Covid-19: A new challenge for corporate governance

Miguel Gallardo Guerra

Bello, Gallardo, Bonequi y García (BGBG), Mexico City

mgallardo@bgbg.mx

Samuel Uziel Rivero Prado

Bello, Gallardo, Bonequi y García (BGBG), Mexico City

surivero@bgbg.mx

Corporate governance

According to Vázquez-Palma, corporate governance should be understood as the way in which companies are directed and controlled. It is the rules, principles and procedures that regulate the structure and functioning of the governance bodies of business companies.[1] Corporate governance includes, among other things, the relations among the board of directors, management, shareholders and with other parties, including employees, suppliers and so on.

The benefits provided by corporate governance include helping us with the correct functioning of the company and helping to generate value to our company. If a company is functioning well, we create credibility and stability, which at the same time reflects trust in our clients and employees.

Our corporate governance rules must establish:

• the way in which the company’s decisions must be taken;
• the corporate policies, whether they are investments, mergers, acquisitions, appointments, etc;
• the control mechanisms for the correct execution of the company’s management with the introduction of a plan; and
• the fulfilment or compliance with these regulations, which establish policies and processes to guarantee that a company's people and governance bodies comply with the regulatory scheme.

Based on the above, we can see that a pandemic, in this case Covid-19, creates several problems with corporate governance.

First, the pandemic creates problems with decision making. When countries implemented protective measures such as quarantine or curfews, in order to comply companies were required to make changes in their marketing, investment, recruitment and meetings. Those measures represented relevant temporary changes to the company’s functioning.

Second, the control mechanisms for the functioning of the company and, therefore, its plans, are totally affected and must be changed. This is necessary to face the protective measures since the main priority is to implement the actions required to cope with the pandemic into our corporate governance without risking our market and functioning.

As a result, the third point is the effect on compliance. Changing plans requires changing the company's internal rules, which initially could present some confusion or even a breach of compliance rules from the corporation's employees.

Altogether these three points represent a significant problem, which transfers into the company’s development and even its existence. As we can see, as corporate governance is an essential element of the company, the protective measures required under the pandemic represent new internal and external challenges for the corporation.

Areas of opportunity

The problems described above are exemplified and, at the same time, their analysis is deepened as follows.

As we have already seen, the first challenge we face is the decision making. A company lives through its decisions. A correct decision may imply gathering investment or potential customers, which can also imply a good state of mind for our employees. We must remember that a company as an organisational unit needs two factors: capital and work. These are understood as assets and rights, with the latter being the activities of peers (employees, suppliers and clients).[2]

Consequently, the first problem is that due to the protective measures we must take, measures such as working from home, which represents a great change in the company’s functioning. Even though our rules are well-established, they are mostly designed for their compliance within our company, that is to say, the workplace. As a result, we must know what this decision represents because two situations may arise: the first one is that employees increase their productivity; but the second  is completely the opposite – that  employees decrease their productivity. It is important to mention that there is a greater possibility of the second situation occurring, as the protective measures affect us all since work generally tends to decrease.

Another important decision is to establish whether the company must stop operations, either because of its commercial downturn or due to the security of the work force. This decision is very delicate, since it represents income, supplier, market and even client and employee loss. If we do not adapt some measures in our corporate governance to address this situation, we could lose a large amount of value.

Regarding the problem arising from the company's control mechanisms, we are presented with a scenario in which the control of our organisation will be different, because we must coordinate in a different way than before. Taking the example of working from home, it is quite different coordinate people who interact physically within our company than coordinating them remotely. Even though there are online tools to facilitate remote meetings, they do not have the same impact as in-person mechanisms, from an admonishment to corporate meetings.

Regarding compliance, this is a great area of opportunity because it represents the policies and processes guaranteeing the fulfilment of our corporate rules. As established earlier, rules are created to be fulfilled in the workplace or in situations where either the board of directors or the employees interact. Nevertheless, without physical interactions, relationships must change and, therefore, ways of working change too.

These two points are the root of the problem, but they are also the source of our solutions.

Now, such problems are inherent to our company even though they arose from the protective measures in response to the pandemic. They are problems that we must solve and, even though we did not create them, we can control them. But what happens with those problems outside of our organisation?

Such is the case that is being observed in several countries, but we will use Mexico as an example.

Since 27 March 2020, a series of unprecedented actions have been published in order to tackle the health contingency and one such decree established that the Ministry of Health has the capacity to create other actions if deemed necessary. But those actions were only intended for the public sector.[3] Later, on 31 March 2020, the Ministry of Governance published a decree of the Ministry of Health in the Federal Official Gazette in which the following was provided:

‘[...] ARTICLE ONE: It is established as an extraordinary action that the public, social, and private sectors must take the following measures in order to face the health emergency created by the SARS-CoV2 virus:

1. The immediate suspension of all non-essential activities was ordered from March 30 to April 30, in order to mitigate the spread and transmission of the SARS-CoV2 virus within the community, to decrease the load of the illness, its complications, and the deaths caused by Covid-19 in the population within the national territory[...]’[4]

As can be seen, all non-essential activities were suspended until further notice. Many companies were thereby affected since this requires a complete halt to their activities, creating a major problem. As we mentioned earlier, we cannot control this, it is external to our corporate governance which we complied with such regulation. At the same time, this meant that a series of additional actions must be carried out to comply with other, different laws, such as those relating to employment, social security, commerce, or civil laws.

Recommendations

The recommendations and solutions can be summarised in three points:

The first one is prevention. Even though it is true that for some companies these actions come late, it is also true that this will not be the first nor the last contingency affecting our company. Therefore, it is recommended to have a section in our corporate rules preventing this kind of situation, starting with the question: How do we change our internal policies and regulatory procedures? There has to be a way in which the corporate rules may be changed when the contingency begins, as these have to guide the company through the contingency. This means the change must consider the gradual stages of the problem because establishing rules on the spur of the moment or without foreseeing the future would be counterproductive as that would represent improvising which, at the same time, generates the difficulty of implementing such rules. For this purpose, different national and international orders must be analysed to ascertain which pre-set action(s) to consider, in several contingency situations, for the purpose of linking them with our corporate rules and having the same gradual states as the regulations. That said, when creating corporate rules with gradual stages and before the contingency, we would have the following benefits:

• change in our organisation policies;
• proper regulatory compliance;
• more control over the situation, even if it is inherent to our organisation;
• creation of trust among our clients, suppliers and employees, since this means that we know what to do and we will do it, therefore reducing uncertainty;
• prevention of any mishap that may arise; and
• the company minimises its less in value loss, and we can even create additional value if the measures are correct and are implemented according to all that was established.

The second point is that there is the change in our policies, which must be directed towards cancelling out the changes created by the contingency and considering the form of work and its relationships. These changed policies must contain extraordinary measures in case of official changes by the state that may affect our company in a way we may not be able to prevent. It is important to point out that this new regulation not only has to be used in case of the protective measures in response to a pandemic, but also as an economic contingency or in force majeure or fortuitous cases, which are those situations caused either by nature or by human activity that are out of our control since they cannot be prevented or that cannot be avoided even if they can be prevented.[5] In this way we can reduce the risk level to our company and minimise disruption to our regulatory, business and work compliance and our other responsibilities.

The third point is that we have the way to guarantee the established rules, that is to say, compliance. This is related to what was mentioned above but consists of a previous phase since it does not make sense to have a regulatory framework if it cannot be followed or if it is impossible to follow.The company must therefore adapt the compliance to such rules. Compliance fulfilment must be possible and overall it must be appropriate; it must have control mechanisms specifically for such situations and not in general. There must be a relationship between behaviour and regulations (fact and law).

On the other hand, as it was previously stated, there will be situations outside of the company which we cannot control, including suspension of our activities.

For this problem, the recommendations that we can give are those described in the above paragraphs. In addition, to try to prevent the different situations that may occur and are different from our general regulation, we recommend professional counselling since this situation creates a possible breach of responsibilities, which can be mitigated if we take into account several actions in our internal regulations. These would include having a reserve for the compliance of contractual responsibilities regarding employees, constant communication with clients and suppliers, and adapting the internal rules with applicable laws or rules preventing contingencies.

Conclusion

The challenges created by Covid-19 measures represent a clear area of opportunity. Even though they have generated new problems, as long as we can prevent or resolve such problems, it is still possible to add value to our company by having established procedures and guidelines to follow. In doing so we primarily create trust from our clients, employees and third parties.

It is also crucial to highlight the importance of establishing rules. Besides creating trust, such rules prevent or minimise the disruption of the company's internal processes resulting in a reduction in losses, while we nevertheless comply effectively with the relevant authorities' applicable regulations.