'In crisis there is opportunity'
As directors of every company grapple with the effects of COVID-19 on their organizations, it is inevitable that corporate governance in general and boardrooms specifically will be forever changed, in ways both big and small. Since the onset of the pandemic, I have had the opportunity, in my role leading WomenCorporateDirectors, to have conversations with hundreds of board members across the U.S. and around the world to discuss how this crisis is affecting governance concerns, best practices, and their direct involvement with their companies.
These discussions have revealed some new examples and nascent trends of board oversight that may well carry over to post-COVID governance. As we face this existential threat together, but experience its impact in highly different ways, there are some takeaways that might prove enlightening to other corporate directors around the world.
Sharing the pain but incentivizing exceptional performance — executive compensation based more on strategic performance vs. financial performance.
Most directors I have spoken with emphasize that their compensation committees have been meeting overtime to address the issue of executive comp, especially in light of the cessation in many companies of share buybacks and dividends. Many chairs have taken this issue to the full board.
On the one hand, there is a priority on conserving cash and, as has made many headlines, in some companies both the CEO, the board and often other executive officers, are forgoing their salaries or taking pay cuts. Salary reductions — starting at the top and then moving through the organization — are a way for everyone to share the pain in order to temporarily reduce costs and help avoid permanent layoffs.
On the other hand, many boards recognize that their management teams are working in extraordinary ways, under unprecedented circumstances. They want to incentivize that dedication. While there is a lot of pressure to reduce compensation across the board, for some companies, it’s a complicated cultural decision.
Directors acknowledge that executive compensation this year may not be about financial performance, but about strategic performance in keeping the business afloat. They may not want to reduce incentives to top team members who are so critical to getting through this crisis and driving company survival.
Despite cost cutting, cybersecurity is getting a big spend.
Many directors are expecting their companies to come out of this crisis much stronger in cyber and data security. With millions of employees working from home, sharing sensitive and proprietary company information from laptops, iPads and phones, endpoint security has become a top priority for both management and boards.
COVID-19-related cyber attacks have exploded with so many people having to shift quickly to less secure devices. Even in this time of cash preservation, directors see a heavier investment in cybersecurity as essential not only now but also for the long term. Boards see an opportunity to close gaps that needed to be fixed before the pandemic, especially with the vulnerability of remote devices, the increased use of wifi, and training employees on how to avoid risk.
Supply chain scenario-planning was a weak spot for many companies.
The biggest blind spot directors see is not having previously done scenario-planning on the potential impact of a pandemic. Many boards believed they had taken proper steps to diversify suppliers and mitigate risk as part of their strategic planning, but did not foresee the extraordinary impact of a pandemic on earnings or the potential scale of its impact on the global supply chain. The crisis has truly revealed unexpected vulnerabilities across all industries.
Companies have become much more engaged with their suppliers in recent years, and the trade war with China had already prompted many to shift their sourcing to different regions. But current severe shortages and delays — with very few plan B’s — have had boards asking management for sophisticated scenario-planning to address the domino effect of these kinds of extreme conditions across multiple steps in their supply chain. This is a trend we believe will extend beyond this current crisis, to become part of boards’ more sophisticated future risk analysis.
“In crisis there is opportunity.” COVID-19 is driving discussions around new strategies and new business and cost models.
A common theme we hear is “never waste a crisis.” This black swan event has opened the door for companies to have candid conversations that may not have happened otherwise.
For years, many businesses have been enjoying quarter after quarter of robust growth, but our reality today is forcing a new discipline. Boards are beginning to rethink everything on the balance sheet — future revenue scenarios, underlying cost drivers, and supply chain considerations — and focus more on cash management and liquidity.
But they also view this as a time of great opportunity to innovate and accelerate the company forward. Companies that were only partially coming into a digital model are suddenly leapfrogging quarters of planning to meet what’s required today. To position themselves for the longer term, companies are exploring new top-line revenue opportunities or M&A deals as markets shake out.
Also, while activist shareholders have been notably subdued since the pandemic, as their portfolio companies are struggling to survive, glimmers of recovery will once again spur activity. Companies expect opportunism from activists in future quarters as there is more blood in the water from companies who haven’t been able to make it through the crisis.
Boards are meeting much more frequently and expanding their role.
While directors continue to emphasize that their boards do not want to become operational, they do say their boards have become more involved with tactical advice during the pandemic. They are working to strike the right balance with management, and that balance is varying company by company.
Boards have moved from convening once a quarter to once a week or biweekly through virtual meetings, with weekly updates from the CEO or CFO. Audit and risk committees are much more active with new risk assessments. Compensation committees are more active in addressing layoffs, furloughs and pay actions for management and directors.
The best boards are leaning in on strategy changes and pivots, worst-case scenario planning, and addressing liquidity issues, risks and opportunities for the business. However, once the crisis is over many foresee a return to pre-virus norms.
What management needs most is the board’s support.
As management is under siege, many directors believe management needs to feel their boards are behind them during this 24/7 existential crisis. They believe the best thing they can do to support their CEO and senior executives right now is to help them focus on survival — and let the less important things wait. Streamlining requests to the CEO and CFO and removing less critical demands and concerns allows management to focus on the all-important tasks of keeping the business running.
The directors I speak with want CEOs to be candid about their top concerns. They are instituting an “open door policy” so that CEOs can call whenever they need to run an idea past them.
Boards today are having some of the most meaningful conversations they have ever had about their companies and their business. This is painful for many, but also a transformative time.
Susan C. Keating is CEO, WomenCorporateDirectors Foundation (WCD). WCD has created a COVID-19 Resource Center for directors.