Navigating the governance curve: 2020 and after

The COVID-19 Pandemic that unravelled in the last week of March 2020 was an out-of-syllabus problem, far beyond the trickiest risk simulations that Boards have been put through. A universal crisis unlike any other. The revenue of several businesses pushed down to zero overnight. A sudden death.

What a time to be a director of a public company. Weekly huddles via video chat on a tablet. Incomplete information decks that can only be digitally accessed through secure networks. Changing goal posts and the seemingly impossible task of cutting costs without attracting attention. Gone are the days of scheduled board meetings (just one every quarter), with detailed agenda papers that are physically delivered in advance. Directors are overcome by the nostalgia of the times when boards met across plush roundtables—with a continuous service of snacks and beverages to fuel their weighty decisions.

During the nationwide lockdowns, Boards have navigated difficult decisions like ensuring health and safety of employees, optimising cash management for an unknown duration, complying with rapidly changing regulations regarding employee pay-outs, managing cyber security risk while facilitating work from home protocols, determining impairments, assessing litigation risk for non-performance of contracts, negotiating in good faith with creditors, staying ahead (or atleast abreast) of competition, recalibrating supply chains and business processes, avoiding personal liability for wrongful trading while raising new debt, and calculating the unknown risk that is yet to manifest.

While business revenue was down to zero, stock markets continued to trade the companies scrip. This has caused Boards to consider different ways of engaging on investor confidence, ranging from pulling forecasts to strong statements on business continuity in the new normal. With a view to bring about a mean disclosure standard, SEBI has now mandated listed companies to make a specific disclosure of the qualitative and quantitative impact of COVID-19 on business, financials and operations.

The toughest part of the conscientious Board’s journey thus far has been weighing the trade-offs between the different stakeholders. While international opinion on the need for balancing stakeholder interests and moving away from shareholder primacy rages as a hot debate, India stands out as being one of the only countries in the world to have legislated on the stakeholder governance model. The Companies Act, 2013 identifies the five stakeholders that should drive decision making by directors to be the Company, its members, its employees, the community and the protection of the environment. These identified stakeholders are placed on par and it is legally imperative for boards to diligently consider and balance conflicting interests amongst the stakeholders while making decisions.

Major institutional investors have also dialled up their expectations on nudging the investee Board’s agenda on ESG. In fact, this has now been upgraded to EESG – i.e. employee, environment, social and governance. There is also the call for adoption of a corporate purpose that is not shareholder profit maximisation. The core argument is that the pandemic has demonstrated a relatedness between corporate governance and societal wellbeing. Many Indian companies are now pondering the systemic adoption of the ESG agenda. Some believe that this will be the high road to sustainability and propose to go deep. Others are keen to skim the waters in full attire, showing willingness to enter but not anchor just yet. There are also the classic deniers who shrug and claim that ESG has always driven their fiduciary responsibility and no change is needed. The regulator is watching the behaviour patterns and the international developments in this space. It is perhaps only a matter of time for detailed ESG disclosures and integrated reporting to become regulatorily mandated.

While COVID 19 has changed the trajectory of governance conversations, we anticipate that the other macro-economic drivers that are currently in play are set to push much bigger changes. How will governance work in a flat organisation that is built around the gig economy? How will artificial intelligence and the explosion of data nudge transparency in corporate disclosures? How will board composition change in an EESG driven capital market? How will director liability jurisprudence evolve to attract people who align with purpose and are competent to discharge the complex role of the board? How will democratisation of capital change business priorities and accountability? In this perfect storm, the one outcome that seems predictable is that there will be a material and fundamental shift in the governance mandate in the coming decade. This will likely not be a step up, but a different plane. The changes will be mainstream and all pervasive. The new normal will pull and push a mindset shift. The train has left the station.

Cyril Shroff is the managing partner of Cyril Amarchand Mangaldas. Amita Gupta Katragadda is a Partner in the Firm’s Corporate, Disputes & Governance Practices. The authors are speaking at a webinar here .