Topics:   Risk Management

Topics:   Risk Management

July 10, 2020

New Guide Emphasizes Adaptive Governance as Key During COVID-19

July 10, 2020

The effects of the COVID-19 pandemic are both wide and deep and challenge nearly every business financially, strategically, operationally, and culturally. The major challenge that directors and their boards face is in adapting their governance to the demands of this extremely uncertain environment. This requires a constant reassessment of the board’s engagement with management; of its internal workings, oversight practices, and priorities; and ultimately of its own performance. In other words, boards will need to become fit for a much more turbulent future.

Since the start of the crisis, NACD has had ongoing discussions with many of its 21,000 members and identified five key questions that boards must address in order to govern effectively through this challenging period. These questions and themes appear in a new NACD publication, COVID-19 & Beyond: A Practical Guide for Adaptive Governance.

  1. Board-Management Engagement: How can the board be a strategic asset to their companies in this crisis without overburdening management?
  2. Board Effectiveness: How can the board maintain its own effectiveness?
  3. Performance and Pay: How should the board evaluate management’s performance, leadership, and pay?
  4. Communication: How should our companies communicate with shareholders and stakeholders? What should the role of the board be in regard to company communications?
  5. Long-Term Risks and Opportunities: What new risks and opportunities, unleashed by a new operating environment, should the board be anticipating? How should the board be responding to them?

Board-Management Engagement

During the early stages of the COVID-19 pandemic, organizations acted quickly, making many material decisions in rapid succession with much less time than normal order allows, intensifying board-management engagement. Many directors expect that some of this increased engagement with management will be part of the new normal going forward. However, most directors we have spoken with are conscious of the danger of a heightened burden on an already crisis-fatigued management team to communicate frequently with the board. The key is to find the right balance between being a well-informed board and giving management the freedom to focus on managing the company through the crisis.

To improve board-management engagement, boards can do the following:

  • Establish a point of contact on the board to engage with management, and agree to the time and format for the board to receive communications outside of traditional board meetings.
  • Understand the objectives of these meetings and what is to be reported.
  • Identify what should trigger a change in meeting cadence and content as the nature and purpose of more traditional meetings may also change.

Board Effectiveness

Different directors’ ability to thrive during crisis can impact board dynamics and exacerbate difficulties that were previously under the surface. In the words of one board leader, “Directors come into the board as individuals, from different backgrounds, and we only meet in person five times a year. If poor dynamics exist, lots of time will be wasted in unproductive conversations—there’s likely to be a lack of trust and uncertainty about different directors’ strengths and weaknesses.”

This is simply not something that most boards can spend time on during fast-paced, virtual board meetings. When it comes to board dynamics, there is likely a marked difference in the effectiveness of boards that spent significant time on crisis preparation versus those that did not. Strong board leadership is indispensable to facilitate the right dynamics during the crisis.

To maintain board effectiveness, directors can do the following:

  • Clarify board, committee, and individual director roles and responsibilities during and after the crisis.
  • Build flexibility into virtual board meetings to keep the board focused on high-priority items during the crisis.
  • Identify and mitigate common pitfalls when pressure testing COVID-19 assumptions.

Performance and Pay

Organizations with a calendar fiscal year may have set CEO and executive performance goals before understanding the broad impacts of COVID-19. With changes to how companies operate due to the current environment, boards may need to revisit executive pay and performance expectations. As one director noted in a research interview with NACD, “We will simply not be able to achieve much of what we planned for at the start of the year. Surviving is the focus now. Thriving comes next.”

Pay and performance goals need to be flexible enough to reflect the economic reality firms are facing, but fixed enough to guide executive behaviors. In volatility, when boards and compensation committees may feel pressure to make decisions quickly, a strong framework for pay and performance can help directors avoid bad decisions. Board leaders and compensation committee chairs should consider what issues are urgent enough to be addressed now, which are better left to the mid-year discussions, and which are best for the end of the year with the benefit of full perspective.

Boards can adjust executive pay through this period of uncertainty by doing the following:

  • Assess the effectiveness of executive leadership during the crisis.
  • Consider a reset to performance goals for the business in light of the COVID-19 pandemic.
  • Review executive compensation with a structured framework.

Communication

Effective communication with stakeholders during a crisis can be the difference between successfully handling and unintentionally exacerbating the situation. Even small mistakes in messaging can create significant reputational damage. As companies now execute their crisis communication plans, it is important to ensure that they coordinate and reinforce the purpose and image the organization would like to reflect. They should also take care to ensure that communications are thoughtful and not to give in to pressure to prematurely respond. Many boards will also need to be prepared to effectively communicate how they have maintained their core fiduciary duties.

Companies can communicate with shareholders and stakeholders by doing the following:

  • Help management articulate the mission and values in the organization’s COVID-19 message to stakeholders.
  • Communicate clearly how the board is maintaining its ongoing fiduciary responsibilities. According to a recent NACD COVID-19 pulse survey, 28.1 percent of director respondents said that communicating with stakeholders was among their top five biggest challenges in the crisis, and 19.1 percent said the same for shareholders.

Long-Term Risks and Opportunities

Boards have an opportunity to start shaping their companies’ post-crisis strategy, assessing longer-term opportunities and risks in a much-changed business landscape. Boards can also help management teams look around corners to see new and disruptive risks that organizations may sooner or later face. To do so, boards will need to enhance traditional enterprise risk management reporting with more forward-looking information. Roughly two-thirds of directors in the NACD May 2020 COVID-19 Pulse Survey reported including a second wave of the pandemic and the increased use of remote work in their planning. Others recognize that opportunities exist for companies able to make the necessary strategic and structural changes to survive and thrive through this period of disruption, while some industries may be more heavily subject to regulatory changes and shifts in consumer demand.

To prepare for new risks and opportunities, directors can do the following:

  • Work with management to ensure that the board has sufficient forward-looking information to effectively evaluate the risks and opportunities the organization may face coming out of the crisis.
  • Review action plans across multiple scenarios and time horizons.
  • Work with management to establish a clear connection between short-term and long-term objectives, and review action plans across multiple scenarios and time horizons.

For more on how to incorporate adaptive governance into your organization’s response to COVID-19 and future crises, consider the COVID-19 Reopening and Recovery Resource Center and the 2018 NACD Blue Ribbon Commission Report on adaptive governance.


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Comments

Ije JidenmaAugust 01, 2020

THANKS