Boards of Directors have a critical role to play in leading their companies through the COVID-19 pandemic and must continuously oversee their companies' responses to the rapidly evolving situation.
The COVID-19 pandemic has undeniably presented complex and unprecedented issues for public and private companies. While companies' management are trying to mitigate the impact of COVID-19 on their businesses and maintain corporate profitability, boards of directors must ensure that they are meeting their legal obligations and duties by overseeing and assessing management activities and responses to COVID-19.
Duties of Boards of Directors
Canadian securities laws require boards of directors to supervise the management of the business and affairs of a corporation. The board of directors' role is one of oversight, which requires monitoring management activity, assessing whether management is taking appropriate action and providing additional guidance and direction to the extent that the board determines is prudent. Boards of directors also have a fiduciary duty to their companies, meaning that in exercising their powers and discharging their duties, they must act honestly and in good faith with a view to the best interests of the company.
In exercising their duties and responsibilities, boards of directors must stay well-informed of developments within their companies as well as the rapidly changing external situations. Boards of directors should be able to demonstrate that they are keeping current with the development of any potential risks associated with COVID-19, and have put in place an appropriate response to any COVID-19 issues that may impact their companies.
1. Board and Committee Capacity
Boards of directors should consider whether the board and its committees are appropriately positioned to provide guidance and oversight as the COVID-19 threat expands by asking the following questions:
- Is there a need to form a special committee to monitor the rapidly-changing COVID-19 situation, and (together with management) assess risk management measures?
- Are board of director and committee meetings scheduled sufficiently frequently? Is the board or a designated committee getting regular updates from management between scheduled meetings?
- Given the social-distancing advisories currently in place, what options are available to the board of directors and its committees to ensure safe and effective meetings (e.g. replacing in person meetings with conference calls)?
- What contingencies are in place if a board quorum is not available or in the event a director contracts COVID-19?
2. Health and Safety
Companies have an obligation to protect the health and safety of their employees in the workplace and to accommodate employee illnesses. Boards of directors should ensure management is addressing workplace health and safety issues, including the health and protection of employees and their families, customers, and business partners. Boards of directors should also oversee the implementation and communication of corporate policies and directives designed to protect employee well-being and reduce the risk of spread of COVID-19 within the workplace. Please refer to our blog post on Coronavirus: Ensuring Your Workplace is Prepared for additional information.
3. Operational and Risk Oversight
Given the uncertainty of COVID-19, boards of directors should oversee management's efforts to identify, prioritize and manage potentially significant risks to the business operations of the company. This role may be delegated to the audit committee, risk committee, or a special committee formed specifically to address COVID-19. Boards of directors and their committees should ensure any discussions and decisions with respect to COVID-19 are properly documented in meeting minutes, but without transcript-like detail. It is also important to ensure that the board materials and meeting minutes are consistent with the company's public disclosure.
Boards of directors should examine potential cybersecurity and privacy risks as a result of remote work arrangements for employees. Factors such as the use of personal computers, accessing company information via unsecured wi-fi connections or taking confidential information in physical form from the office can all lead to increases in cybersecurity and privacy risks for companies.
4. Business Continuity
Boards of directors should consider whether business continuity plans are in place and whether such plans are appropriate to the potential COVID-19 related risks and disruptions. It is important for boards of directors and management to discuss relevant contingencies, and continuously reassess the adequacy of the plans. Potential business continuity issues may arise in the following areas:
- Employee disruptions may be caused by remote work arrangements, travel-related isolation, or in the event employees contract COVID-19.
- Risks related to supply chain and production disruption, particularly where suppliers are located in high-risk areas or areas subject to travel restrictions. Plans should be made to protect against such risks, including exploring alternate sources of supply and reviewing the company's ability to meet its contractual obligations (e.g. force majeure, events of default and termination provisions). Please refer to our blog posts on Questions and Answers Regarding Force Majeure Clauses and COVID-19 and Excusing Non-Performance of Contractual Obligations for additional information.
- Financial impacts and liquidity issues may arise in both the short-term and long-term. Consider the need to seek additional financing or amend the terms of existing debt arrangements.
- Inadequate succession plans for directors and senior management (e.g. does the company have a person ready to step in as interim CEO in the event that the CEO contracts COVID-19?).
5. Crisis Management
In addition to business continuity plans, boards of directors should also consider whether an up- to-date crisis management plan is in place and whether their companies have crisis response teams, which typically include key individuals from management, public relations, human resources, legal and finance. Crisis management plans should include crisis response procedures, communications templates, checklists and manuals that can be readily adapted to a variety of situations for effective, time-critical and agile deployment. The crisis response teams should meet regularly and be prepared to respond quickly as the COVID-19 situation evolves. They should also update and report regularly to the board or a designated committee.
The board of directors should also oversee the company's communication strategy and ensure that internal and external communication are delivered in a calm and thoughtful manner, which will help build confidence during a volatile situation.
6. Public Reporting and Disclosure
Boards of directors of publicly-traded companies should consider whether their companies are making sufficient public disclosures about the actual and expected impacts of COVID-19 on their businesses and financial conditions. Companies should pay close attention to the following disclosures:
- Consider whether there is a need to add or revise risk factor disclosures, such as disruptions to business operations, uncertainty regarding global market conditions, and any credit and liquidity risks. Risk factor disclosure should be specific to a company's individual circumstances and avoid generic language. Please refer to our blog post on The Continuous Disclosure Challenges of COVID-19: What Are the Risks for Your Company? for additional information.
- Consider whether the impact or potential impact of COVID-19 on the company is a "known trend or uncertainty" requiring disclosure in the MD&A of the next periodic report. Tailor any MD&A disclosures to the impact of COVID-19 on the company's business in particular.
- Consider whether previously issued earnings guidance should be updated or withdrawn due to the unpredictability of COVID-19. Please refer to our blog post on Impact of COVID-19 on Financial Disclosure and Outlook for additional information.
- Consider whether the company's forward-looking statement disclaimer language adequately protects the company for statements it makes regarding the expected impacts of COVID-19.
- Consider whether the actual or likely impact of COVID-19 on the company's business and financial condition would be deemed material and therefore require disclosure under applicable securities law.
In any event, boards of directors should monitor corporate disclosure to ensure they are accurate and complete and reflect the changing circumstances around COVID-19.
7. Insider Trading and Tipping
Publicly-traded companies and their directors and officers must at all times comply with insider trading restrictions under applicable securities laws. Boards of directors should closely monitor discussion or disclosure of material non-public information by insiders and consider further restricting trading in company securities by insiders who may have access to material non-public information related to COVID-19. Boards of directors should also consider requiring additional insider trading and tipping training, imposing blackout periods or enhancing preclearance procedures.
8. Annual Shareholder Meeting
Given the social-distancing advisories currently in place, boards of directors should consider and discuss with management alternatives to holding a traditional in-person shareholder meeting (e.g. a virtual meeting or a hybrid meeting). Companies need to review requirements under applicable securities laws, corporate statutes, stock exchange rules and the company's charter and bylaws prior to making changes to its annual shareholder meeting. Please refer to our blog post on The Virtual Reality of COVID-19: Is Your Company Prepared to Hold its Annual General Shareholders Meeting Virtually? for additional information.
On March 20, 2020, Canadian Securities Administrators (CSA) issued a press release announcing that it would allow reporting issuers that have already sent and filed their proxy-related materials to notify their securityholders of the change of its AGM date, time or location (including changes to virtual or hybrid AGMs) without sending additional soliciting materials, provided that the reporting issuers issue and file a news release announcing the changes and containing certain additional information. Reporting issuers that have not yet sent and filed their proxy-related materials are advised to include disclosures in their proxy-related materials with respect to the possibility of AGM related changes due to COVID-19.
9. Shareholder Relations
Boards of directors should ensure adequate communication with shareholders, stay current to the concerns of significant shareholders, and monitor for changes in stock ownership. Due to the negative impact of COVID-19 on the stock markets worldwide, companies are becoming vulnerable to exploitation by well-capitalized strategic buyers.
10. Impact on Corporate Strategy
Due to the unprecedented nature of COVID-19, boards of directors should consider the impact to their company's short-term and long-term corporate strategy. In terms of short-term strategy, boards should consider whether there are opportunities to fulfill an unmet need as a result of COVID-19 or opportunities for growth through distressed M&A. In terms of long-term strategy, boards of directors should consider whether COVID-19 will have any potential lasting effects on market and consumer behavior and expectations and whether their companies need to proactively adjust their existing long-term strategy to prepare for these changes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.