26 August 2020 by and

Corporate governance is NOT in lockdown: The King Committee’s Guidance Paper on Responsible Leadership in Responding to COVID-19

President Ramaphosa has now moved South Africa to alert level 2 of the national lockdown, which has seen a widespread reopening of the economy. This being said, COVID-19 is not behind us yet and there may be further restrictions introduced. Companies should take cognisance of their application of corporate governance principles in this time of crisis, most especially the King IV Report on Corporate Governance for South Africa 2016 (King IV).

In response to the impact of the COVID-19 pandemic around the world, and the unprecedented challenges and uncertainty confronting boards of directors of companies (boards), the King Committee has published the Guidance Paper on Responsible Leadership in Responding to COVID-19 (Guidance Paper). The aim of the Guidance Paper is to highlight areas that companies’ leadership should be considering in order to ensure the effective application of corporate governance principles and practices during this challenging period, and beyond.

King IV generally focusses on the role of ethical and effective leadership. This leadership role includes providing direction to companies through strategy; giving effect to that strategy through the development of appropriate policies; providing oversight on management’s implementation of the strategy; and demonstrating accountability and transparency through disclosure. The Guidance Paper emphasises that these principles should not be neglected in the midst of the COVID-19 pandemic. The Guidance Paper highlights the following five areas a Board should consider in ensuring effective application of corporate governance principles and practice during this challenging time.

  1. Ethical leadership and the roles of the Board and management
  • A Board should consider whether the company’s current culture and values are appropriate in light of changing market values and priorities.
  • A Board should ensure clarity regarding the roles of the company’s Board and management in ensuring adequate oversight and setting policy and direction.
  • A Board should reassess whether the management team has the skills, competency, and experience to deal with the COVID-19 crisis; and determine whether additional resources or strategic counsel are required.

In the absence of relevant experience, a Board should encourage management to seek out best practices, locally and globally; newly available resources and guidance issued by regulators; and external advice where appropriate, in order to strengthen management’s ability to address the consequences of the pandemic on the business.

The Guidance Paper further recommends the Boards to consider whether the company’s response to the COVID-19 pandemic is in line with the fundamental culture and values of the company and whether it demonstrates responsible leadership.

  1. Human capital
  • A Board should ensure that they have an understanding of the impact of the COVID-19 pandemic on the company’s human capital, both in the short-term and long-term, and consider whether fundamental changes or improvements are required to adapt to the current and post-COVID-19 requirements to ensure organisational resilience.

The national lockdown, its extensions and phased relaxation have a significant impact on employees. Short-term interventions should focus on health and wellbeing, and adapting to modes of interaction that still allow productivity.

  1. Organisational performance, control, risk, opportunity and crisis oversight
  • A Board should ensure that they understand the impact of the COVID-19 pandemic on the company and its ability to manage such impact and risks.
  • A Board should ensure that they understand the trading conditions during the lockdown period, and the economic impact on the company.
    • Given the COVID-19 pandemic could have a significant impact on some companies’ economic condition, a Board should consider the company’s going concern assumption, which is the company’s ability to continue in operation for the foreseeable future. While “foreseeable future” technically refers to the next 12 months, additional consideration should be given to the potential impact of COVID-19 on the company’s going concern status during this period.
    • A Board should ensure an understanding of whether current performance metrics are appropriate and relevant; identify new key metrics and support the active monitoring of short-term metrics, including leading indicators that will contribute to a meaningful organisational health assessment and improve the ability of the company to manage variances and respond rapidly with mitigating actions.
    • Amid the pandemic, a Board should also assess opportunities for growth, adaption or diversification arising out of the current crises and ensuring this is dealt with in strategy and recovery plans.
  1. Communication in a crisis
  • A Board should ensure that they understand the effectiveness of communication and stakeholder interaction, with a view to ensuring honest, transparent, and timely communication that demonstrates integrity and empathy, and fairly addresses any unknowns that may impact stakeholder decisions.
    • Building trust between the company and its stakeholders is never more important than in the midst of a crisis, and honest communication brings about collaboration and mutual support throughout the value chain.
  1. Strategy and recovery
  • A Board should ensure that they understand whether the current strategy and model continues to be relevant in the current and post-COVID-19 environment.
  • A Board should consider how sustaining value creation in the current crisis might reveal opportunities for the company to re-invest in recovery.
  • A Board should ensure an understanding of recovery strategies and ramp up initiatives post-COVID-19, through maximising organisational resilience and focusing on areas of maximum short-term impact.
  • A Board should assess how they can mitigate future risks, including learnings from lockdown that could be implemented and adopted as new ways of working where it has improved performance.

It must be noted that the Guidance Paper does not remove the responsibility of those charged with governance to conform to the full requirements of King IV or the requirements of the JSE and other regulators. The Guidance Paper only seeks to draw attention to specific additional areas of focus that may require further thought and attention during this time to assist a Board to navigate the current environment, and also consider how to adapt to a post-COVID-19 environment.

The Guidance Paper is accessible via this link.

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