Webinar: hosted by Governance Professionals of Canada
A panel of governance and risk experts united to deliver well-timed insights and thought leadership on key questions and concerns encountered by businesses and their Boards as a result of the continuing COVID-19 situation. The speakers for this webinar were M.E. (Peggy) Gilmour – Chair, Institute of Internal Auditors, Andrew MacDougall – Partner, Osler, Hoskin & Harcourt LLP, Stephen J. Mallory – President, Directors Global Risk Consulting Inc., Shona McGlashan – Vice-President Governance of Vancity and Andrew Poprawa – Former President and CEO, Deposit Insurance Corporation of Ontario.
The panel provided practical insights and guidance for governance and risk professionals, executives and corporate directors. For length and clarity, the comments below blend together the views expressed by the panel.
How is the current situation different from other crisis situations?
Moderator Stephen Mallory opened the conversation by reflecting on the parallels between wartime situations and the COVID-19 situation. Participants were urged to read An Open Letter from Business Leaders on Limiting Coronavirus’ Spread. The panel distinguished the COVID-19 situation from wartime in terms of global impact and accelerated advancement as well as the absence of at-fault provocations and speculated whether war room tactics could effectively respond to COVID-19 given the impact on every individual. The panel concurred that COVID-19 set in motion extraordinary challenges requiring extraordinary decision-making by all levels of business and society.
Are enterprise risk management (ERM) plans helpful in addressing the COVID-19 situation?
The panel noted that, while enterprise risk and crisis management plans are unquestionably advantageous as an initial point of reference in addressing the COVID-19 situation, plans might fall short in terms of addressing a pandemic. Participants were referred to pandemic plans adopted by many provincial governments as well as the federal government following the SARS outbreak (see https://www.canada.ca/en/public-health/services/flu-influenza/pandemic-plans.html)
The panel observed that the COVID-19 situation requires a multifaceted planning approach from which leadership roles and responsibilities must be defined and experts identified to support business leadership. Importantly, the plan must invoke regular communication protocols between management, who is assessing and executing the plan, and the Board.
The panel distinguished a Canadian ‘stakeholder’ primacy regime from a US ‘shareholder’ primacy regime and suggested that companies undertake a stakeholder analysis and design communication protocols accordingly to address the issues for different stakeholder groups.
How should Boards react?
Due to the unprecedented and far-reaching impact of COVID-19, in order to effectively assist management in assessing the evolving risk profile and executing critical decision-making, Boards must offer support and generously contribute to the evolving situation in terms of availability and being fully apprised of impact issues. The panel noted the dual demands faced by directors who serve on multiple boards as well as outside executive roles and the importance of utilizing technology as a communication enabler for interactions between Boards and management teams.
Questions the Board should be asking.
The panel concurred that the health and safety of employees remains a paramount consideration and Boards must query and seek assurances from management that COVID-19 protocols have been invoked to protect the workforce.
Boards must remain appropriately inquisitive about on-going enterprise risks such as cyber and terrorism and ensure the veracity of preparedness for these and other risks notwithstanding COVID-19.
The panel noted that, from a practical perspective, the Board and company leadership must balance the necessity and immediacy of tactical responses to COVID-19 against other risks and triage issues and resources, questioning and responses accordingly to ensure that essential work is done.
Board agendas have shifted to address issues that are critical to management and non-essential items deferred during the COVID-19 situation.
When does the Board reassess its goals? What process should be followed? What happens to incentive payments?
The Board must be the “voice of calm” and seek assurances that all aspects of risk are considered and that actions, which contribute to the long-term viability of the enterprise, are executed while others are put on hold. Importantly, from a Board duty perspective, “the Board must expend the right amount of time on the right issues” during COVID-19.
From a process standpoint, Boards and management should review business continuity plans to assess whether the spread of identified risks and the envisioned responses are sufficient in the COVID-19 situation and exercise ingenuity where appropriate.
Across the globe, COVID-19 has adversely impacted stock prices and since the stock price serves as a key measure upon which goals and incentive plans are established, Boards and management must communicate assurances to the workforce that goals and incentive plans will be re-examined and, importantly, adjusted accordingly as the COVID-19 situation evolves.
Liquidity concerns – is COVID-19 a Black Swan?
The panel acknowledged that liquidity concerns represent an immense risk for individuals and referred to the emergency liquidity arrangements made available by the government of Canada; OSFI’s lowering of domestic stability buffers required by commercial banks (to reinforce commercial banks ability to supply credit to the economy), and the Bank of Canada rate cut as collective proactive counter measures to the economic impacts of COVID-19.
The panel noted that both lenders and borrowers are examining debt facilities as a result of COVID-19. Companies were urged to review debt facilities to determine whether support is required or whether funds can be drawn down quickly if necessary. Additionally, debt covenants are a key issue for the capital markets and it will be very challenging to raise funds and accordingly companies may need to explore cost cutting measures.
Boards and management should utilize internal audit teams for support in assessing and addressing the financial impacts of COVID-19. The panel noted that most audit plans would be put on hold during COVID-19. The panel suggested that a key component of the internal audit team is diligence and that the COVID-19 situation presents an opportunity to utilize the expertise of internal audit teams to assess and mitigate risks associated with COVID-19.
The panel provided insights on whether climate change risks could be leveraged in the COVID-19 situation. By way of examples, it was noted that while remote work directives and curtailed travel might address climate change risks; climate change risks are expected to endure beyond COVID-19. The panel briefly reflected on the idea of societal changes and the opportunity for societal improvements or for doing things differently as potential positive outcomes of COVID-19.
The role of the governance professional and how it is affected by COVID-19?
The panel noted that governance professionals support Boards and Board Chairs by facilitating Board level decision-making. Additionally, governance professionals could relax process rigour and exert robust communication practices by distilling information about the different COVID-19 planning elements undertaken by management in order to leverage the Boards contribution and exercise of Board duties in response to the COVID-19 situation. To this end, governance professionals may also serve as a conduit for questions posed or information requested by the Board.
Further, the panel noted the need for agile and astute monitoring skills that could be performed by governance professionals to ensure that, as the monitor of company culture, that Boards are apprised of the impacts of COVID-19 on company culture. The panel also suggested that risk management activities will evolve and stressed the importance of planning for multiple events occurring at the same time.
Consider the supply chain and third party contract risks
The significance of supply chain risks and business inter-dependency was strongly emphasized by the panel. The panel recommended a detailed review of the supply chain network (a mapping of supply chain suppliers and suppliers to suppliers) to be undertaken and alternatives sources of supply identified if necessary. In this context, the panel stressed the importance of third party risk management activities to determine the risk exposure in light of COVID-19.
The panel recognized that the health care industry in particular is under extreme pressure and noted the additional risks for businesses to the extent of their reliance on supply links to China.
The risk management process and the Board during COVID-19
The panel noted in general terms that risk management frameworks are based on likelihood and impact. COVID-19 is no longer a likely risk and governments and business leaders are showing impressive responses to the risks triggered by COVID-19. The panel suggested that the questions around resiliency is key as opposed to scenario planning particularly since COVID-19 triggered double and triple threats making scenario planning more complex.
The panel stressed the vitality of timing of risk responses during COVID-19 – what is done in a week, a month or a year as the situation triggered by COVID-19 evolves. The Board must be apprised of the risk and the strategic responses to the risks. The panel acknowledged the importance of succession planning.
While the Board Chair serves a vital role during the COVID-19 situation and is a primary conduit between the Board and management and a sounding board for the CEO in particular, additional resources must be utilized to the fullest extent possible. To that end, under the direction of the Chair, businesses can utilize the skills of individual directors. The Chair may also serve as a conduit between the Board risk committee and management. The panel stressed the importance of agility as management cycled a variety of issues through the Board
Reputational risk and legal issues arising from COVID-19
The panel recommended that it was important that businesses not lose sight of the long term impacts of decisions and suggested that the current situation presents and opportunity to do the right things that will enhance reputation over the longer term. Notably, if a business focuses on financial gains during COVID-19 it is likely to suffer reputational harm.
A variety of legal issues were triggered by the COVID-19 situation. The initial legal concerns focused on privacy and employee matters and quickly evolved to an analysis of force majeure clauses within commercial contracts. In terms of mergers and acquisitions transactions, businesses are seeking a legal determination of the meaning of ‘material adverse change’ to guide the course of business transactions and decisions. The panel noted that the law could hinder or support adjusted strategies to address COVID-19.
The panel stated that a number of regulatory changes invoked during COVID-19 in terms of government and government agencies acquiring broader powers to regulate will dramatically impact business and strategies.
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