Issue #16                                                                                                   April 2020
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
IESE Center for Corporate Governance
Boards of Directors in a Time of Crisis: Some Reflections 
Professor Jordi Canals highlights several goals boards should keep in mind during this time of crisis and suggests some tasks and priorities for board members to consider… read more 
Leading in a Time of Crisis
Professor Jordi Canals offers some advice for CEOs to consider in the current crisis context... read more

Corporate Governance News

The outbreak of COVID-19 renders board engagement key for company survival 
In this article, Forbes Michael Peregrine argues that the magnitude of the challenges posed by the pandemic are so fundamental to corporate stability that the organizational response cannot be left solely to the management team. Ultimate responsibility for corporate affairs rests with the board, and that task is even more pressing when the company's survival is at stake… read more 
COVID-19 will impact company public reporting 
According to Forbes contributor Jim De Loach, there are multiple areas where the pandemic will affect company disclosure beyond financial statements, such as risk factors disclosure, the management discussion and analysis (MD&A) or internal control-related factors… read more
The right and wrong approach to digital transformation in the midst of COVID-19
Forbes contributor Vijay Gurbaxani offers some useful insight on how you should approach digital transformation to help your company survive in the short term and thrive in the long run… read more
COVID-19 sets succession planning as a top board agenda priority
According to the Wall Street Journal, temporary succession planning is a pressing issue and will continue to be in the weeks ahead. Some companies and recruiting experts see Chief Financial Officers as the natural fit to fill CEO positions… read more
Remote work raises new questions on data protection and privacy at the board level
The current context of remote work and data sharing is pushing board members to take a more active role in understanding and discussing how data is being used and protected… read more
European Central Bank asks banks to halt dividends pay until October 2020 
The objective is to strengthen the banks' ability to absorb losses, maintain financing for households, SMEs and large corporations during the current crisis as well as asking shareholders to collaborate in the collective effort to cushion the economic impact of the coronavirus… read more
New version of German Corporate Governance Code comes into effect
On March 20, 2020 a new version of the German Corporate Governance Code (DCGK) came into force. Law Firm Morrison & Foerster provides a complete summary of the most important changes and innovations introduced in the new code… read more
Wells Fargo CEO pitches fresh start for the bank to U.S. Congress 
Charlie Scharf is the third CEO in three years to try to get Wells Fargo out of the bad graces of regulators, lawmakers and consumers. However, unlike his predecessors he is new to the company and thus able duck much of the anger and pin it on prior leaders. Scharf recently spent four hours in front of Congress pitching a new vision of the bank, with the worst behind it… read more

In Case You're Interested...

The Economic Effects of COVID-19 on the World Economy

In this working paper, Professor Nuno Fernandes discusses the economic impact of the Coronavirus/COVID-19 crisis across industries, and countries. It also provides estimates of the potential global economic costs of COVID-19, and the GDP growth of different countries, under different scenarios… read more / read related article / watch video interview

BlackRock Larry Fink addresses shareholders in the midst of the coronavirus crisis

Fink writes to shareholders concerning the effects, consequences and impact of COVID-19 on the company and the asset management landscape, and addresses some of the strategic steps which will be made to help recover from the crisis… read more

State Street CEO offers stewardship engagement guidance in response to COVID-19

Recognizing many companies' necessary focus on financial resiliency at this time, CEO Taraporevala encourages them to also keep material ESG issues as part of the bigger picture and to clearly articulate them as part of their overall business strategies… read more

PwC’s Virtual Shareholder Meetings-What boards need to know 

Virtual annual shareholder meetings are becoming more popular. But this trend has not been without controversy. The Council of Institutional Investors (CII) and some large shareholders publicly oppose virtual-only meetings. Companies thinking about using virtual technology at their meetings will want to ensure the board and management are aligned. And they will want to discuss whether it is appropriate to engage with shareholders on this topic… read more

ESMA Issues Guidance on Accounting Implications of COVID-19

The European Securities and Markets Authority (ESMA), the EU securities markets regulator, has issued a public statement on some accounting implications of the economic support and relief measures adopted by EU Member States in response to the COVID-19 outbreak… read more

PwC’s Global Economic Crime and Fraud Survey

Fraud and economic crime rates remain at record highs, impacting more companies in more diverse ways than ever before. With this in mind, businesses should be asking: Are we assessing threats well enough…or are gaps leaving us dangerously exposed? Are the fraud-fighting technologies we’ve deployed providing the value we expected? When an incident occurs, are we taking the right action? PwC’s survey examines these questions, among others, to help companies assess their readiness, deploy effective fraud-fighting measures, and act quickly once they're uncovered… read more

Activists Will Show Their True Colors in COVID-19 Pandemic

David Katz and Sabastian V. Niles from Wachtell, Lipton, Rosen & Katz raise concerns on activist campaigns that profit from the crisis while destabilize and distract management teams and boards from their focus and full efforts on combatting the COVID-19 pandemic to the detriment of all stakeholders, including shareholders… read more

IESE's Recent Research on Corporate Governance 

“Disclosure Regulation and Corporate Acquisitions”

Journal article (April 2020)

Journal: Journal of Accounting Research
Authors: Bonetti, Pietro; Duro, Miguel; Ormazabal, Gaizka
Read summary

“Political Connections and the Informativeness of Insider Trades”

Journal article (April 2020)

Journal: Journal of Finance
Authors: Jagolinzer, Alan D.; Larcker, David F.; Ormazabal, Gaizka; and Taylor, Daniel J.
Read summary

“Beyond the Target: M&A Decisions and Rival Ownership”

Working paper (last revised: February 2020)

Authors: Antón, Miguel; Azar, José; Giné, Mireia; and Lin, Luca Xianran
Read summary

“Comments on the Potential Procyclical Effect of IFRS 9 During the COVID-19 Crisis”

Occasional paper (March 2020)

Authors: López Espinosa, G; Ormazábal, Gaizka; Sakasai, Yuki
Read summary/ read related article/ read full article

Upcoming Programs

Executive Program: “Value Creation Through Effective Boards”

*New date: September 21-24, 2020

Location: IESE, Barcelona Campus

Visit the program website

*Due to Coronavirus outbreak the program has been postponed from May to September 2020.

IESE CCG-ECGI Corporate Governance Conference

The IESE Center for Corporate Governance (IESE CCG) and the European Corporate Governance Institute (ECGI) co-organized the “Corporate Governance and Ownership with Diverse Shareholders” conference, which took place at IESE's Barcelona Campus on October 25-26, 2019. The high-level event gathered the leading scholars in the field, CEOs and top executives, chairs of boards, investors, regulators, and multilateral organizations.

Check out the highlights of the conference in this video summary:

A detailed report of the conference is available here

A summary article of the event is also available here

Get access to all conference papers and discussions on the conference website (under the section “program”)
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