How can Corporate Canada take a more proactive approach to governance and what can firms learn from the uncertainty caused by the pandemic?
COVID-19 has presented Canadian companies with significant corporate governance challenges. Successfully navigating these challenges requires that corporations be proactive and adapt their approach to governance. The unprecedented risks brought about by the pandemic have highlighted several governance issues that directors and officers should consider, including: 1) access to timely and accurate information, 2) business continuity planning, 3) liquidity and capitalization measures, and 4) shareholder activism and takeover preparedness.
Step 1: Access to Timely and Accurate Information
COVID-19 presents unprecedented risks that every board of directors must manage, particularly in the areas of employment, supply chain management, capital expenditure, credit risk and liquidity. It is imperative that boards have access to timely and accurate information to aid in effective decision-making in these areas.
The traditional decision-making process followed by directors has been to identify the issue, gather information, retain expert advice, and brainstorm the solution. This common process is ill suited to address the rapidly changing business and political landscape during a pandemic. To be effectively prepared for such future COVID type events, boards must find ways to automate or augment their decision-making process in ways that they can pro-actively identify issues and quickly gather the necessary information. Any experts typically retained by the corporation should be notified of potential issues in a timely fashion so that they can promptly expedite their advice. Finally, the corporation's governance framework should contemplate the need for emergency meetings and in such instances empower the board to swiftly reach and implement decisions. For example, minimum notice provisions for board meetings are generally considered good governance but may not be practical and could be detrimental in an emergency situation.
Boards operating in a critical and fast-changing environment, such as a pandemic, may increase the frequency with which they demand operational and financial data from management of the corporation. When the event poses a significant risk to the corporation, the board may demand direct access to instant reporting tools such as live sales data and operational data (for example, drilling monitoring applications), and daily financial updates.
Step 2: Business Continuity Planning
Another governance issue for Boards to consider is the establishment and maintenance of a “business continuity plan” (BCP). Certain Canadian entities, including registrants and dealer members, are required under securities laws to develop and maintain a BCP. The purpose of a BCP is to pro-actively set out a written procedure that ensures the effective operation of a corporation in the event of a significant disruption to its business. Prior to the pandemic, pandemic measures may not have been at the forefront of BCPs, but we expect appropriate procedures to be included in almost all BCPs going forward.
The benefits of an established and tested BCP in the context of a pandemic are clear. For example, an effective BCP will set out items such as who is responsible for decision making should a key person not be available, how a work-from-home infrastructure will be implemented if employees are unable to attend the office, the relevant medical information that employees will require should they become ill, and clear communication protocols between the corporation and its stakeholders, including, among others, the board, management, employees, suppliers, insurers, and government representatives.
Step 3: Liquidity and Capitalization Measures
COVID-19 has caused a drastic and unexpected depression in the global economy. The financial impact of the pandemic caught many businesses off guard. As part of a proactive governance framework, boards should be prepared to rapidly investigate, understand, and address how events like COVID-19 may affect the corporation's cash flow, debt structure, and overall capitalization.
Several publications recommend that in a time of crisis, directors should strongly consider suspending dividends or stock-buyback programs to preserve cash. While these actions may exert downward pressure on a company’s stock price and forego the benefit of buying back shares at a relatively low price, Institutional Shareholder Services' 2020 proxy season guidance suggested that boards who undertake share repurchases under pandemic conditions might be subject to "intense criticism and reputational damage". Further deteriorations of market conditions may magnify these criticisms if a corporation's cash position is weak due to stock buybacks. Directors should be mindful of these considerations and should consider taking a conservative approach to protecting their cash position, particularly in circumstances such as COVID-19, where the extent of the crises may be difficult or impossible to ascertain.
Step 4: Shareholder Activism and Takeover Preparedness
COVID-19 has resulted in significant downward pressure on the stock price of many Canadian companies. While shareholder activism has decreased from 2019 to 2020, it is not expected this trend will continue in the medium and long term. Consequently, businesses with depressed stock prices should be prepared to address potential activist shareholders and takeover bids.
Unlike certain other corporate governance issues, preparation for shareholder activism and unsolicited takeover bids requires significant and ongoing planning and consideration well in advance of a potential takeover bid or other activist action. Further, once it is announced that an activist requisitions a meeting or a takeover bid, securities laws may restrict the corporation from engaging in certain defensive actions.
Management should engage in an ongoing assessment of the risk of an activist shareholder or takeover bid and, if appropriate, engage in defensive planning. Such planning includes developing and maintaining relationships with key shareholders, identifying strategic alternatives to a takeover bid, adopting a shareholder rights plan and advance notice requirements, and following the proxy voting recommendation guidelines of proxy advisors such as Institutional Shareholder Services, Glass Lewis, and the Canadian Coalition for Good Governance.
Summary
The significant corporate governance challenges resulting from COVID-19 requires that corporations be proactive and adapt their approach to governance. Going forward, directors should consider adapting governance policies that provide timely access to accurate information. Directors should also establish a BCP or update their existing BCP to consider the pandemic challenges. Finally, directors should adopt governance measures to prepare for liquidity and capitalization possibilities and shareholder activism and takeover possibilities.
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Greg Peterson is a senior partner at Gowling WLG and head of the firm's Corporate Finance, M&A and Private Equity Group in the firm's Calgary office.
Recognized as a leader in his field by Canadian Legal Lexpert Directory, Chambers Canada and Legal 500, Greg focuses his practice on complex public and private corporate and commercial matters. Over the course of his 30-year career, he has helped clients navigate a range of high-stakes transactions - including mergers, acquisitions, dispositions and reorganizations, plans of arrangement, going private transactions, private placements, and asset and share purchase and sale agreements.
Greg also has significant executive experience in adjusting both private and public companies at all stages of their development, from initial public offerings to large corporate clients with multi-billion-dollar market capitalizations. He complements this experience with an extensive background in private equity transactions and public financings, including equity, debt and venture capital financings.