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Bulletin | Covid-19

Governance in the time of COVID-19: Corporate Board Decision-Making in a Crisis Situation

Fasken
Reading Time 4 minute read
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Corporate/Commercial Bulletin

Corporate decision-making has never been a process to be taken lightly, but in the context of a crisis, where officers and directors must decide complex and urgent matters, the decision-making process to be followed is crucial. This is because there will be a "post- COVID" era and it is very likely that a large number of business disputes will emerge once the dust has fallen.

The board of directors is no exception. Directors who did not adequately perform their supervisory role or who did not satisfy their duty of care, even in a crisis period, will also be potentially subject to legal action.

Board Priorities

In the context of a health and economic crisis, corporate board priorities should include the following:

  1. Health and Safety of Employees – The board of directors must be concerned about how management is ensuring the health and safety of its employees as well as the messages and communication mechanisms that are directed to the employees. It must be informed as soon as possible of any infected employees and measures taken.
  2. Ensuring Business Continuity– Once risk factors have materialized, businesses must adjust their forecasts and adopt a conservative approach to survive the crisis and to be ready to resume activities once it has dissipated. The board of directors will have to ensure the reasonableness of the contingency plans and assumptions relied upon by management to generate cash flow during the crisis. Any scenario or plan that could be too optimistic must be challenged. Given the dynamic nature of the situation, the board may also want to consider putting in place a crisis management committee.
  3. Reputation / Interactions with Stakeholders – The board of directors may also take an interest in the way that the business communicates with its clients and suppliers, regardless of whether it is continuing its activities during the crisis. For example, if the business is in breach of a material obligation with respect to an important client or supplier, the board should be informed.

Governance Adapted to the Crisis

Crisis or not, the board of directors is responsible for supervising the way that management runs the internal affairs of the corporation. However, in a context where the stakes are so high, the board of directors must follow more closely important decisions being taken by management, to maintain regular contact with it and ensure that a decision-making process is followed for important decisions, even when urgent. Management may also benefit from the advice of its directors who are not directly putting out fires on the front lines and who are distant enough to bring a different perspective to the decision-making.

During the pandemic, continuing as much as ceasing activities or slowing down operations entails significant risks for both the corporation and its stakeholders. It is therefore critical that directors exercise due care and that each material decision is well-documented.

When determining whether or not the directors have satisfied their duty of care, the Supreme Court has clearly stated that perfection is not demanded of the directors. The Court will not consider that the directors and officers breached their duty of care if they acted prudently and on a reasonably informed basis. If the decisions taken are reasonable business decisions in light of what they knew or ought to have known, then the business judgment rule defence may be invoked and the courts will not be expected to intervene.[1]

However, the facts are key to determining whether the duty of care was satisfied. This is why governance adapted to the crisis is essential. This includes:

  1. obtaining additional information about the impact of the crisis on the corporation's activities and business and playing an active role by maintaining regular contact with management;
  2. seeking expert advice if necessary;
  3. documenting exchanges between management and the board through all technological means available, especially through regular updates by email, videoconference or telephone calls.

Conclusion

The importance of the strategic role of the board of directors increases tenfold during a crisis where the risks for the corporation and stakeholders are increased. In the context of the COVID-19 crisis, the board of directors must first focus on the health and safety of the employees, then financial issues to ensure business continuity, risks to reputation and lastly exchanges with stakeholders. The board must act prudently and with due care, despite a difficult decision-making context. And in the "after-crisis" phase, it will be important to be able to show that the board of directors acted with due care despite the difficult circumstances.



[1] Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68.

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