Covid-19 Is Rewriting the Rules of Corporate Governance

Harvard Business Review, 2020-10-06


  • The dividend policy can’t stay the same – it’s either the stated dividends, or the need for the company to borrow funds (and oftentimes – using equity at the shareholders’ expense).

  • Paying dividends when staff are terminated or furloughed is a very questionable decisions with a clear priority given to shareholders at the expense of the company and its future.

  • On the other hand, shareholders (especially those reliant on dividend income) would suffer should the dividends be reduced or cut completely. See here.

  • Any decision on dividend in the time of crisis is a clear signal to the company and the market and as such – it has to be properly communicated to avoid second-guessing.

More structured attention to stakeholders

  • That’s where the loyalty of the Board is seriously challenged: is it to shareholders? To the company? Both (in this case both options are mutually exclusive)?

  • One of the ways to look at this challenge is agreeing that the Board’s loyalty is to the share, and effectively – to the long-term future of the company. This requires rethinking the Board-shareholders dynamic, as shareholders can diversify away, and the company can’t (by definition).

  • Long-term view requires Boards to become more actively informed on the relationships with each stakeholder group (customers, employees, suppliers, communities and shareholders) and identify the emerging trade-offs in a timely fashion. Such trade-offs not only need to be acknowledged, but also dealt with in a way consistent with the company’s purpose and strategy.

  • It’s easy to claim to have commitments to all stakeholders, but there must be a process in place to oversee these commitments. There will be increased pressure from all stakeholders to incorporate their perspectives and voices.

More Attention to How Business and Society Intersect

  • Pre-COVID it was relatively easy to ignore the society as a whole, but as the end of the emerging crisis depends largely on the health of the population, many companies chose to participate in bringing forward this resolution. Responses varies from retooling to produce PPE, to sharing proprietary data, to offering logistical capabilities and capacity.

  • Risk management and oversight systems will have to be updated to incorporate societal risks and social issues in order to improve, or at least not to make worse, the impact on society.

  • Boards are expected to call companies to take a more active role in helping to address societal problems.

More comprehensive approach to compensation

  • The classic “pay for performance” comp model for execs ignores the issues of fairness and externalities (impact on third parties and the environment). It doesn’t deal with uncertainty.

  • During this pandemic, many (if not most) targets became unachievable, and the execs are now in charge of navigating the crisis – something they don’t have any pay targets for. Changing targets downwards is laughable, because no one adjusts them upwards if the conditions are unexpectedly favourable.

  • There’s no one-fit-all solution, but definitely keeping exec pay intact when employees are taking pay cuts is inequitable.

  • Since the proper pay system should have the company’s long-term interests at heart, some ESG targets (environment, diversity, etc) may participate in determining exec pay. [MK: this varies culture to culture, of course.]

More deliberative decision-making

  • On the surface, maximizing shareholder value goes against buying PPE (personal protective equipment) for staff. Decisions become qualitative, as it’s not possible to create a proper business case for employee protection. [MK: if the Board really needs explanations of this sort, it’s better to resign.] And while it’s easy to interpret numbers, discussing matters of values and “what’s right” requires Board dialogue.

  • The number of inputs dramatically increases: dealing with uncertainty requires capturing and analyzing much more signals than before; the outputs expand, too, as the Board increasingly communicates to a diverse set of stakeholders.

  • Now is the chance to build a new way of decision-making, as even in the post-COVID world things will not get back to the “old normal”. More information will be needed, and this will put extra stress on the Chair to incorporate it into the agenda.

In a nutshell

  • The nature of Board meetings is changing into holding a series of smaller, but more frequent meetings, and the overall time commitment will increase.

  • Successful turnaround will require more time with the management on strategy, new performance targets (since the old “business as usual” models won’t be too applicable), compensation and much more. [MK: this will finally allow the Boards to utilize an ages-old concepts of “governing by walking around”, i.e. getting out of the ivory towers and getting hands and feet dirty.]