Like a hurricane, the novel coronavirus (COVID-19) materialized quickly and gained strength rapidly. In a matter of weeks, entire workforces and supply chains were forced to adapt, and strategic plans were upended. Topics like employee safety and financial liquidity were vaulted to the top of board and executive agendas with cascading implications for compensation, culture, cybersecurity and peace of mind. As organizations navigate this unique uncertainty and plan for the future, what’s the role of the board?
Since the pandemic began, Diligent has been observing, listening and seeking insight—hosting virtual panels and interviews—in an effort to help determine where boards go from here. Below is an excerpt from our latest report: The Pandemic Agenda: How Corporate Boards Are Navigating COVID-19.
Financial Liquidity: Planning for a Range of Scenarios
“It’s the board’s job to ensure management is planning for the right financial scenarios—and that they’ve identified the right set of metrics to report back to the board.”
– Board member via Diligent’s Next Gen Board Leaders virtual roundtable
Several months into the COVID-19 crisis, oversight over financial liquidity remains a board priority—second only to employee safety. Board members and executive teams have been focused on scenario planning—assessing the organization’s cash and credit position against a range of potential scenarios. And there’s a lot to consider right now.
“At my companies, we’ve already seen a downstream effect on capital expenditures and marketing spend,” said one corporate director we interviewed. “The decisions we’re making now are whether to issue debt, draw on our lines of credit, continue paying rounds, etc.”
Board members have been extrapolating scenarios for the next six, nine and 12+ months.
“We’re planning for the worst case, the best case and the most-realistic case, with the understanding that we’ll likely fall somewhere in between,” said one director during our Next Gen Board Leaders virtual roundtable. A recent article in Harvard Business Review was even more cautious, “Even in the best managed companies, corporate budgets may suddenly be blown and recently approved financial plans have to be redrawn.”
This requires boards to keep a lot on their radars as they communicate with management: revolving credit, renegotiated loans, publicly traded debt markets and more. Each option brings with it a host of considerations, including:
- The cost of borrowing
- Impact on the company’s credit rating
- Financing terms: The Harvard Law School Forum on Corporate Governance notes that businesses accepting CARES relief may be prohibited from paying dividends, repurchasing shares or making capital distributions and that some lending agreements may contain negative covenants preventing a firm from taking certain measures in response to COVID-19-related risks
Navigating Areas of Opportunity
The COVID-19 crisis has not impacted all industries equally. Several board members acknowledged great variance in the challenges and COVID-19 response efforts from one industry to the next. A number of board members in areas like food production, pharmaceuticals and essential retail have been dealing with issues like increasing production and even hiring workers to meet heightened levels of demand.
These directors are dealing with an entirely different set of questions and issues. Should the company invest in supply chain technology or the “workplace of the future”—both areas where innovations like AI can give businesses a competitive edge? In an environment of historically low interest rates and depressed stock prices, should the organization move to longer-term maturities or repurchase shares?
Furthermore, what about that project or opportunity that was put on the back burner before the crisis? Now may be the time for “M&A activity that may have been unthinkable just a few months before,” board member Alex Wolff noted in a recent episode of the Corporate Director Podcast.
Deciding Whether to Continue Forward-Looking Guidance
While directors navigate how and how frequently they communicate with management, they also need to consider the issue of forward-looking guidance. As directors try to get a handle on future business conditions, how much should they share publicly?
We’ve heard directors make a case for both sides of this argument. In some sectors, like consumer discretionary products, the market is just too unpredictable. “Until we can envision a time when people would be buying our products again, it’s really hard to issue guidance,” said one board member.
On the other hand, when you create an information void, you invite others to fill it and take over the conversation. Continuing forward-looking guidance is an opportunity to take control of your company’s story, keep stakeholders aligned, and keep parties like activists and analysts from jumping to conclusions.
Find more insights and opportunities in Diligent’s report, The Pandemic Agenda: How Corporate Boards Are Navigating COVID-19 Challenges.