"Very remote." That is how John Hitchins, a nonexecutive director at two U.K. companies, summed up what many corporate boards thought not so long ago of the likelihood of a pandemic suddenly disrupting countless businesses around the world. Then COVID-19 arrived in the early months of 2020.
Boards swung into crisis mode, often in a matter of days, with many now continuing to take make-or-break decisions for their companies as the virus leaves a trail of bankruptcies, job losses and strategic upheaval across industries and geographies. As that's happening, boards are shifting their focus on the post-pandemic future, despite an array of unknowns, said Hitchins, who is a director at specialist lender and savings bank Aldermore Group PLC and at Societe Generale International Ltd. an investment banking unit of France's Société Générale SA.
"Coming out of it is not just about to getting back to where you were before, but discussing and debating with management what the business model will look like in a post-COVID world and what we have learned from working from home that might well change the way we operate permanently," said Hitchins, whose previous roles including being head of PwC's banking and capital markets practice.
Crafting a robust post-coronavirus strategy is top of mind for many directors. Nearly 60% of 267 directors responding to a pulse survey in late spring run by the Washington, D.C.-based National Association of Corporate Directors, or NACD, said their companies' exit strategies are among their most pressing governance challenges in the coming months, ahead of employee health and safety, the second-highest priority at 49%, and eclipsing more-traditional board remits, such as ensuring appropriate executive pay plans, at 27%, and succession planning, at 13%.
Post-pandemic board discussions are happening with a sense of both urgency and uncertainty for directors getting to grips with new risks. Another survey in late spring of more than 200 directors and executives of public and private companies in a variety of sectors found that nearly 43% believed that the pandemic represents a "fundamental threat" to their company's survival. The survey – run by the Corporate Governance Center of business school INSEAD, advisory company Mazars and business journal Board Agenda – also found that more than 85% of the respondents said their companies are operating in riskier environments than they were five years ago.
Where to focus
"This is the most difficult operating environment I've ever seen," said Peter Gleason, a 20-year veteran of the NACD and its current CEO, in an interview. The dot-com crash of the late 1990s and the financial crisis of 2008 had "a massive impact but they were quick. This? We don't have an end yet."
One area being discussed at boardrooms of all types of companies is supply chains, understanding the new risks of today's increasingly complex and global networks of suppliers and partners, as well as perhaps identifying skills gaps at management and board levels to mitigate those risks, Gleason added.
Manufacturing and distribution channels stretched across borders and time zones may need to be redesigned to avoid the logistics nightmares experienced during the pandemic, for not only practical but also financial reasons.
Recent research from McKinsey & Co. led its consultant to predict that companies across all types of industries should prepare themselves for supply chain disruptions that last four weeks or longer every 3.7 years. As part of that research, the consultants ran various scenarios to understand the costs of shocks to supply chains, with one severe scenario suggesting that such an event could reduce one year of a company's EBITDA by between 30% and 50%.
Despite disruption and uncertainty, boards need to help their management drive strategies forward. "The last thing you want is to be a Rip Van Winkle, and wake up to find the world has moved on," said Blythe McGarvie, a nonexecutive on four U.S. boards: Apple Hospitality REIT Inc., packaging manufacturer and seller Sonoco Products Company, vehicle-parts provider LKQ Corp. and convenience-store chain Wawa Inc.
Strategic M&A and other avenues for growth remain key even today, she said.
South Carolina-based Sonoco, for example, completed a €41.7 million acquisition of Can Packaging, a privately owned sustainable packaging company in France. Among other benefits, Sonoco said the deal adds two production facilities and an innovation center to the U.S. company's portfolio and gives it the potential to expand in new growth markets globally.
Once deals are completed, McGarvie encourages boards to nurture them as they would have before the crisis. "Don't starve your acquisitions. Support your CEO. Now is the time," she said.
For each of those boards, McGarvie said she stays focused on three questions: How is the company doing according to its strategy? How are employees doing? And what is happening with liquidity? "None of the companies of the boards I sit on have liquidity issues, but once a month we talk about it regularly. A lot can change in a month," added McGarvie, a former CFO in both the U.S. and Europe and a director at a variety of companies over the past 20 years.
'Do the right thing'
But there is an additional layer of oversight as directors turn to their own ethics and governance amid heightened stakeholder awareness of the corporate role in environmental, social and governance issues, according to board experts speaking to S&P Global Market Intelligence.
Boards are under pressure to ensure they "do the right thing" when making decisions about potentially thorny issues such as their executives' compensation packages during the downturn, said Doug McAllister, a U.K.-based senior client partner for board services at people management consultants Korn Ferry. He believes that how businesses "behave" in the next 12 months will define their corporate as well as individual executive's reputations among stakeholders for years to come.
Dan Konigsburg, senior managing director of Deloitte's Global Center for Corporate Governance in New York, said boards, particularly in the U.S. following George Floyd's death, are having to ask themselves a lot more questions about "what are our responsibilities to care for our people and the larger society."
Amid such profound questioning, he suspects the pandemic will leave an indelible mark on board strategies. "There is a lot going on in the world today and the virus has thrown into sharp relief that things can go wrong quickly," he added. "This has really woken people up to what seemed to be low risk, high impact events that are listed in that bottom right quadrant of their risk register."
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