COVID-19 Coronavirus – Considerations for Boards of Directors

In fulfilling their fiduciary duties, directors of public and private companies alike have a vital role in ensuring that their companies effectively tackle the immediate challenges and long-term consequences wrought by the coronavirus crisis. For many companies, this task is existential. Moreover, directors may face personal liability for failure to act in good faith in exercising oversight responsibility.

Key Takeaways

• Effective oversight requires that boards identify their company’s particular coronavirus-related risks and vulnerabilities, provide guidance to management and closely monitor management’s activities.
  
• Key areas of oversight during the coronavirus crisis include business continuity, human capital, liquidity, financial and operational disclosure matters and other areas of risk management.
• Directors must adapt their oversight practices to satisfy their duties remotely.
  

In fulfilling their fiduciary duties, directors of public and private companies alike have a vital role in ensuring that their companies effectively tackle the immediate challenges and long-term consequences wrought by the coronavirus crisis. For many companies, this task is existential. Moreover, directors may face personal liability for failure to act in good faith in exercising oversight responsibility.1

Key Elements of Effective Oversight

Well-functioning boards are practiced at providing effective oversight. They work with management and outside advisors to identify and develop a deep understanding of risks to the company. They guide management’s efforts to respond to and mitigate these risks. And they closely monitor management’s effectiveness so they can make adjustments when appropriate. These same key elements apply during this coronavirus outbreak. However, key areas of oversight and key practices for implementing oversight may need to evolve (or shift entirely).

Key Areas of Oversight

Below is a high-level overview of particular focus areas for boards to consider in response to the coronavirus outbreak. Whether a board is refreshing its prior consideration of these topics or considering them for the first time, it will need to do so with the particular circumstances of the coronavirus in mind.

Business Continuity 

Boards should encourage management to adopt or to carefully review existing business continuity plans to ensure responsiveness to the risks of the coronavirus outbreak. Business continuity plans should be continually reevaluated and reassessed in light of new developments and responses from governmental authorities, businesses and the financial markets. Matters to consider in a business continuity plan include:

Communication Plans and Technological Infrastructure – Ensure that there is a robust communication system in place to allow for quick and effective transfer of information between management and other employees and across departments. The communication plan should address business interruptions, emergencies and critical updates. Ensure that the company has sufficient technological infrastructure to support the needs of a remote workforce and employees’ ability to share documents and have conversations confidentially and securely.

Supply Chain Disruption – Review with management current and potential risks of future supply chain disruption and ways to mitigate potential interruptions. Discuss with management any risks regarding the company fulfilling its contractual obligations, or suppliers or customers fulfilling their contractual obligations to the company. Ensure that management has reviewed material contracts and has considered contingency plans for breach of contract, including qualifying and contracting with alternate parties. In some cases, for example where there are long lead times to initiating a new supplier, it may be prudent to forego some scale efficiencies for the security of a second source.

Succession Plans – Adopt or update key employee and board succession plans that account for unforeseen emergencies and incapacitation of key employees and board members. Succession plans should include identified successors, interim personnel or reallocation of duties that can quickly be implemented in the event that one or more key employees or board members become unavailable due to illness or communication breakdowns.

Human Capital Management 

The global health crisis and its effect on global financial markets has caused many employers to require employees to work remotely or otherwise implement social distancing and other health and safety measures. Some employers have had to make difficult decisions regarding employee retention and compensation. Boards should discuss with management the short-term and long-term effects of the coronavirus outbreak on employees and ensure that the “tone at the top” promotes a strong and effective work culture. Below are a few specific human capital management considerations:

Employee Health and Safety – Employers have a legal obligation to ensure a safe workplace for their employees. Coordinate with and provide feedback to management regarding setting the tone at the top through communications with employees and policies that emphasize employee wellbeing, health and safety. Monitor the effectiveness of management’s response to the coronavirus outbreak in promoting the personal health and safety of employees and others. Please refer to Dechert’s OnPoint, “Update: What Employers Need to Know about Navigating the Novel COVID-19 Coronavirus Threat,” for suggested best practices in responding to coronavirus in the workplace, and Dechert’s COVID-19 Coronavirus Business Impact Broadcast Series, “Labor and Employment Challenges for PE during the COVID-19 Pandemic,” for a cross-border perspective on key labor and employment issues.

Incentive Plans – Discuss with management whether to reevaluate incentive plans due to current economic challenges or build flexibility into target incentive awards, while ensuring that management incentives are aligned with employees’ and shareholders’ interests. Discuss the possibility of delaying setting benchmarks or criteria for incentive awards until market uncertainty stabilizes. In some cases, financial distress may necessitate such changes. In other cases, new business goals may engender new performance goals. For public companies, consider proxy advisory services’ perceptions of any amendments to management incentive plans and messaging regarding the rationale for any such amendments.

Retention – Discuss with management the identification of key employees and strategies for retaining such key employees through difficult financial conditions. Discuss with management policies that provide personnel flexibility to address personal health, health of family members or other concerns related to coronavirus, and consider the potential effect of changes to employee compensation and benefits on the company’s long-term human capital needs.

Compliance with Laws – Ensure that management is keeping up to date with federal, state and local employment laws and the changing regulatory landscape and consulting with experts as needed to ensure that the company is in compliance. Please refer to the following Dechert OnPoints for further information regarding compliance with laws: (i) “COVID-19 Coronavirus: Key Considerations for Businesses Facing Potential Shutdown Orders” for recommendations for businesses faced with a shutdown order, (ii) “Families First Coronavirus Response Act: A Legislative Response to COVID-19 and What Employers Need to Know” for an overview of key provisions of the Families First Coronavirus Response Act, and (iii) “Overview of Selected Provisions of the U.S. Coronavirus Aid, Relief, and Economic Security (CARES) Act” for an overview of key provisions of the CARES Act.

Read "COVID-19 Coronavirus – Considerations for Boards of Directors."