Impact of Covid-19 Pandemic on Corporate Governance

Impact of Covid-19 Pandemic on Corporate Governance
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Introduction
As argued by Eccles (2021), due to the Covid-19 pandemic, Corporate boards have to make several difficult decisions as there are several stakeholders (that may have diverging interests) associated with any business. One tough decision that boards have to make is related to the relative importance of ensuring employment vs. declaring a dividend. Under ordinary circumstances, the dividend policy decision would have been straightforward: follow an agreed-upon dividend policy or choose a proportion based on investors’ expectations and earnings by the business. However, as Paine (2020) highlighted that due to the pandemic, many people have lost their jobs and there is a looming uncertainty on the depth and duration of the crisis.
This paper presents the influence of the pandemic on corporate governance practices in businesses and also identifies certain practices to be followed by business leaders to ensure sustainability.
Sustainability and Corporate Governance
Ganu and Kuk (2021) identified that five key themes related to sustainability have traditionally received attention in corporate governance: First, there is a need for increased commitment to ESG (Environmental, Social, and Governance) issues so that priorities of business can be identified. Second, there is a need for a stronger commitment to equity, inclusion, and diversity. Third, the impact of operations on the environment and climate must be given importance. Fourth, executive pay in any organization must be linked with the sustainability targets for any business. Fifth, businesses must look at long-term value creation for shareholders (although it is difficult for public companies, as they have to deliver quarterly results). However, many of the above-mentioned practices are not yet mainstream (Paine, 2020).
Financial Corporate Governance and Pandemic
There is a renewed discussion on corporate governance due to this pandemic (Paine, 2020). Paine (2020) argued that most of the boardroom discussions are now focused on several considerations: symbolism of returning cash to shareholders in a time when many employees are being laid off; the potential future opportunities lost (or gained) by going against (or following) call by governments for dividend cuts; the impact of maintaining vs. suspending (or reducing) dividends on the reputation; shareholders' expectations and their reliance on dividend income; and strategic plans and cash positions. The pandemic made these decision complex not only in terms of taking a decision but also in how to make public communications. Paine (2020) argued that different decisions were taken by different organizations: In the US, most large banks committed to maintain dividends despite authorities advising against it. In the UK and Europe, most of the banks decided on dividend cuts as advised by authorities.
Whether a business goes with dividend-cut or not depends on its shareholder-centricity, which is based on ‘agency theory’ that management must work on creating value for shareholders (Paine, 2020). According to Wigglesworth et al. (2020), there are many shareholders; individuals as well as institutions (charities, foundations, and pension funds) that are highly dependent on this dividend income. In the past three decades, businesses have become increasingly ‘shareholder friendly’, returning a higher proportion of earnings in form of buybacks and dividends. Now, due to the pandemic, most of the companies are forced to conserve cash and reduce dividends up to 20%. (Wigglesworth et al., 2020). Paine (2020) argued that the shareholder-centric model is justified as the management is appointed by shareholders to create value for them. However, the pandemic has resulted in increased pressure and demand from various stakeholders and has led to increased expectation for societal engagement. Therefore, management in various organisations have started updating the board about the situation regarding different stakeholder groups, and the health and safety of employees are being given a high priority and therefore businesses are focussing on setting up systems and technologies that can allow employees to be able to work remotely and continue their employment (Paine, 2020). However, Wigglesworth et al. (2020) identified that this dividend pay-out may continue for some time as governments are expected to increase corporate taxes to bring the economy back on track.
Non-Financial Corporate Governance and Pandemic
Besides the above-mentioned liquidity concerns (dividend payout and executive compensation), there are several other considerations that the board of a company must look at: The first consideration is to enhance the existing information and reporting systems that are used by the board for oversight. The information and reporting systems can help the board to receive relevant information on a timely basis, thereby allowing it to identify, monitor, and respond to various material business risks and red flags that are a result of the Covid-19 pandemic. Also, it is recommended to the board to form a special committee that can be assigned the responsibility of evaluating the risks, adopting any preventive and responsive measures to ensure that there is a minimal impact of the pandemic on the operations of the business. Also, detailed and timely resolutions and minutes of the meeting of the committee must be documented. This would be particularly helpful in situations where the committee declines to adopt any measure, and these documents will show the good faith of the committee and why it declined to take ce...