The following blog post was originally published in Corporate Compliance Insights
As the pandemic continues to take its toll on the economy and on the wider world, corporations have been forced to change the day-to-day at all levels; the crisis has particularly altered the longstanding relationship between boards and management. Dottie Schindlinger and Kira Ciccarelli from The Diligent Institute detail this shift and how it might continue to change moving forward.
The COVID-19 pandemic has impacted nearly every aspect of daily life due to its scope, complexity and longevity. In September 2020, more than nine months since the virus began to take hold in China, a viable and readily available vaccine is still months away. Despite renewed gains in the stock markets, the pandemic’s long-term impact on the global economy remains unclear, and many businesses and industries are struggling. To stay afloat, companies have been forced to adapt. In particular, the relationship between corporate boards and their management teams has evolved considerably to meet this unprecedented challenge.
In March 2020, Diligent Institute published its “Ask a Director” series focused on the ways corporate directors were responding to the early days of the pandemic; however, our conversations with directors have been ongoing. Since that publication, a few new trends have emerged around the ways corporate boards are adapting to the present reality and ongoing climate of uncertainty.
The Line Between Governance and Management Remains Blurred
During the initial phase of crisis management, it quickly became clear that boards needed to take a more hands-on approach to governance to ensure company survival. The normal board approach of “noses in, fingers out,” shifted to an “all hands on deck” mentality as a result of the unprecedented nature of the pandemic and its effects. Consequentially, the lines between the roles and responsibilities of the executive team and the board have blurred.
As the pandemic and its many related economic effects continue, what seemed to be a short-term change in roles has become a more consistent pattern. As directors tend to have previous C-suite experience and wider external networks, companies are relying on their unique backgrounds and skill sets to help address the crisis. While COVID-19 has no true parallel, board members have been drawing on a wealth of experience from previous crises like the financial crisis of 2008 and 2009, or large-scale natural disasters like the 2011 T?hoku earthquake and tsunami in Japan, to help inform management decision-making and identify best practices.
Meanwhile, directors are also providing support to management with a “stamp of approval” on some senior management decisions that normally would not rise to the board level. Management decisions regarding company operations in the time of COVID-19 can mean, quite literally, life and death. Both to ensure effective decision-making and to support management, it has become common for the board to approve company policies regarding resource allocation and the health and safety of employees.
The Pandemic has Created a Shift in Corporate Communications
Corporate communication has changed drastically during the pandemic with the goal of creating better alignment. Now more than ever, shareholders, investors and the general public are holding corporations accountable for crisis response, making alignment crucial for effective and efficient responses to public scrutiny. Communications have changed in terms of who companies are communicating with, what information is being included in internal and external communications and the frequency with which companies are initiating communication.
This extends to how management teams and the board are communicating. In an environment where a company’s decision could mean jeopardizing the health and safety of the workforce or lead to the organization’s financial ruin, it is essential that corporate leaders have the information necessary to ensure company survival. In industries such as tourism and hospitality, for example, companies now need to adapt communications both internally and externally with a host of groups: government organizations, regulators, shareholders, management, the board and employees, among others.
Many directors report increased knowledge of daily operations compared to before the pandemic. This is largely due to the nature of the pandemic itself: It heavily impacts day-to-day operations and it dramatically affects long-term planning. Information on public health conditions, sanitation in the workplace, health care policies for employees, customer safety, technological capacity to work from home and travel restrictions are taking precedence, where before they may not have been relevant to the board’s long-term planning and oversight responsibilities.
In addition to the increased volume of information, communication frequency between management and the board has increased dramatically. Before, the chairperson of the board normally communicated with the CEO at regular intervals and in the run-up to quarterly, biannual and annual board meetings. Now, directors receive weekly email blasts with updates from management, as well as biweekly or weekly calls depending on the client-facing aspects of a company’s industry. Ad hoc communications between board and management have also increased, including notifications from management when major internal or external changes in operations occur – for example, sharing specific plans for offices that are reopening.
Directors Seek a New Balance Between Doing “Due Diligence” and Overstepping
Boards have a duty in this climate to ensure that management is not overwhelmed by information demands. Though directors should seek relevant information for oversight, especially in a crisis, they must also recognize the importance of limiting information-seeking to time-sensitive and pertinent inquiries. If the CEO spends too much time satisfying board members’ desire for information, it takes away valuable time they could be using to effectively manage their company, particularly during a pandemic as debilitating to business as COVID-19.
Before COVID-19, directors generally refrained from engaging in day-to-day operations, as doing so can create inefficiencies at best and a companywide crisis at worst. As the pandemic drags into its ninth month, board members and managers must start planning now for what their “next normal” will look like to in terms of separate governance and management functions. However, whether the “all hands in” approach to governance is just temporary remains unknown. Moreover, the task of how to disentangle the roles and responsibilities once the pandemic subsides will surely present a new wave of complexities and challenges down the road.
Once the pandemic subsides, how can communication shift back to “normal,” and what will that shift look like? Once a board becomes acclimated to receiving weekly updates on the company’s operations, how will they respond once this information is taken away? Even if a vaccine were released tomorrow and was made readily available immediately, it would still take years for companies and for the world to rebuild. As the pandemic continues, it is becoming clearer by the day that our expectations surrounding communication and the flow of information may have changed forever.
Questions for Directors and Executives About Corporate Governance’s “New Normal”
- How will boards and management decide when it is time to transition back to their original respective roles and responsibilities? What metrics will you use to determine when this should occur?
- What aspects of the relationship between boards and management should remain changed, and which should return to “normal?” How will you adapt pandemic-era practices to post-pandemic governance?
- How effective have increased communications between board and management been for your company during the crisis? Is this communication level feasible moving forward?
- Is management becoming overwhelmed with information requests as your company moves past initial crisis management?