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In the latest installment of the Salzburg Questions for Corporate Governance, Nicholas Allen investigates the role of independent non-executive directors
This article is part of the series, the Salzburg Questions for Corporate Governance by the Salzburg Global Corporate Governance Forum
Being an independent non-executive director (INED) in these unprecedented COVID-19 times presents a number of significant challenges.
It is an uncomfortable time for INEDs – not just because the organizations on whose boards they sit are facing unprecedented challenges and even existential threats – but a light is being shone on the value an INED can bring in these circumstances. Nevertheless, there are two prime areas in which an INED has a key role to play.
Firstly, INEDs may have led businesses themselves through unprecedented times, such as the global financial crisis and SARS outbreak. They can quickly bring that experience to bear. "Sorry, that is not a genuine worst case." "What if your customers stop paying you money even if they legally owe it to you?" "Which banks can I trust to be there for me when the going gets tough?" A large part of this experience will be related to liquidity, financial security, balance sheet strength, and stakeholder reactions.
Secondly – even without this experience, the INED presents an important real-time sounding board for management to debate challenging calls. Even without genuine crisis experience, INEDs are smart connected people. They sit on other boards going through the same issues.
Given the above, how should the INEDs interact with management? INEDs do not manage, and yet if major missteps occur in handling the responses to the pandemic and other extreme circumstances, then the board will be held accountable. So a pure "Trust the Troops" approach is not appropriate.
An INEDs thought process should include two steps or questions which need to be answered honestly. Does the CEO and the management team have the skills and experience to navigate a path through this crisis? Do I – as an INED - have the skills and experience to add to the debate? The answers to these questions will determine the frequency of interaction with management – and whether that interaction is with the whole board or a Crisis Management Committee (CMC).
I am seeing different models in operation. At one end of the spectrum, there is a daily online communication channel, such as WhatsApp and WeChat, with the whole board on developments with a CMC meeting as frequently as necessary.
On the other hand, there is a "Trust the Troops" model, where this is an initial approach outlined with periodic updates on progress. Uncomfortable as it may seem, the latter end of the spectrum suggests INEDs are the guardians of good governance in steady times but not of great use when the chips are down.
Allow me to comment on a few board issues arising from COVID-19.
Should the company accept government money?
If this is critical to financial survival and a means to avoid wage reduction, then yes. However, recognize this is crossing the rubicon – away from business as usual and a sign of distress. The natural consequence is that executive compensation and dividends must be reassessed and possibly reduced.
Should a company cut staff headcount and wages?
Reducing staff costs should be considered together with executive compensation and shareholder dividends as measures to achieve financial safety. For me, there is a very short term question: do I need to save money in the short term to survive? Then, there is a medium to long term question: does my business model need to change in the light of the new post-COVID-19 normal, and does the new model require less or different talent?
Is it OK for the company not to comply with its contractual obligations?
A board cannot condone such noncompliance, but it can encourage management to seek to renegotiate.
Should executive and board remuneration be cut?
Where stakeholders (e.g., customers, suppliers, and shareholders) are asked to accept pain, then this is an important signal that all stakeholders are contributing to the solution.
These are some of the key issues that have come to the fore during the COVID-19 crisis. INEDs play an important role in normal time in ensuring their corporations apply the principles of good governance, but they should have that role even now. Indeed, the current crisis may have made their oversight more difficult, or from management's perspective less practical, but this is why INED engagement and attention remains essential. I welcome any comments other INEDs may have on these issues.
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Nicholas Allen is an independent non-executive director for CLP Group, a Hong Kong-based electric company. He is the chairman and an independent non-executive director of Link Asset Management Ltd., as well as an independent non-executive director for Lenovo. In the past, Nicholas served as a non-executive director for Hysan Development Company and VinaLand. He is a Fellow of the Institute of Chartered Accountants in England and Wales and a member of the Hong Kong Institute of Certified Public Accountants. Nicholas earned his bachelor's degree in economics and social studies from the University of Manchester. He is a Fellow of Salzburg Global Seminar.
The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter