COVID-19: Precautions Taken by Boards and Their Reflections on Corporate Governance

Below, I tried to summarize some of the problems and risks that companies currently face in their daily business routines, from the corporate governance perspective. The scope and effects of these problems and risks may vary depending on the nature and size of the company but I believe, despite these factors, the measures taken are very important in crisis management and survival.

Implement an effective communication plan that emphasizes transparency: It is very important to have a communication plan emphasizing transparency and presenting the calm and proficient approach of the board and managers in the COVID-19 process. This plan should also convey that board members and managers are still working hard to make decisions and take actions accurately, although the restrictions apply to them, too. A correct and genuine communication plan will both keep employees in the game and motivate them to contribute to crisis management. The transparency of the critical decisions taken in this period and the processes in their implementation perhaps will be more important than ever before. Because we will be going through an intense period in which everything that companies stated and implemented on transparency and accountability before the crisis, would be tested.

Ensure the continuity of the board of directors and executive board: Considering the extraordinary constraints, including the health problems caused by the COVID-19 outbreak, it will be critical to ensure the continuity of these boards so that the company’s board of directors and the executive board can continue their activities in the coming months and make good decisions for the company. At this point, a revision in backup plans of board members and managers who are in key positions may be necessary.

Review delegation of authority: Review if an update in delegations is required. Usually the tasks in various fields such as mergers & acquisitions, budget variances, financing transactions and employee compensation are carried out with the authority given to management by the board of directors. Considering the extraordinary economic and commercial impacts associated with COVID-19, companies should review these authority delegations and assess whether the scope of current delegations is sufficient in this crisis environment. If it is not sufficient, it may be necessary to reorganize the authority of delegations to allow the management to make flexible decisions as needed and the board of directors to fulfil the monitoring responsibility properly.

Evaluate the supervisory role of the board of directors and how directors can best fulfil their fiduciary duties:

• In this period of crisis, the board of directors should act in a balanced manner causing the least burden on the already intense management team, while fulfilling their responsibility of supervision.
• The boards should devote more time to oversee the new risks and issues posed by COVID-19. In this period, new risks and issues are expected to occur predominantly in the following areas: problems in the supply chain and the financial planning need it creates, liquidity problems especially due to customers’ late payments, emergency backup plans, cyber security measures, human resource issues, workplace safety, travel restrictions and remote work policies.
• By reviewing the dividend policy, the board of directors may choose to act cautiously and not to pay dividends in such a deep crisis period. Considering that the most critical factor in companies’ getting out of this crisis is “cash flow management”, it is a smart and ethical approach for shareholders to support this policy.
• Instead of routine meetings that last all day long or half a day, the board of directors and executive board should have shorter and more dynamic meetings focusing on critical risks, which would make the follow-up and solution of problems easier. During this process, key performance indicators and the risks of COVID-19 should be reported to the board of directors and the executive board at short intervals. Even new and prioritized key performance indicators for the COVID-19 period can be designed. It is possible to hold meetings through video conferencing system and even in legally valid electronic environment in companies which have available infrastructure and article of association.
• In an extraordinary crisis period such as COVID-19, the board of directors can prioritize stakeholders, within the framework of their responsibility to perform fiduciary duties since this approach may also be important for the company’s survival. For example, a company’s obligations to employees, suppliers and credit creditors may take precedence over the company’s obligations to shareholders, for legal and ethical reasons. While deciding on this priority, the board of directors and the executive board should consider the stakeholders who had the most contribution to the success of the company in the past and give particular importance to the business solvency and long-term health of the company.
• The board of directors should ensure that the management fully complies with the quarantine and travel rules set by the government and the rules of remote working. A whistleblowing mechanism can also be supported to keep track of the problems experienced in the new working order and to improve the morale of the employees. As an important change, “remote working” will continue after the COVID-19 period. For this reason, it can be rewarding to get the opinions and suggestions of the employees on this subject already.

Evaluate the effects of COVID-19 on internal controls and internal audit: Companies should consider the effects of the COVID-19 pandemic on internal controls and the internal audit function. Updates related to COVID-19 may pose significant risks for companies, and evaluations regarding these risks (especially in public companies) may need to be disclosed to shareholders. In this process, companies should work in coordination with the audit committee and independent auditors to ensure that their financial reporting and audit activities are working in the healthiest way possible and compliance with applicable laws and regulations in the current situation.

It may be very painful to carry out internal controls during a crisis. During this period, significant changes may occur in internal controls for different reasons, and all these developments can affect the internal control environment of the company dramatically.

New and critical control points should be determined as soon as possible in the crisis environment, and how these controls are adequate, and preventative should be constantly reviewed. Since such a crisis has not been experienced before, internal control points should be updated quickly in the light of daily experiences and cases. Regarding the controls, I think that effective and significant control points determined by operation managers who are the first line of defence of companies would be very useful in this period. Companies may also lose people who have important roles in the application of some controls, and as a result of these losses, may not access crucial information. When these situations are encountered, it is inevitable to proactively implement alternative controls.

Regarding internal audit, companies should review the internal audit plan and assess whether it is appropriate to change the priorities included the plan and whether it is possible to manage remote audits without visiting certain locations. As the COVID-19 continues its impact, internal audit teams will present important suggestions to management by providing important assessments on emerging risks and business continuity.

Crisis periods are the periods that reveal the expertise level of the internal control and internal audit teams in processes besides their competencies in creating risk-based controls, in the most undecorated way.

Bonus payments to managers should be reviewed: Given the market and economic conditions, many companies have postponed their short and long-term incentive plans (premium and bonus payments). Although the effects of the virus are beyond the control of companies, managers who receive generous bonuses in a year where shareholders have serious losses will generally not be viewed positively. On the other hand, compensation committees can work on giving rewards to managers who have shown extraordinary loyalty and contributed to their companies to survive this difficult period resulting from the COVID-19 pandemic.

Consider the period after COVID-19: Boards should also consider the post-COVID-19 period while taking actions or ensuring the actions taken because there will be important changes in the way of doing business and processes. Preparing a guide in this framework can make the lives of employees easier in the period after COVID-19.

Finally, I would like to emphasize one more issue that I think is very important. I believe that board of directors will change their previous habits and ways of doing business after the COVID-19 period and how the board of directors will fulfil their “strategy and monitoring responsibilities” in this new period seems to be a question that needs contemplation to answer.