Executive Summaries Apr 27, 2020
COVID-19: At the Dawn of Reopening, Boards Need to Be Proactive and Involved
Quebec corporations have to ensure that they stay on track, despite the storm they are going through. As we are approaching a possible reopening and a return to business, new challenges are looming on the horizon, especially for boards of directors and their directors.
The pandemic is hitting our world hard. It is an unusual situation: the entire planet is in a sanitation crisis, the world economy is on hold and the very foundations of our corporations are being affected by COVID-19.
Although history provides us with some examples of major crises (sanitarian, humanitarian or economic), the situation we are facing is unique and unprecedented. As of early April 2020, according to various reports:
- 3.9 billion people worldwide are in mandatory or recommended lockdown;
- 7.1 billion people live in countries where there are border crossing restrictions; and
- The estimated economic costs of the pandemic are over US$4 trillion.
This schock of events is likely to cause a lot of disruption for Quebec corporations; they will have to ensure that they stay on track, despite the storm they are going through. As we are approaching a possible reopening and a return to business that will be nothing like we have ever seen before, new challenges are looming on the horizon. Here are a few of them, aimed specifically at boards of directors and their directors, starting with a brief reminder of the role of the board.
Board of Directors’ Role
In general, the role of the board is well known. For instance, the board is involved in the development of the corporation’s strategic orientations and oversees the management of the corporation’s activities and internal affairs. To this end, it routinely delegates certain of its powers to directors, officers and board committees, hence its oversight role once these powers have been delegated. As a general rule, the more out of the ordinary course of business a situation arises, the more closely the board will want to monitor it.
In carrying out its role and duties, the board is required to act in the corporation’s best interests. While this obligation under Canadian law remains unchanged if the corporation is at risk of insolvency (as is the case in other jurisdictions), the fact remains that the notion of the corporation’s best interests requires that our boards, during these times of upheaval and uncertainty, adopt a broad approach and reconsider their approach.
Exceptional crisis, exceptional response. This applies not only of our governments, but also to corporations and their boards of directors. More than ever, the board must be proactive and involved. Here are some suggestions :
1. Be a role model for the entire organisation. During a crisis, we must make the most of everyone.
2. Have a contingency plan. This plan should help you assess threats and issues and manage the current situation. It should include an action plan that contains strong measures not only to protect employees, but also anyone who does business with the corporation or is part of its environment. Set a timeline with specific goals, while reassessing this contingency plan frequently.
3. Create a crisis management committee and ensure that it can act wisely and effectively. It must be flexible and manageable.
4. Do not hesitate to take on a larger role and intervene more directly, especially if it will help the management in place. Increase the frequency of board meetings and board interventions (by telephone or video conference, if possible). Stay well informed.
5. Make sure that all activities, finances, budgets, cash flow, etc. are closely monitored.
6. Do not hesitate to make decisions, even if they are difficult, and above all make them in a timely manner.
7. Consider the real and feared impacts of the pandemic on your corporation. Make reasonable assumptions that are appropriate for the particular environment in which your corporation operates. Each corporation will be affected differently.
8. Plan based on several potential scenarios. Several variables, in addition to the corporation's business sector, such as whether or not it can continue to operate and whether or not it provides essential goods or services or is part of the supply chain, will have an impact on how the crisis and recovery are managed.
9. More than ever, one consistent theme remains : change. Question the ways of doing different activities within the corporation. Nothing can be taken for granted. Challenge decisions : what seemed right yesterday may no longer be right today (as our health authorities have humbly admitted).
10. Highlight the importance of communication. As the primary guardian of the communications plan, one of the things the board should do is ensure consistency in all communications, keeping in mind that many are navigating in the unknown and that the impact of COVID-19 can quickly bring with it its share of concerns.
11. Be honest with employees, customers, suppliers, lenders, etc., about the impact of COVID-19. You will need their support.
12. Identify the risks to the corporation, but also look for opportunities.
13. Ask yourself the right questions in this context of change, as suggested by the Associate Professor at Laval University's Faculty of Law, Ivan Tchotourian. Several articles have been published on good practices and good questions to ask in the context of a pandemic. From a legal point of view, we can think of the following questions:
- Have health and safety measures been reviewed in depth? Failure or delay in implementing strong protective measures suited to this new reality is a significant liability risk for the company and its directors. We invite you to watch a replay of our most recent webinar on the subject.
- Are laws and regulatory developments in response to COVID-19 being followed by the corporation?
- What are the consequences for employees? Shareholders? Lenders?
- What are the consequences on distribution channels and customers?
- Considering the demobilization of employees to telework, are appropriate measures taken with regard to cybersecurity? On this subject, please read this article on data protection strategy in times of crisis.
The board must plan the transition out of the crisis and the recovery as reopening nears. Although recovery brings challenges for corporations that are as complex as the lockdown period itself, it also creates opportunities that both the board and the corporation should take advantage of.
As a general principle, directors and officers are not personally liable for the corporation’s debts and obligations. However, several exceptions to this principle are provided for in both general application and statutory laws. Boards are generally well aware of these exceptions and several governance measures exist to address these issues, such as due diligence, the provision of a certificate or attestation from management on compliance with statutory laws and the purchase of directors’ and officers’ liability insurance.
In the province of Quebec, the directors of a corporation have two main duties : (i) the duty of care, and (ii) the duty of loyalty. In addition to these duties, there are several statutory provisions arising from environmental, occupational health and safety and tax laws among others. The corporation’s articles of incorporation and its general by-laws will also be sources of obligations for directors.
Pursuant to this obligation, directors must exercise the care, diligence and skill of a reasonably prudent person. Thus, directors must act in an informed and cautious manner, according to each situation’s circumstances. Proper crisis and recovery planning, including adopting appropriate and timely measures and actions, will help to meet this obligation.
The duty of loyalty requires directors to act honestly and in good faith in the best interests of the corporation. There is a trend in case law to the effect that in acting in accordance with the duty of loyalty to the corporation, directors may also consider the interests of all stakeholders, including shareholders, employees, creditors, customers, the environment and the governments. It is relevant to consider whether the post-pandemic reality will only reinforce the expectations of these stakeholders.
Decision-Making Freeze Trap
A wise director should not refrain from taking part in decision-making for fear of making a bad decision that could lead to personal liability. Although decisions made may not always lead to the intended result, the directors of a corporation will not be personally liable as long as such decisions were reasonable and justifiable at the time they were made, given the context. Perfection is not what is expected of directors here, but rather an appropriate degree of prudence and diligence to reach a reasonable business decision. This business judgment rule developed by the courts requires that decisions be made free of conflict of interest, in an informed manner and in good faith. A presumption that a decision based, in good faith, on the opinion of an officer, a reliable and competent committee of the corporation’s board of directors or an expert will meet the director's duty of prudence and diligence.
Directors aware of the current situation will protect themselves, not only by respecting their duties and assuming their responsibilities, but also by using appropriate tools to record the decision-making process and the basis on which decisions have been made. Thus, it is important to be thorough with the agenda and minutes and not hesitate to rely on expert opinion. A review of the content and frequency of management's certificate or certification of compliance with statutory and other laws as well as the coverage of the directors' and officers' liability insurance policy would be warranted. Finally, a director should also record any disagreement with a board decision.
Opportunities to Seize
Today’s crisis will leave its mark in history and the ways of doing things will inevitably change. Once the crisis is behind us, the board will have time to reflect on the situation and learn from it. These lessons will have to be properly carried out for the future, and it is likely that business opportunities will emerge. Once again, it will be up to the board of directors and its directors to seize these opportunities and consolidate what has been learned during the turmoil.
For 25 years, BCF's mission has been to support Canadian businesses. We know the issues you face and our Business Law team is available to help you use the resources at your disposal. Do not hesitate to contact one of our members if you need advice or support.
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