers and their corollary, the stakeholder model of the corporation, is unlikely to abate. Too much wind already in those sails and new gusts from the pandemic will lead to calls for even swifter compliance by publicly traded corporations.

Management and boards should act pre-emptively in five areas. The corporation’s access to critical supplies should be closely monitored. All past decisions to outsource and off-shore operations in low-cost countries need to be reviewed and re-assessed.

Work arrangements should be adapted to post-pandemic circumstances, as well as to people’s legitimate quest for work balance and couples’ desire for burden sharing. Though doing so will be hard, boards also need to cut the Gordian knot of executive compensation and set an acceptable ratio of top management compensation to the salary of the median employee.

As most large institutional funds have become advocates of ESG, management and the board should make clear to shareholders what this and the above adjustments will mean for the management, governance and performance of the company.

In the end, the powerful forces of continuity, habit and normalcy may bring us back to the status quo ante. We may wake up from this nightmare unscathed. Perhaps! But a board of directors should not take such a “happy ending” for granted.

À la prochaine…

Le cabinet d’avocat Stikeman Elliott revient dans un billet court sur la mission du CA en contexte de pandémie : « COVID and Corporate Governance: A Broader Mission for Corporate Boards » (24 avril 2020).

Extrait :

The discussion focuses on the key challenges facing Canada’s corporate leaders as the reopening phase approaches:

• Focusing on issues that matter;
• Immediate crisis management and board readiness;
• Re-thinking strategy and risk management;
• Re-thinking incentive frameworks; and
• Re-thinking corporate purpose.

À la prochaine…

Le 30 avril 2020, Philip Gavin s’est interrogé sur l’intérêt de l’article 172 du Company Act pour les administrateurs et dirigeants dans le contexte de la COVID-19 : « Directors’ Duty under UK Law to Promote the Success of the Company during the COVID-19 Pandemic » (Oxford Business Law Blog).

Extrait :

A nuance to director’s duties in the United Kingdom is the expansive statutory delineation of s 172, which endows numerous considerations for directors when acting to promote the success of the company for the benefit of members. Given the unique circumstances of the present-day commercial sphere and the more humanitarian demands being put to businesses, having a statutory foundation upon which to base non-traditional business strategies may assist effective decision-making and financial reporting.

The initial three considerations enshrined within s 172 are (a) the likely long term consequences of any decision, (b) the interests of employees and (c) the need to foster business relationships with suppliers, customers and others. These factors are of particular relevance for firms who sought justification for voluntary shutdown of businesses prior to the wider governmental shutdown.

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Where production changes become quasi-humanitarian in tone and companies internalise cost in the interim, directors may seek justification through s 172(1)(d) and (e), these being the impact on the community and the desirability of maintaining high business standards respectively.  Accordingly, directors can seek to frame these quasi-humanitarian efforts in long-term reputational terms, thereby engendering prospective communitarian goodwill.

Furthermore, as political pressure mounts, boards may evaluate reputational factors not simply in terms of market reputation, but also in terms of Governmental co-operation. This is particularly so where companies face increased intervention by public authorities through the Civil Contingencies Act. Comparatively, in a recent memorandum the Trump administration has attempted to exert control over the distribution of ventilators by the multinational conglomerate 3M. Cautious of such intervention occurring within their own enterprises, companies may shift business operations to such an extent to signal their compliance and co-operation with public authorities, thereby disincentivising the wholesale overrule of board discretion. 

Within jurisdictions with vaguer duties to act bona fide in the best interests of the company (Delaware, Australia, Ireland), directors may still engage in such quasi-humanitarian efforts. Nevertheless, utilising s 172 to steer directorial judgment may assist effective decision-making, and furthermore guide financial reporting, which mandates s 172 director’s statements.  Given that the tenor of 2020 reports will be likely dominated by COVID-19, UK directors will benefit from the homogenising structure of s 172 when making such disclosures in the coming months.

À la prochaine…

Me Ravipal S Bains propose une belle synthèse des conséquences de la COVID-19 sur la gouvernance d’entreprise : « Emerging Corporate Governance Considerations for the Post-COVID-19 World » (Oxford Business Law Blog, 12 mai 2020). Une belle synthèse des questionnements qui agitent la gouvernance d’entreprise actuellement !

Extrait :

Board Oversight

Board charters, if they don’t already, will need to cover global pandemics, including COVID-19, as one of the risks that directors should oversee. Given the on-going impact, companies will want to consider the timing of updated duties and responsibilities. While risk governance frameworks are generally updated annually, some may not want to wait and revise as soon as practicable. For instance, earlier this month The Home Depot Inc. added COVID-19 pandemic and related risks to the areas of the board’s risk oversight. Boards are also likely to weigh-up obtaining coverage for pandemic risk insurance, perhaps like the prescient Wimbledon managers.

Executive Compensation

Compensation committees will have to consider whether metrics used in executive compensation plans should take into account material drops in share prices and earnings in 2020. Although these decisions will be reviewed in the 2021 proxy season, boards may provide advance disclosure of such changes. Proxy advisory firm Institutional Shareholder Services Inc., has already indicated that while it generally does not support midstream changes, it will assess amendments if an adequate explanation is provided. Alternatively, if metrics are adjusted less aggressively and the share price recovers, directors will have to evaluate if the executives stand to receive a windfall gain.

Earnings Guidance

Many management teams are facing an uphill task of providing guidance regarding the impact of COVID-19 on operations, revenues, and risks. The challenge is that even the best forward-looking disclosure may need to be revised due to pandemic-related factors outside of their control. Not surprisingly, many public companies have withdrawn or revised their previous earnings guidance. To quell this uncertainty in the US, the Securities and Exchange Commission (SEC) issued a statement urging companies to provide fulsome forward-looking information, including expectations regarding operating conditions and resource needs. The SEC also asked companies to avail safe harbours and noted it would not second-guess good faith attempts at providing forward-looking information.

Succession Planning

After the crisis, expect more focus on comprehensive succession planning policies that contemplate different scenarios, beyond a mere CEO transition, and changeover in non C-suite positions. These could include more defined temporary incapacity assessments and consequences of prophylactic requirements. Boards will need to ensure that the policies provide for multiple candidates for key roles. While many public companies have robust emergency CEO succession plans, few contemplate situations where key executives are affected simultaneously. Last month, when Altria Group Inc.’s CEO tested positive for coronavirus, his successor and other members of the leadership team had to quarantine as they had contact with him.

Opportunistic Investors

With record low share prices and a dismal earnings season on the horizon, a number of once formidable companies could be vulnerable to unsolicited acquisition proposals or takeover attempts. If directors and executives expect their company to be susceptible to strategic and financial threats, they should implement appropriate responses. This may include (a) strengthening relationships with principal shareholders, (b) profiling possible strategic partners and alternative transactions, (c) observing market activity in options, derivatives, and corporate debt to promptly detect stealth accumulations, and (d) adopting defensive strategies. The spectrum of possible defensive actions depends on the jurisdiction. At least in the US and Canada, a shareholder rights plan will be a crucial device to help a target’s board discharge its fiduciary duties, deter opportunistic control block acquisitions, and maximize negotiating leverage.

Environmental and Social Governance (ESG)

Many severely impacted companies will be focused on ensuring financial survival. Many more boards will have to be cognizant that the post-pandemic environment will provide fertile grounds for ESG-focused investors to press on preparedness for, and disclosure of, non-financial risks. As the former Governor of the Bank of England Mark Carney recently noted, ‘when it’s over, companies will be judged by ‘what they did during the war,’ how they treated their employees, suppliers and customers, by who shared and who hoarded’. Management may want to convey that while pandemic has shifted short-term priorities, ESG efforts are ongoing, and highlight progress where possible. They should consider approaches for issues that will be areas of sharpened interest such as dividend payments, stock buybacks, and employee treatment.

Supply Chains

Companies, investors, and stakeholders are likely to emerge from this crisis chastened by the just-in-time, multi-step, and globally dispersed supply chains that dominate production today. Board-level oversight for supply chains, increased management engagement with critical suppliers, and nimble contingency plans for future disruptions will likely become market standard. Executives will also be encouraged to demonstrate knowledge about suppliers—not just tier 1, but also tiers 2 and 3—and to be prepared to trade elements of cost-efficiency for redundancy. Diligence reviews will be expected to cover resiliency across the board and stress-test scenarios that may have been considered too remote in the past.

Government Ownership

Directors and executives of companies who seek government support will have to carefully manage competing public and private interests. Once the state wears the dual hats of a shareholder and an investor, conflicts of interest often arise. COVID-19 interventions are unlike previous crises where government investments were ad-hoc measures targeted at specific industries, like banking and finance. Current measures offer broad-based long-term financial support with limited prospects for near-term divestitures. Governments could re-interpret the definition of ‘strategic assets’ to add new industries (eg agri-business) and act proactively to prevent foreign takeovers. Enhanced government influence could also lead to growth in cross-border competition amongst state-supported firms that will increase trade and political frictions.

Infrastructure Investments

Governments across the globe are sketching plans to fund ‘shovel-ready’ infrastructure projects to rebuild economies. This desire to kick-start projects immediately will need to be weighed against long-term viability. Staffing numerous projects concurrently with boards sufficiently knowledgeable, diverse, and experienced to oversee project delivery through to completion will be challenging. Mechanisms for periodic governance reviews will have to be built in. Investments in digital infrastructure that will likely involve private sector partners will need to include clear governance standards for data collection, use, and storage.

À la prochaine…