Addressing COVID-19: Key Considerations For Board of Directors

July 10, 2020

As we enter the recovery mode from the COVID-19 pandemic, some companies may struggle to manage challenging economic conditions. This is where company directors must fulfil their corporate governance role and duties to ensure business recovery in this “new normal” business landscape.


This includes assessing whether the company’s management team is taking appropriate actions, overseeing the company’s operational viability, legal compliance, financial performance and ensuring that business continuity and risk management plans are implemented expeditiously.

In this alert, we discuss the practical issues which the Board may face and steps to be considered by the Board in responding to the crisis.


Key Areas & Considerations

In a recent poll conducted by the Institute of Corporate Directors Malaysia, the results show that the top four areas that Boards were planning to evaluate and improve on to strengthen their organisations in response to the COVID-19 pandemic relate to the following:

  1. IT infrastructure

  2. Human Resource Management and Policies

  3. Reputation and Crisis Management Planning

  4. Effective Stakeholder Communication

In view of the challenges that lies ahead, the Board should take on a more active role to ensure that they are well informed about all facets of the company’s financial and operational situation. This will enable them to propose strategies to deal with the issues related to the economic crisis caused by the pandemic, including the following:

  1. Forming a COVID-19 committee or similar task force which reports to the Board on a periodic basis to discuss all COVID-19-related issues which affects, or could affect, the company. The committee or task force may include members of management, legal, finance, compliance, operations, HR, and IT.

  2. Managing legal risks concerning the rights and obligations relating to the company’s performance under its contracts such as contractual provisions on force majeure, contract termination, material adverse change, breach of contract and indemnity.

  3. Addressing cybersecurity, data privacy issues and phishing attacks (including protecting the company’s intellectual property and trade secrets), particularly due to employees working remotely and to mitigate any insider risks which a company may face due to disgruntled employees who are facing redundancy and may attempt to unlawfully use the company’s intellectual property or gain financially from selling the company’s trade secrets.

  4. Restructuring of the company’s loans and debts or obtaining additional liquidity through refinancing.

  5. Negotiating with creditors or financiers to avail the company of any corporate rescue mechanism or financial relief measures offered by relevant financial institutions and government agencies.

Additionally, directors are encouraged to ascertain the following at the outset prior to making decisions:

  1. Information they require from both internal and external parties, including the management, respective Board committees of the company, company records, third-party experts and other professionals.

  2. The most efficient method to obtain such information promptly and accurately.

With the focus on accountability in the current regulatory and corporate governance environment, adequate record-keeping of communications and minutes of meetings reflecting sound, informed and deliberative decision-making are frequently used to prove or disprove that directors have satisfactorily discharged their statutory and fiduciary duties.

As such, the Board should ensure that each decision made by the Board should be clearly recorded in the minutes of meeting. A brief outline of key material considerations to the decision, any dissenting views and the amount of time spent on discussion may assist in establishing that the Board had exercised proper care and diligence in their decision making.


Fiduciary Duties Of Directors

In addition to the statutory duties imposed under the Companies Act 2016, the Board owes fiduciary duties to the company and must act in the best interest of the company, including advancing shareholders’ economic interests to ensure long-term profitability of the company.

For so long as the company remains solvent, the shareholders are the beneficiaries of corporate decision-making, and thus, shareholders are in a position to assert derivative claims for breach of fiduciary duty against directors. Upon insolvency, the companies’ creditors will have legal standing to assert derivative claims for alleged breaches of fiduciary duties against the Board.


“Best Interests Of The Company”

Both the statutory and fiduciary duties of a director require that they exercise their powers not arbitrarily but in the best interests of the company.


It is therefore essential for the Board to prudently set business continuity plan in place which are in the “best interests” of the company to address the potential risks of disruption, including liaising with the management team on relevant contingencies and continually reassessing the appropriateness of such plans in light of the unprecedented and unpredictable developments and devastating effects of the COVID-19 pandemic.


When considering insolvency issues, the Board may be held accountable for not acting in the “best interests” of the company in the event the company goes into administration or liquidation and the Board had not put in place adequate crisis management plan. Basic contingency planning should be adopted by the Board, to ensure that the Board had considered the interests of creditors in the event the company becomes insolvent.


Further, the Board should consider the processes which may be available to the company, including corporate voluntary arrangements and judicial management, which are two corporate rescue mechanisms provided under the Companies Act 2016.


With stresses caused by the COVID-19 pandemic on companies’ cash flow and repayment obligations under existing loan/facilities agreements, directors are advised to regularly review the financial position of the company and ensure that liabilities are kept to a minimum and that new liabilities should not be incurred unless the company is able to satisfy such liabilities as and when they fall due.


Conclusion

The Board plays a pivotal and imperative role amidst the unprecedented global crisis brought by the COVID-19 pandemic. Directors are urged to consider how best to position the company for resilience and success in the “new normal” business environment. In doing so, directors should be mindful to act in the best interests of the company when discharging their duties in ensuring that the short, medium and long-term impacts of the pandemic are adequately addressed and mitigated.

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