Coronavirus: how do I discharge my duties as a director in the current crisis? (COVID-19)

This high-level know-how guide for directors is intended to reassure directors that they have identified all relevant considerations for themselves and for their companies.

ICAEW’s guide to directors' responsibilities and duties covers internal governance, transactions between a company and its directors or shareholders, and corporate administration. It also covers directors’ responsibilities in relation to insolvent or financially challenged companies.

Companies’ investment in the exploration and articulation of culture should be paying off now, and robust business continuity plans are directors’ central reference point. However, directors may be concerned about how they can fulfil all of their personal responsibilities and duties during the Covid-19 crisis. They may even be concerned about their personal liability.

Although the expectations and requirements in codes and rules have not gone away, they may seem inadequate or irrelevant. Regulatory announcements such as extra time for the publication of audited financial reports and ability to request late filing of accounts at Companies House are welcome, but for many directors they might seem a drop in the ocean.

This high-level know-how guide for directors is intended to reassure directors that they have identified all relevant considerations for themselves and for their companies.

1. Flex your leadership style

   Health and safety is suddenly paramount, and at the moment it overshadows all other considerations. The extent and longevity of the crisis is unfolding on a daily basis. For these reasons, directors need to acknowledge that the pandemic poses great emotional challenges as well as practical ones. Employees are bound to look to board directors for stoicism, and the best approach is deliberate calm coupled with bounded optimism. Success depends upon sufficient pragmatism to adapt to the new reality.
   Directors need to be open to a variation in routines and structures. A good starting place is to make changes to the board’s calendar of meetings. We suggest scheduling additional board meetings as they can always be cancelled if necessary. Too many is preferable to too few. It may be necessary to create a means of confidential communications between board members if a mechanism doesn’t already exist.

2. Get close

   NEDs will want and need to get closer to operational management than usual, eg, they will want greater visibility around human resources. NEDs should seek reassurance that those working on the frontline feel safe and sufficiently empowered, and that reporting lines are efficient and flexible. Contingency plans for any sickness absence is critical, including the absence of the CEO or other key personnel.

3. Remuneration

   Existing remuneration structures should already encourage everybody to pull together, but if not, then consideration should be given to revising or suspending discretionary incentive and bonus plans. However, contractual changes can only be made with the agreement of the beneficiary.
   Longer-term considerations for Remuneration Committees and boards may include exercising discretion to account for share price volatility, and delaying setting incentive plan goals until the uncertainty has subsided.

4. AGMs

   The flexibility allowed by the Corporate Insolvency and Governance Act (2020) has expired, and up to date guidance is available here 

5. Risk management

   The importance of identifying, prioritising and managing the greatest risks probably goes without saying, but may be harder said than done. If a company has a Risk Committee then their skills should be utilised. Audit Committees may have a role to play.

   Operational considerations may require a variation in financial controls. Companies should also be alive to cyber risk. Highly regulated companies need to stay vigilant to compliance risks. The usual reporting mechanisms and protections for whistleblowers must be maintained as their insights could be particularly valuable at this time.

   Activists and others may take advantage of the situation. Well-capitalized activists could attempt to exploit the enhanced vulnerability of target companies. Companies should monitor for changes in stock ownership.

6. Insolvency

   As regards personal liability of directors for wrongful trading under the Insolvency Act 1986, the Corporate Insolvency and Governance Act (2020) provides that a Court is to assume that directors of relevant companies are not responsible for any worsening of the financial position of the company or its creditors that occurs between 1 March - 30 September 2020. New regulations apply this exemption from 26 November 2020-30 June 2021. Any Court considering wrongful trading will have to consider whether wrongful trading liability can be traced to the specific period between the two suspensions. Possibly, a Court would chose to ignore that period in all but the clearest (and probably rarest) of cases and instead concentrate on whether there has been a breach of directors’ duties, as there has never been any suspension of these. Other insolvency laws, for instance on fraudulent trading, continue in force and companies that are, or may become, insolvent should continue to consider the possible implications carefully and seek advice where appropriate. See ICAEW’s publication Early Action is the Key.

7. Directors’ Duties

   Directors have a duty to consider or act in the interest of creditors. The seven general duties of directors continue to apply : to promote the success of the company (referred to s.172 duties) ; exercise independent judgement; exercise reasonable care, skill and diligence; avoid conflicts of interest; not accept benefits from third parties; and declare any interest in proposed transactions or arrangements. Although legal remedies can be applied to directors who breach their duties, directors should bear in mind that courts always decide cases on the specific facts and the circumstances generated by Covid-19 will be highly relevant.

   Companies in financial difficulty should also be aware of their duties to creditors and insolvency law noted above.

8. Reporting

   Companies which have recent additions to their Strategic Reports and Directors’ Reports will be mindful that boards’ discussions and decisions during the Covid-19 crisis will be disclosed in due course.

   Companies which need to make s.172 statements in their Strategic Reports should be aware that BEIS have suggested that companies will probably want to include information on some or all of the following:

   • The issues, factors and stakeholders the directors consider relevant in complying with section 172(1)(a) to(f) and how they have formed that opinion;
   • The main methods the directors have used to engage with stakeholders and understand the issues to which they must have regard; and
   • Information on the effect of that regard on the company’s decisions and strategies during the financial year.

   Directors should be inspired by examples of companies having impressive regard for the community, eg, supermarkets have dedicated shopping times for the elderly and NHS staff, and companies are working on the provision of personal protective equipment.

   All UK registered companies (quoted and unquoted) which have employed on average more than 250 UK employees in the preceding financial year have had a recent addition to their Directors’ Report about employee engagement. These reports detail: how directors have engaged with employees; how they have had regard to employee interests; and how employee interests have effected principle decision-making.

   Other companies (including subsidiaries) are required to provide more detail on how directors have fostered the company’s business relationships with suppliers, customers and others, and how this has effected principle decision-making.

   Again, there are inspirational examples of companies* supporting their employees and others during the pandemic crisis.

   *_{When promoting the success of the company, directors must have regard to the following: the likely consequences of any decision in the long term; the interests of the company’s employees; the need to foster the company’s business relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment; the desirability of the company maintaining a reputation for high standard business conduct; and the need to act fairly as between members of the company.}

9. Why directors should use social media

   Thoughtful and calm external and internal communications are needed. A ‘message from the CEO’ is low-cost but invaluable for boosting employee morale and customer confidence in the brand. Other directors may be wondering what they can do to help, and for some directors the answer will be social media. The crisis has once again underlined the power of social media, and the perceived barriers are not as high as directors might imagine. There are many benefits for directors, e.g. updating their skills, enhancing their credibility and controlling their legacy. Companies’ communications executives may welcome directors support at this time, subject to appropriate controls being agreed.

10. What we’ve learned and what we want to continue

    In the aftermath directors and companies should reflect on lessons learned and what should be continued.

    • It may be possible to protect supply chains from future shocks, eg, seeking alternate suppliers.
    • Companies which have struggled with their AGMS may want to propose amendments to their Articles of Association in order to allow hybrid AGMs . This could include exploring the technology for electronic voting.
    • Contracts which haven’t been fulfilled should be reviewed for force majeure clauses.
    • Indemnification and insurance for directors may need to be reviewed
    • Some companies may benefit from strategic opportunities, eg, to fulfill an unmet need occasioned by the pandemic, or opportunities for growth through M&A.