A Note on Boardroom Challenge,Board Effectiveness and Corporate Stewardship During COVID-19

Introduction

The Global COVID-19 pandemic has led to spawning norms in all quarters, including the corporate boardrooms. Several parts of the world have been shut down due to the alarming rise of COVID-19 cases. Pandemics like COVID-19 have been a terror for decades that people have imagined. It is different from the earlier financial crises 2008 or 1997 Asian crises as people have to live a new normal life of social distancing, work from home, mask and other preventive measures. COVID-19 has been a game changer in the way people interact, think and work. This has affected the corporate business to a large extend. This has alarmed the challenges the boardroom is going to face to manage this economic and financial crisis ahead. The transformation required in boards is unprecedented in its intensity to overcome the changing challenges in the global market.

According to the literature, effectiveness of board plays an important role in the growth and sustainability of a company (Kaur & Vij, 2017). The primary role of the board is to represent the shareholders of the company and decisions are to be made on their interest (Nam & Nam, 2004). However, dominant shareholders influence the board more and deviate them from their primary role.

The development of global corporate codes is the result of the scams or the failures of a number of firms in developed countries such as USA, UK, and so on. The new codes and global governance standards over the years have aligned the board to be more accountable, responsible and transparent. With managements locking up capital, shareholder activism in countries is on a rise (Yoshikawa & Chua, 2020). Stewardship is of extreme importance during COVID times as the absence of accountability and right information has eroded WHO’s faith (Prah Ruger, 2020). Board of directors is now expected to be emphasized more on enhanced business strategy, risk management, and evaluating their companies controlling environment more closely. To combat the situation of COVID crises effectively in a corporate, a steward board is required. Figure 1 presents the conceptual model and depicts that if board effectiveness and corporate stewards are put aligned together, they can help to combat the boardroom challenges the organizations are facing these days.

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Figure 1.

Source: The authors.

The study is the first of its kind to observe the boardroom challenge in 2020 due to COVID-19, and a corporate steward or board effectiveness is what is required by the boards to make paradigm happen for the long-term survival of the organization. The article discusses the boardroom challenge, board effectiveness and corporate stewardship during COVID-19.

Boardroom Challenge 2020

Boardroom has been a ubiquitous device in a corporate organization. The foremost boardroom challenges that the corporations have been into is a new norm of ‘virtual boardroom’. Pandemic have changed the way the boardroom looks now with virtual board meetings and no face-to-face contacts. The challenge has been the change in board priorities and increase in time demanded for board responsibilities and to stay focused to review and update the corporate strategy. Another boardroom challenge that the corporations have to face is ‘board composition’. In the current scenario, the board has to ensure that the present composition of the board is with a long-term view and are optimized to meet the slump in the economy. The experience, skills and knowledge have to be blended appropriately to survive in the long term. The board needs to find out the new ways to incentivize the management for the future. Third, ‘dynamic risk assessment’ needs to be done by the boards to make sure the directors know ‘flow on effect’ or the most influential risk during this testing time. The challenge for the board is to rethink the current risk model which shall comprise of the traditional risk management and also the unprecedented developments for the future risk. Lastly, the major challenge for a board is the ‘continuity and resilience’. The boards need to assure that the organization is agile and have adopted new strategies of planning to make a position in the new normal.

Corporate Stewardship: Helping Companies Find Sustainability Post COVID-19

In the stewardship theory of corporate governance, managers are inherently motivated to work. Their interests are aligned with that of corporations and its owners to attain high corporate profits and shareholder returns. Davis et al., (1997) defines this theory where ‘a steward protects and maximizes shareholder wealth through firm performance, because by doing so, the steward’s utility functions are maximized’. This theory states that managers are good stewards of the corporations and there will be no agency problem associated with managers. The theory suggests that stewards are motivated and pleased when organizational success is attained. Daily et al., (2003) argues agency theory considers the employees and managers to be self-interested and treat them as an economic being. Whereas the stewardship theory recognizes the significance of the structures that authorize the steward to have highest independence built on faith (Donaldson & Davis, 1991).

Corporate stewardship implies truthful communication between the steward and people under his guidance (DeCampos, 2020). A proper accountability and transparency would help to reduce corruption and in turn would help in nation building during these times of crisis (Ojiagu et al., 2020). With the advent of Coronavirus pandemic, responsible innovation can be done with right corporate governance practices and corporate stewardship (Scherer & Voegtlin, 2020). Value creation and sustainability in challenging times can be managed with proper communication between stewards and those who work under their leadership. Thereby, a corporate governance policy which focusses on sustainability, employee wellbeing and future technological challenges is to be framed (Mathew & Sivaprasad, 2020). The stewardship behaviour of managers leads to exemplary corporate governance practices (Clarke, 2004; Glinkowska & Kaczmarek, 2015; Kruitwagen et al., 2017; Madhani, 2017; Melis & Nijhof, 2018; Subramanian, 2018; Swedan & Ahmed, 2019). It helps companies to adapt to the external economic environment and create shareholder value, which is one of the main goals of corporate governance. Good corporate mechanism would help in managing earnings forecast behaviour (Chapple et al., 2018). Therefore, investment efficiency in a firm is negatively impacted by ownership concentration.

Corporate Steward on a Global Platform

Businesses have witnessed major environmental, socioeconomic, technological changes which caused a re-evaluation of corporate governance principles and board practices. Corporate governance stewardship has to be taken as an initial step to have a positive effect on the long-term functioning of the company. In changing times of COVID-19 crisis, one of the main objectives of a company is sustainable value creation which is created by environmental, social, governance and data (ESG&D) stewardship. Due to the crisis, boardrooms are aware that ESG&D factors are critical for value creation in short run or even to sustain the business in the long run. Therefore, a complete integration of strategy, operations and governance is a must rather than it being a part of corporate social responsibility. Corporate governance features such as board size, board independence and foreign ownership strengthen its CSR and thereby its financial performance (Kabir & Thai, 2017). Simon Sinek once said, ‘Corporate Culture matters. The way management chooses to treat its people impacts everything for better or worse’. Thereby, COVID-19 crisis has shown that the board of directors should support management in keeping people first, in terms of their health and safety and coordinating in business management and risk mitigation measures.

Corporate governance in these times talks about five major aspects of stewardship. The first one is ‘facing dilemmas’. COVID-19 has taught the companies to hope for the best and prepare for the worst. The companies had to make a trade-off between handling macroeconomic decisions such as lockdown and policy changes to business-level decisions of struggling with uncertainty and loss of sales. Therefore, managing risk and not avoiding risk has been the right way for the amicable companies. The second one is ‘ownership’. Stewardship implies taking responsibility of the complete situation and being a company that manages the ship in a storm as everyone can manage well when the sea is calm. Examples for the same have been of the medical practitioners, small businesses paying salary to employees during the tough crisis times. Boards have emphasized on investing in training and development to help people transition to online working, especially for those whose job would be impacted by automation. The third is ‘human capital’. COVID-19 has been an economic and a health shock. Good ethical values with long-term goals is the need of the hour. For example, ‘teamwork’ and ‘employee welfare’ are claimed in good times by all organizations. But with the outbreak of COVID-19, employees were the first hit in some companies in terms of reduced compensation and layoffs. COVID-19 has been a situation of survival. Steward companies have acted in such times with calculated risks and recovery for long-term growth.

Board Effectiveness During the Pandemics Times

The need of the hour for corporates is to have an effective board to overcome the health and financial challenges. Some of the important focus areas for board of directors in COVID-19 crisis situations are as follows: improving the reporting and diligence of a company to being informed of the risks that lay ahead. With a proper system in place, a company should be informed of the industry-specific risks and the business risks a company might face due to the pandemic. In order to understand the proper diligence and monitoring, a committee assessing the impact of COVID-19 on affairs and operations of a company can be framed. Specific strategic decisions relating to the company during the pandemic could be monitored by the COVID Committee.

For an effective working, communication between the board of directors and top management on matters related to business risks, position of the company in the completeness industry, health and safety of employees during COVID-19 should be on a frequent basis. This would help in proper informed decision-making in the organization. If changes in the regulatory scheme impacts a company’s operation, the company would need to strategize its risk mitigation policies, aligns and conform to the developing regulatory standards. For the same, proper communication between the management and the board is very important. The board should effectively communicate to the management, their expectations regarding management responsibility for COVID matters. Creation and checking feasibility of a reversal plan is of importance during the pandemic. The reversal plan would look after matters such as cybersecurity issues, health issue in company with employees suffering from COVID, employee absence, change in legal and regulatory compliance. The board needs to communicate with the management of any reversal and backup plans in case such an issue arises. It would help to improve cultural, technical and operational resilience in the future. Emphasizing on possible disturbances in operations and business relationship during COVID times is crucial. Impact of COVID-19 on major financial decisions of a firm relating to investments, financing and dividend decisions is to be paid attention. Decision relating to COVID-19 have impacts on customers, default conditions and contract terms. Decisions of boards with top management to contribute beyond its business should be in terms of handling injustice based on race, gender, household income or structural inequality. Also, it is important to considering contributions plans like UN sustainable development. Boards need to integrate practices among the organizations to create sustainable values for shareholders and stakeholders.

The capacity of the company to raise government funds in times of emergency and knowledge of company’s insurance cover in times of COVID-19 is important. In the light of many top directors falling ill due to the pandemic, importance of succession planning is realized. The Board should consider framing a COVID-19 transformation team, which would act as a governing body to decide the roles and responsibility of acting management during emergency situations. A list of deemed directors for special meetings approved by the board should be made.

Conclusion

Among a number of businesses restructuring themselves during the pandemic, it is of extreme importance that the board reinvent themselves and prioritize to understand the current vulnerabilities for the business to survive in the market. The article explained the new boardroom challenges the organization have to face like virtual boardroom, right board composition, dynamic risk assessment, continuity and resilience. The article also intends to give suggestions to the companies to manage the pandemic situation with a right stewardship attitude and board effectiveness. Their diligent work can lead to increase in profits, which could further satisfy the shareholders with higher returns. The behaviour of the board would be analysed by other stakeholders and therefore they need to act with the highest level of governance. Corporate stewardship would help them in having a balancing which would help the business, satisfy the employees, build shareholder value and provide a positive image of the companies in the market.

The boardroom effectiveness is the talk of the town these days. It is essential to understand the new board roles by concentrating more on integrity and transparency. Replanning and closely monitoring the operations to meet the desires of customers is what’s required by the boards to make paradigm happen. Consequently, addressing gaps in the regulatory compliance, legislative changes and emerging risks and at the same time holding the leaders accountability for all these is required for the board to be more effective.