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Some Unique Challenges for Boards of Directors
by Professor Jordi Canals
The world economy has been put under a tremendous downward pressure with the global pandemic. Economic activity has been reduced to some vital activities in many countries. Companies are under enormous stress. What should boards of directors do during these extremely exceptional times?
Under normal circumstances, the main role of the board of directors is to help and supervise the CEO and top management to develop the company for the long term by serving customers well, and creating value for all. Companies need to serve customers in a unique way, and to do so, they should invest in their people, capabilities, intangible and tangible assets. The nature of these investments requires a long-term horizon and boards should oversee this process.
In this time of crisis, boards also have a special duty: to support the CEO and senior management team so that they focus their efforts in guaranteeing the firm’s survival. Firm survival may be under real threat now due to a variety of reasons, such as people’s health conditions -as a result of the infections-, cash constraints, supply chain restrictions or lockout conditions.
Some reflections can be particularly useful for boards in this context. The first question that board members should ask the Chair and the CEO is to have (as early as possible) a formal board session assessing the strength of the company in this new context. The information required to conduct a good assessment may be incomplete, since the fog is too thick. Nevertheless, in the same way as the CEO and the senior management team should work on strategy issues and share and discuss them with the board, the current crisis makes this exercise even more urgent. The board should understand well the firm’s weak points, the risks and the financial constraints, including cash constraints. The board should encourage the CEO and the CFO to start working with banks as soon as possible on making sure that the company has the liquidity facilities that it needs to operate.
Some attributes of the firm’s strategy will need to change. In many industries, new opportunities will emerge, in part, as a result of changes in consumers’ preferences. Companies will need to adapt to new customers’ behavior and serve them well. Experienced board members can contribute a lot to the board and the whole company in these very important discussions.
The board of directors can be extremely helpful in supporting the CEO in organizing the company for the crisis. The formal corporate organization may need to change in this crisis. At the same time, some new teams may be needed to tackle some of the new critical challenges. These areas fall under the CEO’s responsibilities. But the board should make sure that the CEO has the time and the right organizational support to keep the overall perspective of the company. With its exemplary and professional behavior, the CEO should serve as a vital reference and provide some meaning for employees, customers and other stakeholders, particularly valuable in this context.
In fulfilling its duties and collegial leadership functions, the board always needs to take care of the overall firm’s reputation. This is particularly important in this time of crisis. Through the quality of its governance decisions and the professionalism and fairness that the board and the top management display in their behavior, the firm’s reputation and the firm’s credibility for good governance can be enhanced, even if the company needs to make very difficult decisions. This is a very special time, during which boards of directors have a unique role: to help their companies survive and turn them into respected institutions. Boards should live up to this challenge!
Jordi Canals
President
IESE Center for Corporate Governance
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