As a result of the pandemic, some businesses may have been affected by suppliers who have not performed on a contract. Boards will need to review these contracts and decide whether or not to attempt to enforce these contract rights. Below are some questions boards should consider.
How will boards assess the consequences of not enforcing contract rights?
The business might be continuing to pay suppliers on time while collections from customers are reduced or delayed. As a result, the risk profile of the business in the short term might increase due to a lower net cash position. However, by supporting stakeholders until they are recovering, the medium-term risk profile could be lowered.
Possible consequences include:
- financial – leverage the strength of the balance sheet to support weaker customers and suppliers as debt collection is delayed or early payments made to small suppliers;
- reputational – increased brand equity;
- operational – positive impacts on supply chains may be realised with partners seeking to do more business in future, given the organisation has proven to be a partner in adversity. The business may retain access to assets (eg. trading locations) that competitors have relinquished. Equally, failure to adapt early may restrict options for change;
- workforce morale – helping the workforce feel that they are making a difference during the crisis could boost morale and increase engagement.
The board could also consider what this decision signals to stakeholders and whether it will set a precedent, making it more difficult to enforce contract rights in the future.
How will the business communicate with counterparties?
Regardless of the strategy adopted, the business should communicate decisions in a timely fashion to allow counterparties the opportunity to assess the viability of their business.