Issue #17                                                                                                     May 2020
Boards Need to Think Beyond the COVID19 Crisis
by Professor Jordi Canals

Since the eruption of the global pandemic earlier this year, many boards of directors have been working with their companies’ management team to support them and help the firm’s long-term survival. Many boards are taking their duty of care more seriously.

Boards of directors are facing various challenges in trying to help their companies in this crisis. I will highlight two of them. The first is the low visibility that we have on the long-term effects of the pandemic on our companies and the global economy. It is difficult to draw scenarios. We do not know whether the pandemic will be under control in six or twelve months. Moreover, though we know consumers’ behavior will change, we do not know how deep the change will be once the pandemic is under control.
The second challenge is that many boards of directors do not have a well-developed competence to work on strategy issues with the CEO. A common practice in boards throughout the world parcels off strategy as the CEO’s and senior management team’s domain. The board approves the key strategic decisions but does not spend a lot of time in strategy debates.
Boards can work on the firm’s strategy issues by knowing the business well, asking some questions on key themes for the company’s future and debating the answers with the CEO. I will describe four of these questions.
The first question is related to company survival. This will still be a very important goal throughout the next months. CEOs are considering some gloomy scenarios. But boards should ask CEOs and CFOs some central “what if” questions. A very important one is to think about how a company can survive if the final scenario for 2020 -and possibly 2021- happens to be a really bad “worst case scenario”. Some industries such as airlines, hospitality and non-essential retail are considering falls in revenues between 50% and 80% of the 2019 levels. 
To consider these pessimistic scenarios, boards should not stick to the GDP growth forecast prepared by governments and central banks. These institutions try to do a good job, but it is very difficult to forecast when everything looks dark. Instead, boards may want to focus on what they consider a very bad “worst case scenario” and accordingly introduce the required correction. Can we adjust the company to it? In this crisis, we should hope for a quick recovery -and this hope is very important for getting rid of fear-, but we should plan for the worst to make sure that the firm can survive.
Strategy reflections: Some forces that will reshape businesses
The second question is which underlying trends in our industry are here to stay, and their impact on our business model. We should take them into account when we think about the future of our company. Each industry is different. Throughout the past weeks of this global pandemic, some emerging trends have grown stronger. I will highlight some of them:
  -Global supply chains are suffering a hard blow with many disruptions as a result of trade restrictions and social distancing measures put in place by governments.  
  -Consumers will do more shopping online if the shopping experience is good enough. Physical stores will not disappear, but the move to online shopping will speed up.
  -Virtual work has become widespread. Online work and meetings may not be as productive as physical meetings. Balancing family with work responsibilities is a challenge. But flexible work time between home and the office may be the new normal. 
  -Online work has an important implication: the days of large corporate offices in prime locations and overcrowded cities may be over. 
  -The quality of the firm’s people remains its highest valuable asset. Individuals are having a great impact in this crisis, helping the company navigate in a difficult context, serving customers by solving their problem and helping other colleagues. Investing in people is even more important than investing in technology or physical assets. 
New board’s agenda and priorities
These trends will have a different impact depending on each industry and company. Boards that care about the firm’s long-term development, under the leadership of their chair person, need to redefine the board’s agenda and its priorities, as most of these trends will become part of the new normal, even if there are still many unknowns. The firm’s strategy needs to take newly emerging trends into account and the board needs to spend time reflecting upon their impact on the firm’s business model and performance.
How do we serve our customers?
Boards of directors should encourage CEOs and their senior management teams to think about how to better serve customers in this changing business context. Winning customer propositions will likely be different when it comes to key dimensions such as pricing, product variety and environmental awareness. People’s policies and development will need to adjust to this new world to attract the best talent. 
The technology platform and capabilities will need an important change to serve more customers online and allow people to do a better job working from home. Sourcing and global operations will need to be redesigned. 
This crisis is not only about a temporary fall in revenues; it will open up more changes and companies that adapt fast and develop the required capabilities will emerge stronger. In this sense, a central question is: Are we serving our customers really well?
Time to stop, think and adapt
After initial effort to make sure that employees´ and customers’ safety is guaranteed and liquid assets are ensured at reasonable levels, boards should spend time thinking about how the business needs to change and set new priorities. In this process, boards should also reflect on their firm’s purpose, their people, and the capabilities that they need to adopt, as well as their reputation and role in society.
Boards can offer a great service to their companies: they can help firms not only to survive, but also -if possible- to create a better future. Companies with sound strategic orientation and good execution not only will do better, but will also create shared prosperity and jobs for many.

Jordi Canals
IESE Center for Corporate Governance
Boards in Time of Crisis: Some Reflections 
Prof. Jordi Canals addresses some of the challenges and responsibilities boards of directors face in the present context of crisis and uncertainty. He offers some ideas on the role the board should play during these times and suggests priorities boards of directors should establish to tackle this current challenge 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 

Corporate Governance News

Proxy advisors update their corporate governance voting policy
ISS and Glass Lewis have issued policy guidance to protect companies from some of the major challenges and shortcomings stemming from the COVID19 crisis. One of the instruments adopted is the introduction of poison pills to protect companies from opportunistic behaviour… read more 
The EU provides new facilities for companies to hold annual meetings
The European Commission has adopted a proposal for a temporary and targeted derogation of the rules governing annualshareholder meetings by which companies will be able to hold their general meetings within 12 months of the end of the financial year, but no later than December 31, 2020… read more
SEC to abandon central aspect of initial proposal affecting proxy advisory firms
The Financial Times reports the SEC is relinquishing a key component of its early proposal on proxy solicitation, namely the portion of the proposal that would have forced proxy advisers—led by Institutional Shareholder Services (ISS) and Glass Lewis—to submit their voting recommendations to companies for revision before distributing them to investors prior to shareholder meetings… read more
UK’s most important investment association addresses FTSE 350 over dividend matter
In an open letter, UK’s Investment Association (IA) has addressed FTSE 350 calling for an exercise of prudence over dividend pay outs. Moreover, IA has encouraged companies to find new ways to foster effective engagement with shareholders to overcome shortcomings from limited personal interactions due to virtual AGMs… read more
Executive compensation under further scrutiny
According to The Wall Street Journal, companies whose leaders forgo taking pay cuts will suffer important reputational consequences… read more
Corporate governance standards of Chinese companies put to the test
The current investigation of Luckin Coffee (the Chinese equivalent of Starbucks), after a serious accounting scandal has put the spotlight on corporate malpractice at US-listed Chinese firms, which also has cast suspicion amongst investors over all Chinese companies traded in the US… read more
EU companies may be held liable for supplier wrongdoings against human rights or the environment
The European Commission is working to pass new legislation to prosecute companies that fail to take due diligence to investigate any form of abuse against human rights, society or the environment in its global supply chain… read more

In Case You're Interested...

Interview with Prof. Jordi Canals on the role of boards during COVID19

The long-term survival and success of a company are the core responsibilities of its board of directors. But how does this role change during times of crisis like COVID19? Prof. Jordi Canals offers an interview to examine the transformation of the role of the board during these uncertain times… watch video interview

New IESE Insight report examines corporate purpose in an altered business environment

The report, completed just as the coronavirus was declared a global pandemic, continues an important conversation that now seems of utmost urgency as we adjust our businesses and societies to the new normal. For many, this global crisis marks a before and after. What are the issues that executives and directors need to reflect on now, as they look for purpose beyond profits in a radically altered business environment?… read more

The COVID19 crisis and its aftermath: corporate governance implications and policy challenges

The European Corporate Governance Institute (ECGI) organized a 24-hour webinar conference worldwide to address, among other topics, corporate governance in war-like times and organizational purpose in times of crisis… read more

Former chief justice of Delaware Supreme Court advocates for reform in US corporate governance system

In an article in The New York Times, Leo Strine Jr. -one of the most influential judges in corporate America- has exposed some of the blatant unfairness of the existing corporate governance system (namely, a lack of focus on three areas: financial soundness, sustainable wealth creation, and the fair treatment of workers), which begs for regulatory action to make sure investors, boards, and executives work in the best interest of workers, customers and the broader society… read more

Should boards create a special committee to oversee corporations’ responses to the pandemic?

Allen C. Goolsby and Steven M. Haas from Hunton Andrews Kurth LLP. reflect on two main issues: how boards can improve their risk oversight responsibility and the best way to monitor how companies are responding to COVID19… read more

ICGN’s statement of shared governance responsibilities during COVID19 Pandemic

In this letter addressed to corporate leaders, the International Corporate Governance Network identifies governance priorities and an agenda of common interest with a heightened focus on the importance of social factors as a key determinant to a company’s long-term financial health and sustainability… 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

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”)
A Way to Learn. A Mark to Make. A World to Change
Barcelona    |     Madrid     |     New York     |     Munich     |     Sao Paulo